The digital asset landscape is evolving rapidly with Institutions taking a prominent role. A survey conducted by EY revealed that over 60% of institutions plan to allocate more than 1% of their portfolios to virtual assets, representing a collective holding exceeding 7% of the total Bitcoin supply. With volume being a key factor affecting a token’s price and the overall market, an institution-level security breach could trigger a market meltdown. This is why instituations cannot rely on exchange for the custody of their assets unlike retail investors. A reputed and proven digital assets custody solution is needed by institutions to provide tailored solutions to their specific needs. But what’s the ideal process that digital assets institutions should follow to secure custody of their assets?
The Risk Of Ignoring Digital Assets Custody
Contrary to popular belief, reputed digital assets exchanges are not hack-proof. They have faced vulnerabilities in the past, falling prey to sophisticated hacks and manipulation attempts in several instances. The infamous Ronin Network hack resulted in the loss of digital assets worth over $615 million. The Poly Network hack amidst the 2021 bull run had a similar result with funds worth over $600 million being siphoned off. Binance, the world’s largest digital assets exchange has also fallen victim to sophisticated hacks, losing funds worth over $500 million.
With more and more institutions jumping on the bandwagon fueled by factors like ETF approval playing a catalyst for mass adoption, the risks involved have become bigger than ever. It is a high time digital assets institutions partner with the top digital assets custody solutions to safeguard assets and create a favorable environment for mass adoption.
Key Considerations for An Ideal Digital Assets Custody
A multi-faceted approach is required to choose an effective digital asset custody provider for institutions. This includes security, regulatory compliance, and user experience:
a) Security Measures
Digital assets worth over $475 Million have been lost to sophisticated digital assets hacks in 2024 so far and the risk of online attacks is only going to rise significantly with a flurry of institutions entering the digital assets industry. The cost of these hacks could be too huge to mitigate. Thus, effective security measures are the most prominent component when opting for a digital assets custody solution.
While making a decision, here are a few key decisive features to make a decision:
- Multi-Sig Wallets: Multi-Sig wallets are wallets that require multiple signatures to authenticate a transaction. They ensure that no single authority enjoys complete authority over assets and eliminate a single point of failure.
- Two-Factor Authentication (2FA): Hackers use sophisticated techniques, including phishing, brute forcing, and session hijacking to override authority and siphon off funds. 2FA-enabled digital assets custody solutions add an additional layer of security, minimizing the risk of unauthorized access substantially.
- Insurance Coverage: Despite a bank-grade security architecture, hacks might happen and thus, insurance against such risks is paramount to gain users’ trust and safeguard large-scale funds. Leading digital assets custodians like Liminal offer a $50 Million insurance coverage to offer additional security in case of such incidents.
- CCSS Certification: Different institutions may need different security wallets, such as Cold Wallets, Hot Wallets, and other key features, including Automated Refill Engine, and EVM Fee Saver Workflow. This means institutions must do their due diligence to identify an inclusive custodian to enhance security and efficiency. Liminal is the only CCSS Level III Full System certified digital assets custody provider, securing digital assets worth over $700 Million.
b) Regulatory Compliance
The ever-evolving regulatory landscape poses the second major challenge to digital assets institutions with operations in multiple countries, jumping on the bandwagon. Thus, a digital assets custody provider needs to do much more than just secure assets. Here are a few key pointers beyond security features to make a decision:
- AML and KYC Procedures: Some of the leading global economies have strict AML and CTF laws that could be difficult to mitigate, especially if an institution has a business presence in multiple countries. Thus, it is highly important to ensure that the digital assets custodian implements robust Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures to prevent fraud, and money laundering and ensures the legitimacy of transactions.
- Adherence to Regulations: It is equally important for institutions to comply with local and international regulations governing digital asset management. This might mean obtaining necessary licenses and adhering to regulatory guidelines. Thus, it is always wise to select a digital assets custodian platform that has partnerships with government agencies dealing in digital assets and possesses licenses like TCSP, FSP, and VARA.
- Audit and Reporting Standards: Institutions must ensure that the digital assets custodian they are partnering with has stringent audit and reporting standards to ensure accountability and transparency in their digital assets custody processes.
c) User Experience
Navigating the digital assets space means dealing with intricate technologies and emerging trends. Something that might overwhelm traditional institutions transitioning into the digital realm. An ideal digital assets custody solution should be inclusive, support multiple chains, be easy to integrate, and offer satisfactory customer support.
- Easy To Implement: Decision-makers at digital assets institutions might not be well versed in the technicalities of asset custody in digital assets and the application of smart contract-enabled security. Thus, an ideal digital assets custody solution should be easy to implement. For example, Liminal’s custody solution comes equipped with easy-to-integrate APIs and SDKs through a plug-and-play mechanism.
- Automation: Ignoring efficiency for security could be fatal in a fast-moving world like digital assets. An effective third-party digital assets custody solution must replace human intervention with an automation engine, minimizing the chances of human errors and enhancing operational efficiency substantially, guaranteeing transaction confirmation.
- Customer Support: Dedicated customer support is essential for troubleshooting and assistance. Institutions should choose custody providers that offer responsive and knowledgeable support services. Instant online or on-call issue resolution is highly important to deal with critical issues.
Additional Considerations:
Besides the aforementioned critical issues, an ideal digital assets custody solution should have a proven track record of securing institutional assets and saving manual hours through enhanced efficiency. It should be customizable to suit the institution’s requirements and backed by a reliable and scalable IT infrastructure to manage large volumes of digital assets.
Also, an ideal custody platform should be updated regularly with security patches to steer clear of vital bugs that might emerge in the system. A digital assets custodian should also support the corresponding institution with a comprehensive disaster recovery plan to address potential system failures or breaches.
Parting Notes
To conclude, finding the right digital assets custody platform is a process encompassing several critical components, including advanced security measures such as multi-sig wallets, strict regulatory compliance such as CCSS along with security certifications like SOC 2 Type 1 & 2, ISO certifications, and if the business has presence across multiple countries, then obtaining regional licenses adhering to regulatory guidelines like FSP, VARA, MAS, TCSP etc in place is duly required. They should also have a robust technological infrastructure, and an excellent user experience. As the digital assets market evolves with increased institutional investments, tackling security risks and navigating regulatory hurdles are the two key challenges. A digital assets custody platform must address both these issues while offering an inclusive, easy-to-integrate, and robust user experience.
