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Multi-custody: the endgame for institutional digital asset safekeeping 

The past 18 months have underscored an unarguable truth: that the seamless integration of digital assets into mainstream financial services can only happen with robust custody.   

This in turn is accompanied by another truth: financial institutions must not be constrained with exclusive dependence on just one digital asset custodian, and instead should break free to adopt a multi-custody approach. This article explores why a strategic transition to multi-custody is integral in unlocking new possibilities and advantages across the digital asset landscape.  

The advantages of going multi-custodial 

The institutional digital asset industry is maturing. As part of that, the ecosystem is responding to create more intuitive products and services to better suit the complex needs of institutions.  

But to truly become an ecosystem akin to what financial institutions are used to seeing, these solutions need to be able to work together. Custody is a prime example of this.  

A multi-custodial approach is necessary for the development of that market through an institutional lens. As institutions increase their exposure in digital assets into the billions, it will be a requirement to not simply have all of your eggs in one basket. This is especially true when the assets in question are effectively bearer instruments. We’ve already seen how the risks of the old model play out: if a huge, integrated financial company is taken out of action, then the entire stack goes with it — everything could be lost.  

A multi-custodial approach mitigates the risk of this happening, which is why it is so commonplace in traditional finance. It also greatly prevents operational redundancy, as the potential for downtime is reduced when you have a network of custodians.   

But beyond risk, it also creates greater opportunities to harness different approaches and models to custody, so you can be sure that the right model is available for the specific requirements you need it for. Not to mention the myriad of other benefits, including various pricing models, a wide range of digital assets available, and even geographical reach. 

While the need to go multi-custodial is not a necessary requirement for all players — smaller funds and startups might not have the resources to take this approach in the first instance, and it may be a problem for tomorrow. So, the option has to be there for the future. If we want digital assets to become truly a part of mainstream, institutional offerings, then the ecosystem is responsible for building that.   

Preparing for a post-regulatory future 

Talking about incoming regulations is perhaps the biggest pastime for everyone in the digital asset sector, and a significant point of interest for asset and fund managers around the world. We all know it is coming, even if we don’t know precisely what shape it will take.  

If we go with the most prevailing sentiment, then we can expect a mirror of the regulations the financial services industry already has to accommodate. To that point, the more rigorous providers in the space — including ourselves — are already adhering to financial services best practice. This is a crucial point, especially when considering the sophisticated needs of larger institutions’ activity in digital assets.  

This is where a multi-custodian approach will pay off. Adopting this system now means both sides of the trading equation, both institutions and exchanges, will be able to pre-empt a post-regulation environment from day one.   

A multi-custodian approach should not just be viewed as a preventative regulatory measure. It can also be used as a selling point.  

For institutional clients, a networked approach to custody can create greater cachet — you are not just working with one of the best providers in the market, but with multiple providers boasting both excellent reputations and diverse capabilities. This, in turn, makes investors more comfortable while also expediting the due diligence process. 

But this will only work for early adopters of such a model. The future will see this as not just commonplace, but also a requirement for any large or sophisticated venture in digital assets. The time for adoption is now.  

Building the ecosystem 

It is an understatement to say that it’s not often you get to build an entire financial ecosystem from scratch. One of the most exciting things about the digital asset sector is that there are so many opportunities for innovation — to create something new in an area that is still relatively nascent.  

But as the market matures, the innovators in this landscape will need to be able to integrate in order to meet the demands of institutions and investors. Our clients aren’t just used to working in a certain way out of mere preference — they have to work in that way because of regulatory requirements.  

Thus, it is the responsibility of the digital asset ecosystem to create a truly networked approach. We must — together — build the future institutional infrastructure for digital assets.  

As a bank-owned and bank-backed organisation, this is something we take to heart. We know, intimately, the pressures and requirements. This can be seen in our key services, such as Interchange Connect — our “network of networks” that connects custodial services. It is also something we kept at the forefront when developing Zodia Custody Gateway, our latest offering which provides a curated marketplace to quickly select and onboard services from Staking to Yield to Prime.  

