Cryptocurrency and Digital Asset Custody – Solving the Security Conundrum.
Seamus Donoghue, Vice President of Business Development for Swiss technology solutions provider Metaco, is an expert in the world of digital custody, which is evolving fast, enabled by digitalisation and new transaction methodologies such as blockchain. He addressed the audience at the Hubbis Digital Wealth Asia Forum on the current state-of-the-art in the world of digital custody.
Donoghue began by explaining that Metaco’s core product is SILO, which is a custody solution for cryptocurrencies, security tokens and other digital assets.
Cryptocurrencies, he reported, have had a major struggle this year, having fallen dramatically from an earlier surge and there is a considerable question mark over the survival of many of those.
Metaco launched its SILO in late January 2018, telling the world that the solution allows banks to take secure custody of their clients’ cryptocurrency assets.
“Even though cryptocurrencies, such as Bitcoin and Ethereum, have become much more popular over the recent years, they remain extremely difficult to store. Individual holders are required to keep safe a private key, which many forget, lose or have stolen, while many cryptocurrency exchanges have gone out of business, committed fraud or been hacked. When we launched in January, we noted that just for Bitcoin, over 2 million coins had been stolen at least once, representing more than USD22 billion at the prices at that time.”
The patented multi-wallet solution deployed partly on-premise at Metaco and partly in the cloud is designed to manage multiple accounts with different currencies and includes security protocols such as multi-signature and transaction flow limits. “In short,” Donoghue explained, “it allows banks to provide clients with the highest-grade protection of their assets while still giving them liquidity to trade and make payments.
Donoghue gave the audience some brief background on the digital assets market and its recent evolution. While he noted that cryptos have had a bad run in recent times, Metaco’s main premise is that irrespective of the performance of such digital assets, the underlying technology of tokenising assets is here to stay and will revolutionise the security space.
“We have already seen central banks around the world experiment in this space, so what we are seeing is the decline of retail adoption and the rise of institutional or corporate adoption, especially in the banking space,” he observed.
“For example, companies such as Fidelity announced they are getting involved in the custody space. There are various banks making initiatives around trade finance, and the owner of New York Stock Exchange, ICE, is launching a crypto exchange in cooperation with Starbucks and Microsoft.”
The keys to the keys
Donoghue explained that the biggest hurdle for enterprises to come into the custody space is how to manage these assets. “I think perhaps the best analogy around cryptocurrency assets or digital assets is they are bearer securities but in digital form via a private key. But for a company, how they manage those is the major issue – a retail holder can stick the key on a USB, but that is too portable for a corporation, they don’t want the risk of the assets walking out of the door.”
The result has been a host of companies emerging to solve this conundrum. “The key,” Donoghue explained, “is the balance between security and availability. As a custodian, one wants to build services on top of the asset, you want to interact with the market. To do so, you need a full infrastructure to manage these private keys and our approach is what we call ‘warm storage’ a technology solution, rather than ‘cold storage’ which is a physical solution.”
And to achieve that, a variety of elements needs to be addressed. “You might have a custody solution that needs to fit into your banking system but there are many specific services around digital assets that need to be specific to digital assets. The compliance, AML, tax reporting, integration with liquidity providers, exchanges, how to lend against these assets, one needs an entire infrastructure to manage all that. And this must all be integrated into the clients’ reporting.”
Which brought Donoghue to the solution Metaco offers in the form of SILO, which the firm launched earlier in 2018. Donoghue described this as an end-to-end wealth management and private key management system with integrated hardware.
“Importantly,” he explained, “the hardware is produced by a Swiss partner called Guardtime which specialises in producing hardware for US defence contractors who need total secrecy for equipment such as missile systems or other systems of critical national security. And Guardtime has adapted that specifically for the needs of cryptocurrencies, it is enormously secure, even if anyone obtained physical access to it.”
The solution offers end-to-end wallet management. “Whether the wallets are ‘hot’ or ‘cold’ clients in all cases have full control of all the keys, as we are a technology provider, not a custodian,” Donoghue clarified. “It comprises full sets of API [application programming interface] with integration, with very flexible security vaults designed for wallet and, importantly, the hardware itself is wallet-aware, meaning they understand that if a certain address is related to a client or not before the whole process of security policies can start. That is the first step and hitherto has been where clients get hacked.”
After that, there are limitation hurdles, for example, waitlists to access the wallet, time locks, or various other security policies to enforce the various levels of ‘hot’ to ‘cold’ controls that might be required for each wallet. “And very importantly,” Donoghue added, “we are integrated with a number of core banking platforms, Avaloq and Temenos, Finnova and Swisscom, for example, so we deploy our technology solution to your data centre, to your backup centre, or if clients do not want to manage the infrastructure we basically work through those partners, who then offer SILO’s infrastructure as a service.”
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