As we’re entering an upward cycle of cryptocurrencies continuing to show resilience and gaining more mainstream adoption, having a secure digital asset storage and management infrastructure in place remains all the more important. In this context and at this stage of the custody industry’s development, institutions looking to safely store their digital assets have two main options: entrust their security with a third-party custodian, or choose to self-custody their assets. 

In this article, we explore the value proposition of these options, both of which present several benefits and challenges, to help you understand which one may be the more suitable choice based on the needs of your organization.

Third-party custodians

Managing crypto assets can be complex, requiring a deep understanding of blockchain technology, security protocols, and regulatory requirements. Institutional, third-party crypto custodians specialize in securing and managing digital assets on behalf of their clients. At a high level, they provide institutional clients of all sizes with a range of solutions and services, including various types of wallets to safekeep cryptocurrencies, access to liquidity and yield-generating products, and insurance coverage, among others.

Benefits of third-party custodians

Institutional-grade security

Third-party custodians use a variety of security measures to ensure that their clients’ digital assets are kept safe at all times and are covered against potential damages. These include segregated cold storage to keep their assets 100% offline, multi-party computation (MPC) technology ensuring there is no single point of failure to manage clients’ private keys, multi-signature schemes to approve transactions, and insurance plans covering clients against theft and permanent loss of their digital assets.

Access to liquidity

Through partnerships with cryptocurrency exchanges and other liquidity providers, third-party custodians can provide attractive and secure solutions with access to liquidity, allowing institutions to buy and sell cryptocurrencies efficiently. 

Compliance and independent audits

Given the regulatory nature of financial institutions, custodians can help them comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) measures, as well as provide audit trails and reporting capabilities. It is also common for custodians to be independently examined by third-party auditors to ensure their infrastructure addresses critical information security and privacy protection requirements to keep their clients’ data and assets secure.

Delegated risk of managing private keys

Crypto private keys are essential for accessing and controlling your digital assets. However, managing their security can be a complex process. Third-party custodians have specialized knowledge and expertise in the management of cryptocurrencies to provide institutions with peace of mind.

Scalability

Custodians can support businesses in need of scalable solutions that allow them to handle the increasing complexity of managing digital assets as well as their growing adoption on behalf of their own customers or users. This is particularly relevant to B2B2B and B2B2C companies who may rely on a custodian’s infrastructure to build their own solutions that are used by their own customers.

Drawbacks of third-party custodians

High entry barrier

Complex fee structures imposed by some custodians may prevent smaller-sized institutions with more limited budgets from accessing these security and liquidity services, thereby creating higher barriers to entry.

Counterparty risk

Relying on a third-party service provider to manage digital assets exposes institutional clients to counterparty risk, should the provider fail or become insolvent. It is important to ensure a custodian has the necessary solutions and policies in place to minimize such a risk and protect the client’s assets in extreme scenarios.

Limited services and support

Compliant custodians may be subject to regulatory restrictions with regards to the types of services they are able to provide their clients based on the jurisdictions where they operate, and may not support certain digital assets that institutions are looking to secure. 

Lack of ownership

Entrusting the security of your crypto assets with a third-party custodian means that you may renounce partial or full ownership of your assets. This can be a concern for institutions who prefer to retain full control over their digital assets.

Self-custody solutions

Self-custody, or non-custodial solutions, refers to the practice of holding and managing your digital assets on your own, without needing to entrust them to a third-party custodian. This is generally preferred by institutions who wish to retain full ownership of their digital assets and are willing to bear the risks associated with managing them themselves. 

Self-custody requires institutions to store their private keys in a secure wallet, such as a hardware or non-custodial software wallet, which consequently also requires more responsibility and caution given the lack of safety measures, such as protection against theft or loss, typically provided by third-party custodians.

Benefits of self-custody

Greater control

Unlike third-party custody, institutions using self-custody solutions retain complete control over their own assets, which allows them to manage them as they see fit. That said, with greater control also comes greater accountability and responsibility.

Decentralization

Given the nature of self-custody, institutions choosing to manage their digital assets on their own no longer have to rely on a central authority to hold them which, as discussed previously, presents counterparty risks. Blockchain-based, non-custodial applications have risen in popularity in recent years, offering users a decentralized platform to manage their crypto assets through an open-source architecture.

Lower cost

While there may be upfront costs associated with purchasing a hardware wallet, clients can avoid the ongoing or “hidden” fees that some third-party custodians can charge for using their services. Some open-source software wallets are free to use, thereby eliminating the entry barrier based on cost entirely. 

Privacy

Self-custody may also be preferred by users who do not wish to disclose their personal information to a third-party custodian and who are concerned about their personal data being compromised.

Self-custody allows users to maintain their privacy by not having to disclose their personal information to a third-party custodian. This is particularly important for individuals who wish to remain anonymous or are concerned about their personal data being compromised.

Drawbacks of self-custody

Responsibility

Self-custody requires institutions to keep track of their own private keys and bear full responsibility for their safety. If one loses their recovery phrases or forgets their password, they will no longer be able to access their crypto assets. Non-custodial, software-based wallet users may also fall victim to phishing scams or malware attacks, which can result in the loss of their digital assets.

Lack of regulatory compliance

Unlike most institutional custodians, which are subject to regulatory requirements, self-custody solutions do not have AML and KYC measures in place.

Technical complexity

Engaging non-custodial services requires a foundational level of understanding of user interfaces that can be difficult to navigate for first-time participants entering the digital asset economy. 

There is no one-size-fits-all solution in crypto

In the end, much of the debate between third-party custody and self-custody boils down to an institution’s risk appetite with regards to managing their crypto assets. A third-party provider offers enterprise-grade security, access to liquidity and regulatory compliance, though may come with higher fees and more limited control over one’s assets. Self-custody, on the other hand, comes with full ownership, flexibility, and responsibility to manage your digital assets on your own and bear the risks associated with it.

How Ceffu addresses private key management

Enterprise-grade wallets powered by MPC

Our cold storage solution, Qualified Wallet, and warm wallet infrastructure, Prime Wallet, run on industry-leading MPC technology, which splits a client’s private key into multiple key shares. Those key shares are stored on hardware devices and distributed across different geographical locations, thereby eliminating any single point of failure if one of the key shares were compromised. 

While this solution requires clients to entrust their key shares to us, our compliant and audited infrastructure, backed by our team of technology, security, and risk management experts, provides them with peace of mind that their assets remain safe.

New wallet solution coming soon: Co-sign Wallet

Our new Co-sign Wallet solution – our third wallet infrastructure – will require 2 out of 3 key shares to approve transactions, one of which by default will remain in the client’s control. This means institutional users of this wallet solution will be more closely integrated into the signing experience.

This wallet will also allow our clients to access our off-exchange settlement solution, Mirror, which up until now had been exclusively integrated with Qualified Wallet. This opens up more opportunities for institutions to access the world’s deepest liquidity in the Binance Exchange, and empowers clients with more control over their digital assets and transactions.

For more information, please contact our designated Relationship Managers by filling out our institutional form.

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About Ceffu

Ceffu is a compliant, institutional-grade custody platform offering custody and liquidity solutions that are ISO 27001 & 27701 certified and SOC Type 1 & Type 2 attested. Its multi-party computation (MPC) technology, combined with a customizable multi-approval scheme, provides bespoke solutions allowing institutional clients to safely store and manage their digital assets through its insured, segregated cold storage solution, Qualified Wallet. Institutions also benefit from Ceffu’s secure gateway to a wide range of liquidity products within the Binance ecosystem as Binance’s institutional custody partner.

Media contact: pr@ceffu.com 

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