Do I want to carry my stock portfolio around on a hardware wallet?
Custody in the age of tokenized securities and cryptocurrency.
The best feature about a digital asset is that you can control it yourself. The worst thing about a digital asset is that you can control it yourself.
The unique benefits of digital assets like bring unique problems. These unique problems drive demand for custody services like BitGo and others. BitGo offers cold storage custody and multi-signature wallets and this week announced funding led by Goldman Sachs and Mike Novogratz’s Galaxy Digital Ventures. Fidelity, Coinbase and others are also working on custody solutions.
A benefit of a digital asset with private keys is that you can control it yourself. You can have absolute power over your own money. No centralized party can reassign your coins or tokens. If secured using best practices, digital assets are durable and difficult to destroy.
The greatest disadvantage of this technology is also this control. By controlling our own wealth we also expose ourselves to risk of loss, human error and theft.
Banks are so disliked, we forget why they were invented: because many people dont want the risks of holding their wealth.
For the better part of the last century, people have generally not had control of their own wealth. Stocks, currency, commodities, real estate and other wealth is usually controlled by third parties. Distributed ledger technology and Bitcoin is changing this for much of the world.
Rather than relying on trusted third parties to say what is true we can now rely on a network of peers. The peers, not a centralized authority say what is true. This is very powerful and can change the way the world works.
Cryptocurrency solves the need for third parties to run a ledger. Crypto doesn’t solve the original reason for custodians: because it’s too damn scary to hold your own money.
Crypto is not only scary, it’s more scary than all previous forms of holding wealth.
There are more ways to steal it and it’s easier for the thief to get away. Most titans of industry in the non-crypto world don’t worry much about theft or extortion or catastrophic hacks. Cryptocurrency holders, often opsec driven people, are still fearful of loss, hacks and attacks.
As one friend once noted after a high-profile hack: this damn stuff is just too appealing to steal.
Indeed Bitcoin’s fungibility and other properties which make it great money also make it great money for bad actors, hackers and thieves.
Some crypto holders are hesitant to hold large amounts crypto for the same reason the people are hesitant to hold large amounts of cash. You don’t want €100,000 under your bed because it could be lost or stolen.
Compounding the problem for crypto has been the lack of high quality custodians. The space is so rife with scams, bad actors and failures that many have adopted the motto “not your keys not your coins”. This can be good opsec but for investors with complex portfolios, it is difficult to practice. Many institutions, money managers and fiduciaries will not manage their own custody. In many services, security for Bitcoin wallet management by users is not scaled to an institutional level.
It’s one thing for an individual investor to have a small amount on crypto on a hardware wallet. It’s another matter for a family with multigenerational wealth. Family offices have complex entities and issues to be concerned about. Adding custody on top of all these other issues is unappealing. For professional money managers and other fiduciaries the risks are significant.
It’s likely that custodial solutions for tokenized securities will look a lot like the companies and players we see doing this today. Nobody wants to risk losing their shares due to hackers. Legal ramifications are huge: a Zuckerberg-level shareholder won’t risk billions without legal failsafes. This would likely need centralized control.
So what’s the point for stocks if you need a trusted custodian and central control anyway?
If a company can exercise central control, what’s the purpose of this Rube Goldberg blockchain nonsense?
It’s all about the ledger.
The problem digital assets solve is all about who controls the ledger and the right to say what you have.
When we improve the way this ledger works we make it so new structures make sense. Ideas which would not have existed in old systems now become workable. Today it is almost impossible for a medium sized business to have a large number of global shareholders. Managing that ledger effectively is difficult.
Custodians exist because we often like to trust other people to take care of our wealth. While many consider it less responsible to trust your keys to someone else, it depends on your specific situation. For example, someone who is not technically savvy might be better off trusting a custodian.
This problem is being attacked from multiple angles including advanced hardware and software wallets. Regardless of how the ecosystem unfolds, there will be demand for services to help hodlers reduce risks.