Top

Cryptocurrency and Digital Asset Custody – Solving the Security Conundrum

Seamus Donoghue

Metaco

Seamus Donoghue, Vice President of Business Development for Swiss technology solutions provider METACO, is an expert in the world of digital custody, a fast-evolving domain, 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. SILO is an end to end crypto-asset custody solution specifically designed for the financial sector. It is a complete technology infrastructure to manage cryptographic keys, wallets and transactions in cryptocurrencies, security tokens and other digital assets with the security, reliability and functionality guarantees that financial institutions require.

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. That said institutional interest in the sector, particularly in the fast emerging tokenized securities sector, continues to increase.

METACO launched SILO in late January 2018, under the premise that the solution enables 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; moreover, 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, representing more than USD22 billion at the prices at that time.”

The comprehensive hot to warm multi-wallet solution deployed either on-premise by METACO or as a service via one of METACO's partners, is designed to manage multiple accounts with different currencies and includes security protocols such as multi-signature and flexible security policies such as quotas, time locks, whitelists 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 - it is the optimal balance between security and availability.

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 crypto and digital assets is how to securely 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 conected infrastructure to manage these private keys and our approach is what we call ‘warm storage’ which is 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.”

SILO’s solution

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 wallet management and private key management system with integrated custom built hardware.

“Importantly,” he explained, “the hardware is produced by a 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 hardware secured 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 can be accessed and managed via a desktop application or  a rest API [application programming interface] which provides easy integration to any core banking platform. 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 flexible security policies, for example, quotas on maximum outflows from a wallet, velocity limits, time locks, whitelists 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, 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.”

We would like to hear any feedback or suggestions you have – either on this content, or on what you would like to see us produce going forward. Plus – we want to hear about your news and any interesting developments at your firm.
Please email [email protected]