The future of digital assets is networked and integrated. Custodians such as ourselves must be at the forefront of this work. We must collaborate as one to create an infrastructure that allows institutions and investors to maximise the opportunities digital assets bring, without compromise.  

Want to learn more about how we are building the future infrastructure for digital assets? Contact us here.  

Digital assets down under: empowering institutions in Australia’s evolving regulatory landscape 

Faced with imminent regulatory changes to the Australian digital asset landscape, now is the time for institutions to make some moves and set themselves up for success. 

Safeguarding digital assets with a specialist, registered custodian like Zodia Custody, and making best use of our world-class connectivity will be what helps get them there.  

This article explores how Zodia Custody offers unique value to Australian institutions, including exchanges, asset managers, family offices and wealth managers. We’ll also dive into the importance of collaboration and connectivity with SAF3 and Interchange Connect, and how we’re challenging traditional notions of competition for the better.  

A new face for a new regulatory landscape 

While Zodia Custody might be a relatively new name in Australia, we bring with us not just the hunger of a freshly founded fintech, but also the deep understanding of what financial services clients really need, five years in the making. We bring a wealth of expertise that is recognised by National Australia Bank, and backed by global institutions like Standard Chartered, Northern Trust and SBI Holdings.  

We’ve just launched our digital asset custody platform, SAF3, unique to the Australian market. Perfect timing, in readiness for upcoming regulatory changes proposed by the Department of the Treasury which will likely require digital asset platforms to obtain an Australian Financial Services Licence (AFSL). Zodia Custody Australia welcomes the Government’s proposed framework, and we’re readying ourselves for our clients to have peace of mind they will meet upcoming regulatory obligations. 

How do we deliver on this promise? Our dedicated team on the ground in Australia are actively working to adhere to the very best standards and tightest of controls, boosting our already impressive credentials achieved with the FCA in the UK, the CSSF in Luxembourg, and with the Central Bank of Ireland. That’s before we even start counting the work we are doing in Japan, Singapore and Hong Kong. All this means that our commitment to safekeep digital assets on behalf of our clients is simply unmatched – both in Australia and around the world. 

Specialist, qualified custodian  

By offering cold wallet storage with 24/7 instant availability, we eliminate key risks associated with other forms of custody still prevalent in Australia. Self-custody, for example, leaves responsibility for safeguarding clients’ and businesses’ digital assets with the crypto exchange, wealth manager or family office themselves, creating significant exposure. Soon, many of these players will have to obtain an AFSL for holding or managing digital assets, adding another layer of regulatory complexity.   

In contrast, Zodia Custody Australia’s specialist approach can mitigate against the above, as well as the risk of the loss of private keys, human error causing transactional mistakes, operational complexity, and physical risk brought by self-custody. 

Harmony over disruption  

But for institutions that aren’t ready to completely change their digital asset management strategy just yet, now is the perfect time to hop on board and try us out alongside your existing setup, before time runs out to make important decisions. 

Zodia Custody Australia’s SAF3 platform with our Interchange Connect service means institutions can get the best of both worlds and leverage the expertise of multiple custodial and digital asset software providers in Australia – including the likes of Fireblocks – and get the most out of the wider ecosystem without added operational complexity. 

Interchange Connect allows institutions to use a network-of-networks to transfer digital assets across their accounts and wallets, and benefit from off-exchange settlement on their trades, while mitigating potential counterparty risk exposure on other providers’ networks. Crucially, this also ensures an additional layer of security, risk management, and solvency protection when trading digital assets.  

By being interoperable by design, institutions in Australia can use both Fireblocks and Zodia Custody Australia together to achieve a holistic digital asset management strategy. This way, there’s no need to pick one or the other.  

A new dawn for Australian digital assets 

Digital assets have a bright future in Australia. Having the right approach to custody will be what determines how soon the financial system will reap the benefits of this emerging asset class and innovative technology.  

By employing our network-of-networks strategy, we’re not just the most qualified custodian, but also the most connected. Reach out today and learn more about how we’re building the future of digital assets in Australia and beyond.  

Building Bridges: Interoperability, collaboration and Interchange Connect 

To paraphrase an old Chinese proverb, “If you want 1 year of prosperity, grow grain. If you want a lifetime of prosperity, grow your network.” 

