Think twice before deciding who holds your cryptocurrencies
Cryptocurrencies are a new kind of Bearer and Non-physical asset class. Keeping cryptocurrency holdings safe from loss or theft is challenging and essential. There are several options for cryptocurrency owners to consider.
In the 2018 Mary Poppins returns movie, the Banks family runs into great trouble and risks a foreclosure of their home. The reason is that they can’t find the stock certificate and the Chairman of the Bank rips the bank ledger and throws it in the fireplace. There is no proof of ownership!
Cryptocurrencies are Digital Bearer instruments (no ownership record kept by the issuer). Therefore, storage security is paramount. Since cryptocurrencies are not physical but strictly digital, hacks and theft are a real challenge. In the past ten years, there have been close to $10billion worth (at current valuations) of losses from hacks and compromises of crypto assets. At the same time, the technology and the software for crypto custody have improved considerably.
On the one extreme, there are Self Custody Solutions that offer full control to individuals or businesses of any size of their crypto assets. These are hardware or commercial software that crypto-asset owners can store their crypto, and be solely responsible for their private keys but have no ability to recuperate losses of any nature. Examples of hardware self-custody solutions are Ledger and Trezor. Examples of software self-custody solutions (called non-custodial wallets) are Jaxx and Blockchain.com.
The next option for cryptocurrency owners, are crypto exchanges or other financial providers that are third-parties storing your assets in several different ways. The numerous regulated or unregulated crypto exchanges all over the world, offer typically different types of digital wallets. Investors who don’t trade frequently and are buy and hold, may choose `Cold wallet` storage which is safer but the assets are less accessible. Cold storage digital wallets have additional security procedures that result in delayed time to transaction and additional costs. Warm and Hot digital wallets are the intermediate and fully accessible digital wallet alternatives on crypto exchanges, respectively.
Without getting into technical details, digital wallets also differ in terms of the technology the third-parties deploy for access to the wallets. There are three main types of security approaches and storage providers may use combinations:
- Multi-signature wallets which require the involvement of at least two different private keys-people to access the funds in the wallet.
- Multi-party computation (MPC) is a software solution to security that does not require a private key to access the wallet and the assets. It works with mathematical computations performed by multiple parties jointly in an encrypted way.
- Hardware security modules (HSM) are used for hardware solutions that store the so-called “cold wallets`.
All these kinds of storage options evidently entail trust to the third party. One of the largest crypto asset losses happened in May 2019 with a phishing attack on Binance`s hot wallet for 7,000 Bitcoin (worth $40million at the time).
The higher institutional quality level of storage is Custody from qualified custodians. Such services even in the traditional world are typically offered by banks or other entities that are licensed by a regulatory body. In the crypto assets world, the formal qualification of a crypto asset custodian is evolving and varies by jurisdiction.
It is clear that each crypto asset owner needs to decide the security risk level he or she is comfortable with when handing over its bearer digital assets to a third party.
Licensed banks naturally have earned higher trust but at the same time banks also differ in terms of the degree of security measures they implement and the level of technological procedures they deploy. Similar, to the traditional world, Trust is paramount in choosing your storage provider who you can count on, as a Custodian of your assets.
 Bearer instruments in the conventional world are those that are not registered by the issuer who keeps also a record. They are physical and have no ownership title, so whoever is in possession is the owner. Transfer of ownership can be don via endorsement. The issuer of a bearer security which is more common the bond worlds keeps no record of who owns the security.
 Binance is a highly profitable unicorn and did cover the losses from its secure asset fund for users (SAFU). This is a business decision that Binance has made and not an obligation.
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All investments carry a degree of risk.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74–89 % of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high risk tolerance. Make sure you understand each Digital Asset before you trade.