Cryptocurrency custody problems and solutions

March 27, 2019 | AtoZ Markets - Self-custody is a vital and fundamentally native feature of cryptocurrency. A blockchain-based virtual asset can be stored by its owner without the help of financial intermediaries or registered brokers. But just because you can store all your coins yourself, Is it still safe in your hand?

The answer depends on many factors, including the variety of currencies, the frequency of transfer and the complexities and risks of self-custody which equal with the size of funds being stored. Moreover, your custody solution will differ depending on whether you are a normal user, a high net worth individual, an asset manager, a company, or an ICO project with cryptocurrency in your wallet.

While most users will often prefer the self-custody option, some will likely keep their deposits in hosted exchange accounts. Token recipients will rely on self-custody methods, in addition to remote cold storage if the amounts are large enough and the team has long term hold requirements.

Cryptocurrency custody problems and solutions

Cryptocurrency custody is difficult to implement for investment managers as they have high risks of coins being stolen or hacked. Due to the nature of their operations, funds need strict custody methods that address risks such as security of the digital assets and operational efficiency that follow requirements of their regulator. These funds work with licensed custodians with audited control processes who exist to protect these assets and minimize the risk of their theft or loss, whether these are assets in physical or electronic forms.

Problems with cryptocurrency custody

Keeping one’s cryptocurrency offline by using USB-based storage or relying on cold storage, poses a big risk that should be tackled as the industry matures. Above are the two major problems that the cryptocurrency industry is facing. 

  • Current custody solutions aren’t highly secure: Although individuals and exchanges have devised sophisticated means of safeguarding their cryptocurrencies, these efforts haven’t stopped hackers from hacking it. The story is the same for crypto exchanges that stores funds of their customers offline.
  • The problem of usability of crypto assets: Another issue with current cryptocurrency custody is that they tend to limit the all-time usage of cryptocurrencies, and instead lock these assets, which are supposed to be working.

Solutions for cryptocurrency custody

There are a number of firms providing crypto storage services, including San Francisco-based exchange Coinbase, Kingdom Trust, Xapo, and the Winklevoss-owned Gemini. Other companies that have also announced their plans to launch regulated custody services include Bakkt and Fidelity Investments, as well as Anchor Labs, which is building new crypto custodial technology that leverages behavioral data and biometrics to keep crypto assets safe. As digital assets grow in usage over time and the industry matures, cutting-edge storage solutions might emerge and will help keep users assets safe whiles providing everybody the opportunity to engage in crypto networks.

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