Digital assets are evolving at speed enabling new markets and paradigms that underpin a new financial system. While custodians like Zodia Custody remain central to securing, and helping evolve the digital assets landscape, we realise that no one custodian or infrastructure provider alone will be able to serve the whole ecosystem. Instead, the future will be dependent on multiple parties being able to work seamlessly together and provide robust access for institutions, but to ensure that they can do so efficiently, and with security at the heart of everything. 

Taking a leaf from the TradFi world where institutions have been able to connect and collaborate across a wide variety of services seamlessly, and in real time, we made a strategic decision last year, to open up our venue connectivity and off-exchange settlement product, Interchange, to selected partner networks. 

The result was Interchange Connect.  

Interchange Connect: Network of Networks 

We launched Interchange Connect in late 2023 as a natural next step in the evolution of our off-exchange settlement solution, Interchange. It represents the next major leap forward in creating a rigorous and interconnected digital asset ecosystem.  

Starting with Fireblocks’ NetworkLink, Copper’s ClearLoop and Metaco’s Sub-Custody networks, we plan to expand our reach even further with more partners on the way. This “network of networks” approach provides institutional clients the widest connectivity and access to the best services for their digital assets, directly from their Zodia Custody wallets. 

In addition to unrivalled reach, another core tenet of Interchange Connect has been to ensure that we are reducing the technical and operational complexity with each integration. Clients can access all connected networks from the comfort and familiarity of Zodia Custody’s APIs, and we can streamline mutual onboarding so that our clients do not need to go through the same process multiple times. 

Looking to the future, together 

Across our business, we are all very much attuned to the idea that as the industry grows, it cannot be down to just one entity to future-proof the entire sector. Each entity will certainly have a specific part to play, and it will be in collaboration with each other. 

Interchange Connect is opening the industry up and providing better and more robust solutions to fit the varied needs of institutions. It represents true ‘one stop shop’ model for digital asset ecosystem interoperability. This is custody with collaboration, without compromise for either side of the equation.  

We are very excited to champion this ethos and execute on this shared vision with our fantastic partners. 

Learn more about how Interchange Connect can bring greater interoperability to your digital asset team – contact us here.  

Exploring the evolution of digital asset ETFs and the necessity of custodians 

January 2024 marks a significant milestone in the ETF space with the approval of digital asset ETFs in one of the largest markets, the US. While we’ve already witnessed similar activity on this side of the pond, these updates in the US should be considered more than just a market update; this could signify a pivotal shift, opening doors to fresh opportunities for institutional investors and paving the way for a more mature digital asset market. In the focus now: robust custodial services. 

What’s the buzz about and what’s in it for digital assets? 

The digital asset ETF space is witnessing significant momentum, with established players like BlackRock, Grayscale, Bitwise, and more gearing up to launch their ETF products. Let’s delve deeper into BlackRock — a global financial giant boasting an impressive $9.42 trillion in assets under management. The company is making a strategic move into the digital asset ecosystem by launching the iShares Blockchain and Tech ETF (IBLC). It’s designed to provide investors with exposure to companies that are involved in the development, innovation, and utilisation of blockchain and digital assets technologies. A testament to the rising importance of digital assets-focused investment products, sending ripples throughout the industry. 

The launch of IBLC is a nod from one of the world’s largest asset managers, signalling a significant shift. As the industry watches, the launch has the potential to boost confidence, spur innovation, and diversify the offerings. An institutional backing which has the potential to pave the way for a more mature and stable digital asset market – validating the conviction that digital assets is an integral part of financial services. 

A market update already yielding positive consequences with Standard Chartered Bank foreseeing USD 50-100 billion inflows to Bitcoin ETFs in 2024, potentially propelling BTC to reach the USD 200,000 level by end-2025. 

A new era of custodianship? 

In this transformative period, the importance of robust custodial services comes to the forefront. With the digital assets market maturing, the need for secure, innovative custodians becomes paramount. They play a crucial role in ensuring the safety and regulatory compliance of digital assets, within the digital asset market. 

