In a collaborative effort, Zodia Custody and Hogan Lovells have converged their legal, technical, and operational expertise to craft a comprehensive whitepaper on digital asset custody. This paper seeks to demystify digital asset custody by comparing the custody of digital assets with that of more traditional assets, as well as highlighting key considerations and questions for institutions and corporations when exploring projects in this field.
Key takeaways from the paper
At a high level, the paper identifies the following key points that institutions need to consider before entering into a digital asset custody arrangement:
- Legal structure of the custody arrangement – Not all custodians are the same. To avoid loss, it is important for clients to carefully segment custody providers and work through all asset flows to understand the vulnerability of their assets before choosing a custodian.
- Operational approach to custody and resilience – Risk must be balanced with potential operational and commercial benefits. Considering the custodian’s approach to information security, business continuity, and disaster recovery, it will provide some additional comfort to clients that key technology can be restored or replaced if disaster strikes.
- Security mechanisms – There is a need to build a picture of the custodian’s risk tolerance and the potential worst case scenario. A key consideration relates to the custodian’s approach to hot and cold storage (or variations thereof, such as “warm” wallets) and other applicable security mechanisms (such as sharding or multi-signature wallets).
- Regulatory compliance – Digital asset custody regulation is not currently uniform between jurisdictions. Custodians need to demonstrate, at a minimum, that they either have core regulatory building blocks or a regulatory road map in place.
- The continued evolution of the digital asset industry and applicable regulation – What still lies ahead is greater clarity as to: (a) the regulatory characterization of digital assets; (b) the precise nature of legal property rights associated with the asset class; and (c) the approach to regulation of the services relating to digital assets, including custody. Institutions should keep pace with these developments.