As tokenized assets like cryptocurrencies and NFTs have gained popularity, security threats have become more sophisticated than ever. Individual investors, institutions, hedge funds, and cryptocurrency exchanges are turning to digital asset custodians for support.
If you want to safeguard your digital assets but don’t know where to begin, this guide is for you. Here’s a closer look at what digital asset custody is, how it works, and the top features you should look for in a digital asset custodian.
What is Digital Asset Custody?
Digital asset custody refers to a range of methods that help store and protect digital assets. They combine speed, efficiency, and scalability so investors and financial institutions can have complete control over their assets.
How Digital Asset Custodians Work
But how does a digital asset custodian actually protect your digital assets? Let’s break it down using cryptocurrency as an example.
Cryptocurrencies like Bitcoin and Ethereum are created and transferred through a decentralized network called blockchain. Blockchain is an online ledger that stores all the details of cryptocurrency transactions. Owners use cryptographic keys to access their assets and make transactions. In simple terms, asset custodians don’t necessarily protect your assets, but your private cryptographic keys.
Types of Custody Wallets
Custodians primarily store your cryptographic keys using wallets. The three common types of wallets include:
Hot Wallets – They are always connected to the Internet, which means your assets are available for transactions all the time. If you want to make frequent transfers, your custodian will store your keys in a hot wallet.
Cold Wallets – They are always offline, ensuring greater security. Cold wallets are used for storing large sums of cryptocurrencies. Keep in mind that custodians typically require 24-48 hours to transfer funds to a hot wallet, after which you can make a transaction.
Warm Wallets – These are hybrid wallets that combine the benefits of both hot and cold wallets.
Features of Digital Asset Custody Solutions
Not all digital asset custodians are equal. Here are five features you should look for when choosing one:
Robust security – Pay close attention to the security standards your digital asset custodian follows. A reliable custodian incorporates state-of-the-art technologies, such as Threshold Signature Schemes (TSS), Multi-Party Computation (MPC), Trusted Execution Environments (TEE), and Hardware Security Modules (HSM). Multi-signature accounts, authentication protocols, and encrypted transfers are also important.
Compliance – Regulatory compliance is of utmost importance for financial institutions and hedge funds. Reputable digital asset custodians comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.
Ease of use – Ensure your digital custodian has an intuitive and easy-to-navigate dashboard. We’re talking about intuitive dashboards, user-friendly buttons, and robust customer support.
Scalability – As your financial needs grow, you will need a custodian who can scale alongside you. Pay close attention to the infrastructure of different custodians and choose the one that best suits your needs.
Insurance – Despite taking security measures, the risk of theft and lost keys remains. Therefore, choose a custodian that can protect your assets in case of a security breach. Reliable custodians like BitGo offer up to $250 million in coverage in case of loss, theft, or misuse.