Custodians are poised to lead the charge in this new era of ETFs by offering secure storage, streamlining processes, reducing costs, and furnishing a comprehensive suite of services essential for digital asset management. A pivotal moment turning custodians into architects of opportunity in this new era. 

Three reasons why digital custodianship is vital in the new digital asset ETF era 

There are a variety of reasons why custodianship emerges as pivotal for institutional investors. Let’s dive deeper into the ways they are taking centre stage: 

  1. Highest level of security & insurance 

It all comes down to security. Custodians protect client’s assets by adhering to the highest security standards, implement robust digital and physical protocols, utilise advanced encryption techniques, multi-factor authentication, and continually monitor the network to protect against digital threats like hacking, phishing, and unauthorised access. Additionally, employment of cold storage solutions and the use of physically secured, air-gapped hardware devices, safeguards assets from both online and offline vulnerabilities. 

  1. Advanced technology 

Tech is key. Key technological benefits from custodianship lie in the advanced solutions integrated into custodial platforms. From cutting-edge staking mechanisms to ecosystem connectivity through Interchange Connect, liquidity pool access, and yield generation functionality, custodians ensure access to the latest and most effective tools when it comes to digital asset management. 

Another benefit: the ability to process efficient, compliant withdrawals in real-time from cold storage. This eliminates the need for batching redemptions – ensuring efficiency and responsiveness. One example of our commitment to technological excellence is the approval we’ve secured from the FCA to offer staking services, including staked ETFs. These technological differentiators underline the significance of custodians in providing institutional investors with access to the latest and most effective tools for digital asset management, reinforcing their central role in the evolving landscape. 

  1. Ecosystem expansion 

Be at the forefront: Clients not only benefit from the security of their assets but also gain access to a suite of additional options within our ecosystem. One example: staked ETH as collateral. The feature allows clients to stake assets while concurrently processing redemptions. It’s a game-changer, especially for those clients exploring the option of borrowing ETH to expedite redemptions, particularly when facing extended lock-up periods.  

Beyond custody, Zodia Custody’s ecosystem extends to include Interchange Connect for seamless connectivity, staking facilitation offering potential yield generation rewards on locked assets, and Zodia Protect ensuring hyper-secure storage of assets. This strategic approach not only safeguards assets but also opens doors to a diverse range of possibilities for clients. 

The beginning of a new phase 

The launch of BlackRock’s Bitcoin ETF signals a turning point in the financial services landscape, validating the conviction that digital assets are an integral part of the industry. It’s not just about embracing digital assets; it’s about simplifying the path for institutional investors to access this transformative asset class without the complexities of direct bitcoin ownership. 

As the industry embarks on this exciting new phase, custodians like Zodia Custody are not just protectors of assets, they are architects of opportunity. The future belongs to those who can seamlessly navigate the evolving landscape. 

Ready to explore the secure, innovative, and prosperous of digital assets? Contact us at [email protected] 

Zodia Custody launches Gateway, a marketplace for curated services


Gateway offers a curated, marketplace-like experience to help institutions discover select, vetted partners and services. As the most connected custodian, Zodia Custody is able to connect institutional clients to the most diverse ecosystem of products and services all with the benefit of seamless integration.

The marketplace will help reduce the time and effort it takes for clients to select trusted providers and functionality. In this vein, onboarding is simplified with clients being able to access the additional services from their existing Zodia Custody wallets. 

Zodia Custody Gateway is built to be an evolving marketplace of products and services, providing financial institutions a growing array of partners to increase connectivity to the digital asset space from a single source. Through Gateway, the digital asset custodian aims to bring an “app store” style experience to selecting products and services. From its launch, clients will be able to access Yield, Staking, and Prime services, with more to be announced in due course.

Twinstake, the institutional-grade and non-custodial staking provider, will be one of the partners providing services through Gateway from its launch. Andrew Gibb, COO and CFO at Twinstake said: “As a launch partner of Gateway, Twinstake is excited to bring staking services to Zodia Custody’s new and existing institutional clients, setting a benchmark for excellence and forward-thinking in the digital asset sector.”

Other partners providing services on Gateway at launch will include Blockdaemon, Hidden Road and OpenEden, with more in the pipeline. 

