Importance of Digital Asset Custody

When one accumulates a large amount of money, safeguarding their fortune becomes a top priority. Technical and operational factors must be considered by the individual or entity when setting up an account to deal with such matters.

One of the biggest concerns for crypto investors is the loss of private keys through misplacements, hacks, or broken hardware.

Just as gold bars or US dollar bills can be lost, bitcoin is no exception. According to research from Chainanlaysis, nearly 4 million bitcoins are lost forever and this figure is likely to be growing. For example, a man in 2013 threw away a hard drive with the key to 7,500 bitcoins.

Reasons why custody is needed

1. “Be Your Own Bank” is not possible for everyone — Crypto gives people the option of not needing intermediaries and banks to manage/store their money. But eventually, people realize being your own bank is more complicated and risky then imagined.

2. Mismanagement of the secret passphrase and loss of private keys — Accidents can happen. A fire may arise where you store your passphrase or the ink on the paper fades. These are some factors that can cause an individual to lose a significant amount of cryptocurrencies.

3. Putting funds on exchanges is dangerous — Exchanges can get hacked, bankrupt, or shut down by authorities. Mt. Gox is the most infamous example of this. The system is centralized and could be cut off at any time since there is a single point of failure.

4. Risk of losing investors’ money — This year already, there are over 466 crypto hedge funds and venture capital funds. Over 500 ICOs so far this year have completed their token sale. Both parties have the responsibility to find a secure place to store their funds. Rather than exploring strategies on keeping assets safe and meeting compliance standards, it is recommended that companies focus their core strength in identifying investment opportunities or on building their products. They can then leave the safe keeping of assets to a trusted third party.

Risk can be minimized by having a trusted third party to oversee the wallet. Xapo, Coinbase Bitgo, Coobit, Formosa are a few options. Cryptocurrencies simplify cross-border transactions and settlements. However, the problem of safekeeping still exists.

Christian Ng is an entrepreneur and investor with experience in cryptocurrency and global financial markets. He enjoys identifying opportunities and getting involved with blockchain projects to bring them to scale and profitability.