What Is Digital Asset Custody?

Cryptocurrency enables peer to peer transactions — instead of a bank holding your money, you are solely responsible for your money and keeping the funds intact.

Asset custody is a service provided by professionals for holding and maintaining valuable assets. High net worth individuals and institutions traditionally use this.

The everyday consumer doesn’t usually consider asset custody in their daily lives because their banks act as custodians, and people store their few valuables in a bank account or safety deposit boxes.

With the advent of cryptocurrency, an era of peer to peer finance creates a new way of conceiving asset custody. Digital custody is a new wave in the institutional and high net worth realm of peer to peer finance. And for good reason — managing private keys of accounts up to and beyond a million dollars is a task too crucial to be left to a single individual to maintain on a hard drive or USB key.

Why do I Need Digital Asset Custody?

The demand for digital asset custody of cryptocurrency is rising rapidly. Speculating, holding, and using crypto assets has become more and more popular. Now, in 2021, cryptocurrencies have hit the mainstream and are seeing adoption from major industry players. Options for digital asset custody range from robust, institutional-grade compliance solutions like Coinbase Custody to more flexible custody options like personal cryptocurrency wallets.

Owners are holding onto assets for the long term, and security threats are standing their ground. Digital custody is an essential topic of discussion for future asset classes.

What are Digital Assets?

Digital assets are defined as “ digital representations of value made possible by the advances in cryptography and distributed ledger technology .” Digital assets are assets that exist virtually. This makes them intangible but increasingly linked to real-world assets. While there is no universal definition of digital assets, they can be separated into five categories.

1. Cryptocurrencies — Also known as exchange tokens. These are the most common grouping of digital assets. They use cryptography for security and are designed to work as a medium of exchange. Bitcoin and Ether are currently the two biggest cryptocurrencies.
2. Stablecoins — Digital assets that attempt to stabilize volatility by attaching themselves stable assets like the US Dollar or gold
3. Security Tokens — Tokens with unique characteristics similar to traditional asset instruments like shares, debentures, or units used in a collective investment scheme.
4. Utility Tokens — Digital tokens provide value to investors by providing access to a future product or service. For example, a startup may develop a digital product/ service and issue utility tokens to investors.
5. E-money Tokens — Tokens designed to function as electronic money representing a claim on the issuer. They are issued on the receipt of funds for making payment transactions and accepted by a person other than the issuer.

What are Custodians?

Custodians provide customers with multiple financial services like trade settlement, exchange, clearing, and corporate action execution. One of their most notable roles is in the safekeeping of assets. Custodians are like bank vaults, holding assets both electronically and in physical form. They charge investors a fee for maintaining the assets securely.

When investors enter into agreements with custodians, the asset temporarily remains in the custodian’s safekeeping and returned to the investor upon request. Custodians use their market expertise to minimise the risk of fraud, theft, and loss of assets.

How Does Digital Asset Custody Secure My Cryptocurrency?

Multi-signature wallets are the standard for institutions managing cryptocurrency. These wallets enhance security more than single-key wallets. However, Multi-Party Computation (MPC) is ushering in a new key management generation.

There are seven ways the MPC is revolutionizing the multi-signature wallet technology.

1. No single point of failure

MPC protects your key so it can’t be compromised by cybercriminals and internal fraud. This prevents any employee(s) from stealing your digital assets.

2. Protocol Agnostic

Not all crypto protocols accept multi-signature wallets and those that do have various implementations between protocols. With MPC, it works on the standard cryptographic signature algorithm (EdDSA or ECDSA) that is used for most blockchains. That way, the performance of MPC is possible between blockchains.

3. Practical Application and Academic Validation

Since MPC implementation is neutral, the attack risk is minimal, and each review corrects the implementation across all protocols.

4. Better Flexibility Across Your Operation

MPC allows for continued modification and continuity of the signature scheme. When changing setups to another setup, signature schemes require current shareholders to agree on the new computation and addition of a new user share.

With this process, the blockchain deposit address is maintained and removes the need for creating a new wallet, moving funds, and both parties can use the existing address. This makes the process of scaling operations and making adjustments to your team operations frictionless and eliminates the risk of accidentally losing funds.

5. Low Transaction Fees

MPC-based wallets are represented as a single wallet address on the blockchain with the distributed signature computed outside of the blockchain. This allows for the lowest fees per transaction available.

6. Hidden Signatures and Off-Chain Accountability

MPC provides off-chain accountability so that the co-signing component can audit the keys participating in the signing without being made public to outsiders.

7. Hardware Isolation Reinforced

Hardware Isolation Modules are essential for protecting cryptographic materials when a system is compromised. HSMs alone do not provide the most secure solution to protecting a private key. When used with MPC, they increase security exponentially and create a true, in-depth defense security architecture.

What’s Next?

As secure cryptocurrency custody grows, enterprises and institutions need options they can rely upon without worrying about industry changes. The push for structured products will skyrocket as businesses know their funds are safe and secure and lead to additional retail interest pushing for increased adoption and betterment.

Digital custody remains an opportunity for innovation. There is a fine line between decentralization, security, and the use of cryptocurrency wallets and other ways to contain digital assets.

Trade With Confidence

Finding a digital custody solution is necessary for private key storage capability. As a result, the question is how those private keys are controlled and are critical for defining the role of custody of your crypto assets. Whether for Bitcoin, blockchain, or DLT, the differences between crypto and institutional platforms are still evolving and require a holistic view of custody beyond just the storage of private keys.

Aus Merchant holds your cryptocurrency and you have the confidence in an institutional-grade wallet system. Our technology provider uses MPC technology, ensuring the security of your assets. We are always establishing additional integrations with decentralised finance and share-yield generating products. We believe that for mass merchant adoption of cryptocurrency for payments, custodian services will be an essential aspect. Providing merchants with the confidence to enter and benefit from this emerging financial system.

Contact us today for a review of your digital assets and how we can increase profit and keep them secure.

Originally published at https://ausmerchant.io.