“No one can do it alone in digital assets. To get the most out of the opportunities in the market, financial institutions need the whole ecosystem at their disposal. And that’s what Zodia Custody Gateway is built for – to deliver the very best our industry has to offer from a single, seamless source.” said Julian Sawyer, CEO of Zodia Custody. “Through curated platforms like Gateway and our recently launched Interchange Connect network, we are connecting the digital asset industry piece by piece, and making it more accessible than ever for financial institutions.”

Zodia Custody to integrate Copper’s ClearLoop

Through this partnership, Zodia Custody will provide clients with on-chain custody alongside access to off-exchange settlement and rapid settlement times of up to T+4 hours through ClearLoop. The integration will also offer clients access to Zodia Custody’s network of networks, Interchange Connect.  

Access to Copper’s ClearLoop gives Zodia Custody’s institutional clients seamless access to off-exchange settlement across seven exchanges and another three coming in early 2024 while continuing to ensure the highest standards of digital asset safety. The move comes at a time when custody is becoming increasingly interconnected across the market – a development that increases the accessibility and security of digital assets for institutional market participants. 

What this partnership will bring for institutional clients:  

  • The ability to trade on leading global exchanges while assets are held within a secure custody environment. 
  • An institutional environment for users to participate in a new standard of digital asset infrastructure, challenging the existing model of holding assets directly on individual exchanges.  
  • Bankruptcy remote protection through both Zodia wallets and the Copper ClearLoop English law governed trust structure.  
  • Users will soon have access to Bybit, OKX, Powertrade, Bitget, Gate.io, Deribit, BIT, and Bitstamp through Copper’s ClearLoop network. 

Subject to legal documentation being put in place, this integration will be available to institutional clients in the first quarter of 2024 and delivers the much sought-after connectivity and functionality for financial institutions. Through the integration, institutions will be able to connect to Interchange, Zodia Custody’s market-leading solution that provides effective safeguarding of digital assets and mitigates counterparty risk exposure. 

The move is part of Zodia Custody’s mission to develop greater rigour and discipline across the institutional digital asset ecosystem. By doing so through the establishment of increasingly connected networks, Zodia Custody is facilitating higher standards of security, compliance, transparency and governance as the norm in digital assets. This will also include wider integrations to connect with a variety of custodians to provide institutions with greater optionality, without any compromise on functionality or security. 

“Financial services are quickly waking up to the importance of connectivity,” said James Harris, Chief Commercial Officer, Zodia Custody. “Digital assets cannot lag behind. Connectivity is the key to the wider adoption of digital assets for financial institutions, in giving them the functionality, optionality and security they need. By integrating the ClearLoop Network, we’ve taken a huge stride in achieving this, becoming the most connected custodian on the market today.”

“We have a shared vision and commitment to building a more secure, transparent and accessible digital asset market infrastructure,” said Dmitry Tokarev, Founder and CEO  at Copper. “That’s why this was a natural next step for both our teams in collaborating together.”

Zodia Custody integrates with Fireblocks 

Joining Fireblocks comes as a natural step for Zodia Custody towards continuously building the market infrastructure institutions need to enter the digital asset ecosystem at scale. As part of the Fireblocks Network, institutional investors are able to transfer digital assets securely across all of their accounts, using Fireblocks’ unique automated address authentication which removes the requirement for counterparties to exchange deposit addresses, when transferring assets, as well as benefit from off-exchange settlement on their trades. 

The strategic collaboration connects financial institutions to Zodia Custody’s Interchange – a market-leading solution providing investors with top-class safeguarding of digital assets and mitigating counterparty risk exposure – on the Fireblocks Network. This added connectivity offers an additional security layer, risk management and solvency protection when trading digital assets.

The integration also effectively eliminates the technical and operational complexity that comes with using multiple accounts on trading venues and exchanges, providing financial institutions with a seamless one-stop shop to manage all of their digital asset holdings. 

“Connectivity is key in digital assets,” says James Harris, Chief Commercial Officer, Zodia Custody. “That’s why being the most connected digital asset custodian is our top priority. In working with Fireblocks, we’re making digital assets more accessible and streamlined for institutions in need of a simplified solution to trade digital assets — without compromising security. Advancing and strengthening networks such as these are key for the future of this market.” 

