Customers of third party custody platforms, such as exchanges, can face total losses if the platform files for bankruptcy.
Qredo offers an alternative model that enables complete recovery of assets even in the event of catastrophe.
An inconvenient truth is that the promise of crypto — self-custody and financial sovereignty — has largely fallen by the wayside.
Many users give up control of assets in favor of the convenience of storing funds on exchanges. Few realize, however, that by storing crypto with third party custodians, they are effectively surrendering assets completely — with little possibility of recovery in the event of catastrophe.
Qredo restores full control to the owner. Digital assets remain completely in their possession, and can be recovered even in the unlikely event that Qredo Ltd is dissolved.
Crypto exchanges differ in critical ways from their counterparts in traditional finance.
Firstly, crypto exchanges act as combined broker-custodians — serving as both central marketplaces for buyers and sellers to trade, and as custodians keeping customers’ crypto holdings in their own omnibus wallets.
Secondly, unlike equities, futures or commodities exchanges, crypto exchanges are not regulated under federal law in the USA. Indeed, very few jurisdictions around the world hold crypto exchanges to common operational and security standards.
Finally, perhaps the biggest distinction is that deposits on crypto exchanges do not legally remain the customer's property.
According to law professor Adam Levitin, depositing assets to a crypto exchange is not a custodial relationship at all.
He argues that deposits represent a sale, and not a bailment. Which means (minus the legalese) that depositing crypto involves the transfer of ownership; you are effectively giving up all control over your coins.
This becomes significant when exchanges collapse, which they have an unfortunate habit of doing. In such an event, the crypto held by the exchange is then legally treated not as property of the customers, but as property of the exchange.
Exchange customers, then, are not necessarily legally entitled to the full return of their funds.
Instead, they become what is known as an "unsecured creditor", joining the end of a long line of people that are owed money. And as a paper from Leiden Law School identifies, exchange bankruptcy can be a fraught process, particularly if crypto is stored in omnibus or pooled addresses, rather than segregated accounts.
In the end, customers can be left waiting years to recover whatever funds make it through the bankruptcy proceedings, and can ultimately be left with only pennies on the dollar. Just ask the victims of Mt. Gox or QuadrigaCX.
On Qredo, assets are secured by decentralized custody. This has two powerful advantages when compared to depositing assets with a third-party custodian:
Users retain the unequivocal right of ownership. Assets are not surrendered to a third party.
Users have the ability to recover funds independently from the decentralized network in the event of a disaster.
At present, all Qredo Network’s hosting bills and critical third party services are pre-paid six months in advance. This means the network would remain operational even in the unlikely event that Qredo Ltd ceased operations — giving users enough time to retrieve their assets.
Looking forward, when the Network’s journey to decentralization is complete and all validators are controlled autonomously, recovery would remain possible from any catastrophe— as long as there are two nodes of the network in operation.
Accessing funds would then simply require building a signing app to interact with the network. This would need to be based on BLS signing keys, and could be incorporated into existing apps or wallets.
To achieve this, you would need three things:
Control of your threshold signers. i.e. staff that want to cooperate
Your BLS keys (any app can include the signing key technology, or it could be done manually.)
At least two Qredo Network nodes in operation
With these three things, you can recover your funds from Qredo Network independently without the need for Qredo Ltd — meaning that you are not reliant on a single counterparty and stay true to the original vision of self-custody and financial sovereignty!
For more information on Qredo's Disaster Recovery policies, speak to a Qredo specialist.