In the rapidly evolving landscape of digital assets, investors are faced with a critical decision on digital asset custody: whether to self-custody their digital assets or entrust their assets to a qualified digital asset custodian; or both.
All approaches have their own set of pros and cons, and understanding the nature between self-custody and qualified custodians is crucial in making informed decisions regarding digital asset custody and management.
How does crypto self-custody work?
Digital asset self-custody refers to the practice of individuals or entities managing and securing their digital assets, without relying on third-party custodians. In this approach, the owner retains full control over their assets, including private keys, which are essential for accessing and transferring digital holdings on blockchain networks.
Here’s a breakdown of how digital asset self-custody works:
Why choose self-custody?
Full Control
Self-custody empowers investors with complete control over their digital assets, as they retain possession of their private keys and have sole responsibility for their security which enables them to manage their assets independently without a third party.
Cost Efficiency
Self-custody often incurs lower fees compared to qualified custodians due to many of the functions being brought in-house. With no intermediary fees or service charges, investors can reduce expenses associated with asset management, making self-custody an appealing option for cost-conscious investors seeking to maximize their returns.
Disadvantages of self-custody
Security Risk
Self-custody places the burden of security and its complexity entirely on the investor. Managing private keys and protecting them from theft, loss, or unauthorized access requires robust security measures and technical expertise. Lapse or unknown gaps in security architecture will likely result in an irretrievable loss of assets.
Lack of Insurance
Self-custody does not typically include active insurance policies that guard your digital assets against the loss of assets due to theft or other events, leaving investors to bear the full risk of any potential losses. Procurement of digital asset insurance with appropriate coverage has also proven to be complex.
Digital Asset Custodian
Qualified custodians are regulated entities that provide secure storage and management of digital assets on behalf of investors. These custodians offer professional services designed to mitigate risks and ensure compliance with regulatory standards.
Here’s a breakdown of how qualified custodians operate:
Why digital assets & crypto custodians?
Connectivity to Trading & Yield Opportunities
Major custodians such as Rakkar have high connectivity with partners that can provide investors with seamless accessibility to deep liquidity across multiple asset classes of different risk profiles. These opportunities may include DeFi, Staking, Tokenized Money Market Funds and more. Custodians will facilitate the transactions across their network to reduce operational complexity and improve cross-wallet operability when investors deploy their funds while enjoying the enhanced security a custodian offers.
Enhanced Security
Qualified custodians employ advanced security frameworks and security design architectures, such as employing multi-party computation (MPC) technology, multi-factor authentication (MFA) and multi-layered defense mechanisms to protect digital assets. They also have dedicated security teams and infrastructure to monitor and respond to threats, significantly reducing the risk of asset loss or theft.
Regulatory Compliance
Qualified custodians adhere to stringent regulatory standards and compliance frameworks, such as SOC 2 Type 2 attestation and ISO 27001 certification, ensuring that digital assets are managed by legal requirements across local jurisdictions. Custodians also ensure KYC/AML/KYT evaluations are put in place. This compliance provides peace of mind to investors, particularly institutions that must meet regulatory obligations.
Cold Wallets
Cold wallet solutions operated by qualified custodians provide enhanced security through isolated, secure environments – this may also be termed as “air-gapped” signing. These are monitored round the clock and staffed by security professionals, ensuring the highest level of protection for digital assets and private keys.
Conclusion
While self-custodial wallets offer control and cost efficiency, they may not provide sufficient protection in a volatile and unpredictable market. Qualified custodians, with their enhanced security measures, regulatory compliance, and insurance coverage, offer a compelling alternative for managing digital assets. Investors may consider a diversified approach, combining the strengths of both self-custody and qualified custodians to optimize security and manage risk effectively.