“We are excited to bring our enterprise-grade, multi-layer security solution to Zodia Custody. In today’s markets, regulation and risk is at the forefront of client decision making,” says Richard Astle, Vice President, Fireblocks Network at Fireblocks, “The Fireblocks Network has helped connect 1,800 of our clients to transfer trillions in digital assets directly between one another. Rather than creating isolated ecosystems, it’s important for technologies to interoperate and ensure digital market infrastructure can function efficiently and securely when transferring value, particularly for regulated institutions to enter the market.”

The collaboration with Fireblocks signals Zodia Custody’s commitment to unmatched connectivity, coming a day after it announced the integration with Metaco, a Swiss-based provider of digital asset custody and tokenisation technology, to offer greater custody options for institutions. It will come into force and be available for financial institutions to access in Q1 2024.

Zodia Custody integrates on Metaco network

The integration enables institutions to access Zodia Custody’s bank-grade custody solutions through Metaco.

The expanded collaboration between the two companies follows a longstanding strategic relationship and is designed to further build out networked options for institutional investors, enabling them to gain additional secure, reliable and compliant end-to-end digital asset service capabilities. It also strengthens global digital asset infrastructure by improving connectivity to the foundational Layers 0 and 1 blockchains – creating a robust settlement network built on distributed ledgers. 

Institutions connected to the Metaco network, where sub-custody networks serve as a foundational, initial use case, can also benefit from Zodia Custody’s Interchange offering, providing them with an added layer of security, risk management and solvency protection. In particular, Metaco’s institutional clients — including some of the world’s premier banks and financial institutions — are able to leverage the network’s interoperability standards to access and govern interactions with various value-added service providers, allowing for better choice in how they execute their digital asset strategy across jurisdictions and asset classes. The integration also allows institutions using Zodia Custody’s Interchange — such as Bitfinex, LMAX Digital, and CoinShares — to leverage Metaco’s solutions. 

The collaboration is part of Zodia Custody’s plan to ensure it is the most connected custodian in the digital asset ecosystem. This includes further plans to develop and launch its own network in Q4 2023. 

“Combining our forces on this institutional network for digital asset flows, spanning sub-custody, trading use cases, and beyond, is an important step on the way to building truly rigorous digital asset infrastructure, globally,” said James Harris, Chief Commercial Officer, Zodia Custody. “We are focused on expanding the options available to our clients via our financial network, thus ensuring Zodia Custody can become a truly comprehensive digital asset solutions provider. We want to ensure that any institutional investor can seamlessly trade, without compromise — this is another significant step on that journey.” 

The partnership reinforces Zodia Custody’s commitment to keeping client assets safe both at rest and in transit across the Interchange network. This includes trades connected to exchanges, assets being transferred to institutions aligned on KYC and AML practices, and assets being used as collateral in protocols to meet regulatory requirements.

“As the industry undergoes a pivotal transformation, our networked infrastructure is dedicated to standardise, govern and connect institutional digital asset flows — an essential step in forging use cases that transcend individual companies.” said Adrien Treccani, Founder and CEO of Metaco. “We are committed to providing interoperable, open infrastructure that enables institutions to create innovative, value-added services, thereby establishing the benchmark for the future of digital asset ecosystems.”     

Custodial tech providers vs. digital asset custodians: the 4 key differences 

Choosing between a custodial technology provider and a digital asset custodian depends on an investor’s specific preferences and needs. With self-custody via technology providers, investors take on some of the duty of storing and safeguarding their assets, while digital asset custodians provide this expertise on behalf of their clients. It’s the decision between taking on self-custody vs. delegating for enhanced security and peace of mind. It is crucial for investors to thoroughly assess their requirements and make a well-informed choice regarding the storage and protection of their digital assets. 

  

In this article, you will learn: 

  • What are custodial technology providers? 
  • What are digital asset custodians? 
  • Four key differences between technology providers and digital asset custodians 

  

What are custodial technology providers? 

Custody technology providers are companies that provide infrastructure services and software solutions for the secure storage of digital assets. They provide an agile environment for institutions to satisfy their business demands by offering software and/or hardware infrastructure. These providers enable their clients to independently organise the storage of their digital assets without requiring the providers to store the clients’ private keys. Fireblocks, Metaco, Ledger, and Blockdaemon are examples of leading technology providers. 

Technology providers offer a distinct approach to self-custody that differentiates them from basic self-custody. Unlike basic self-custody, which lacks advanced features, technology providers supply the essential infrastructure for securing and enhancing the capabilities of digital assets. 

Institutional investors considering self-custody should recognise that the loss or compromise of their private keys can result in permanent asset loss. According to research from Chainalysis, 20 percent of the existing bitcoin that has not moved from its respective wallet addresses in five years or more is considered lost.    

  

What are digital asset custodians? 

Digital asset custodians are third-party companies that safekeep digital assets on behalf of their clients in a safe, secure, and auditable way. Depending on the jurisdiction they are based in, digital asset custodians are also required to be compliant with regulatory requirements and registered with regulatory bodies.  

Operating with regulatory oversight, registered digital asset custodians have a proven track record in safeguarding digital assets on behalf of their clients. The core custodial offering is invariably supplemented by value-add services such as off-exchange settlement to reduce counterparty risk, access to yield generating protocols, and a chance to participate in governance and security of blockchains via staking. 

Hedge funds, large corporations, and asset managers are examples of such client types. 

  

Four key differences between custodial technology providers and digital asset custodians 

  1. Access and control: – Technology providers and custodians serve distinct roles in the world of digital asset custody. Unlike custodians, technology providers do not possess the authority or capability to freely move their clients’ assets. This places the responsibility solely on clients to assume full responsibility for sending and transferring assets to custody wallets. When you take on the duty of self-custody, the safety of your assets is entirely in your hands. This means that if the recovery phrase is not carefully secured, you run the risk of indefinitely losing access to your funds. To mitigate any potential loss, it is important to recognise the critical role of securely storing your recovery phrase. 
  1. Backup and recovery possibility – Clients share the burden of securing their assets, including in backup and recovery scenarios, when working with a technology provider. By contrast, custodians bear full responsibility of assets both in business as usual and disaster recovery scenarios. Consequently, recovery possibilities may be more limited when relying on tech providers compared to the comprehensive options offered by digital asset custodians. 
  1. Lack of regulatory protection - Technology providers and digital asset custodians have distinct differences in terms of asset storage and regulatory obligations. Technology providers, unlike custodians, are not tasked with storing their clients’ digital assets and, as a result, are exempt from holding regulatory licences and are not subject to the same regulatory requirements as custodians for the safeguarding of digital assets.  
  1. Insurance coverage – There is often a wide variation across the industry in the type and scope of insurance cover offered to protect digital assets under custody.  Due to the difference in burden of responsibilities, it is best to check the scope of insurance cover carefully when going down a tech provider route to ensure that your assets will be protected in all reasonable scenarios. Custodians typically provide a more comprehensive and higher grade insurance cover that can be reassuring for clients. 

For institutions aiming to navigate the world of digital assets, Zodia Custody stands as a trusted custodian, assuring the safety and security of your assets. This peace of mind empowers you to explore the untapped potential of the digital asset market. Stay ahead of the curve, get in touch with us here

12 months on: 3 lessons learnt post-FTX  

November 11th marked the first-year anniversary of the collapse of FTX, serving as a crucial source of lessons and warnings for all players in the digital asset ecosystem. Acting as a catalyst, the collapse has sparked necessary dialogues geared towards providing clarity to all industry participants, ranging from regulators to institutions. 

In this article, we explore three lessons learned from the fall of what was once the world’s second-largest cryptocurrency exchange. 

Lesson one:  prioritise robust risk management 

The mismanagement of critical risk factors, including counterparty risk, inadequate liquidity, and operational oversights, played a pivotal role in the downfall of FTX. This collapse serves as a stark reminder for crypto asset service providers (CASPs) to bolster their risk management practices and implement robust internal controls when navigating the intricate landscape of digital assets. 

In the aftermath of the collapse, a notable shift occurred—institutional firms and CASPs themselves began taking a more proactive stance to identify and assess the risks that CASPs they deal with, either as counterparties or clients, may pose, and evaluate the adequacy of controls that are in place. This has enabled better-informed decisions to be made with respect to risk management and has, over the past year, resulted in standards across the industry increasing. Additionally, CASPs and institutional firms need to ensure that training and risk awareness throughout their organisations are significantly improved and that a culture of risk awareness and compliance is embedded. 

Embedding these cultures extends beyond merely implementing risk and compliance measures. As an industry, cultivating a mindset that truly values and proactively manages risks at every level is essential for attaining lasting success. 

This increased scrutiny reflects a growing awareness within the institutional landscape regarding the importance of comprehensive risk management strategies, which remain a challenge in the lack of clear consensus and crypto specific regulation. 

Lesson two:  embrace transparency and reporting  

Transparency and accountability form the bedrock of a thriving digital asset ecosystem. The FTX collapse reinforces the indispensable roles played by both internal and external audit functions. 

 For CASPs, transparency is not just an organisational value but a necessity for building trust with clients. The situation with FTX, where audited financial statements remained undisclosed until after the collapse, is an obstacle for clients seeking to comprehensively assess the financial health and operational integrity of a service provider. 

In response, institutions are increasingly choosing to collaborate with service providers that can provide evidence of reporting through SOC 1 and SOC 2 reports. The former focuses on internal controls over financial reporting, while the latter examines organisational controls pertinent to both operations and compliance. This transformative shift highlights an increasing emphasis on accountability and transparency within the digital asset space, marking a game-changing moment for those seeking to establish credibility and build trust. 

 However, the mantle of responsibility for transparency extends beyond service providers alone. Institutions, as architects of their partnerships, bear the responsibility to conduct thorough due diligence when selecting a partner. Asking rigorous questions and carefully researching a service provider’s history, shareholders, and risk management practices are non-negotiable prerequisites before making any commitments. 

The responsibility for transparency and accountability within the industry also extends beyond service providers and institutions; regulators play a crucial role. They bear the responsibility of proactively formulating clear and comprehensive regulations, enforcing them diligently, and taking decisive action against any misconduct. Well-defined regulations in the digital asset space act as necessary regulatory guardrails, contributing to clarity within the industry and fostering a conducive environment for the growth and maturation of the digital asset sector. 

Lesson three:  asset segregation is paramount   

In the aftermath of FTX’s collapse, a crucial lesson emerges — the importance of asset segregation and the protection of clients’ funds. The fallout, marked by the disappearance of significant client assets, serves as a stark reminder to the industry about the importance of maintaining a clear distinction in clients’ holdings. 

Asset segregation involves a clear separation of clients’ assets, preventing any co-mingling, whether among institutional clients or between an institution and the service provider. Let’s explore two scenarios of asset co-mingling and their potential outcomes. In the case of an omni-bus wallet where clients’ assets are mixed and the crypto service provider goes under, determining ownership becomes challenging. Despite the potential for retrieval, the looming risk of prolonged asset entanglement within a complex administrative process is evident. 

In another scenario, if there’s a failure to maintain clear segregation between clients’ assets and those of the provider, there’s a potential for these assets to come under the administration of the service provider should they go bankrupt. This outcome is contingent upon the legal structure in place and without the safeguard of insolvency protection. 

The collapse not only highlights the importance of a clear legal framework but also underscores the critical role of the implementation of a well-defined recovery and resolution strategy. Such a strategy is essential for ensuring that clients maintain both legal and operational control over their private keys and underlying assets. These measures serve as integral components in fortifying the resilience of market infrastructure and fostering confidence in the ongoing development of the digital asset ecosystem. 

Conclusion 

These lessons highlight the foundational principles that shape a resilient and trustworthy digital asset ecosystem. By implementing robust risk management practices, industry participants can navigate the complexities of the ever-evolving landscape with greater confidence and stability. Embracing transparency and reporting not only fosters trust but also cultivates an informed and collaborative industry. 

These fundamentals collectively set the stage for the sustained growth and maturation of the sector. Prioritising risk management, transparency, and asset segregation establishes a strong foundation capable of overcoming challenges and instilling confidence within the sector. 

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