As awareness of cryptocurrency grows, forward-thinking governments have put the ecosystem under the regulatory spotlight, and are beginning to issue guidelines, erect regulatory frameworks, and enact laws to govern this new asset class.
Some of the most progressive regulators—from Mauritius to Wyoming—are recognizing the unique decentralized nature of cryptocurrency, and issuing guidance that suggests existing custodial solutions like cold storage will be unable to stand up to the next wave of regulation.
In the current storage paradigm, custodians receive their customer’s cryptocurrency to addresses owned by the exchange, and then rely on inaccessible cold storage vaults to safeguard the private keys that created these wallet addresses. While this is marketed as being secure, it represents a transfer of ownership—turning exchanges from simple crypto custodians, into unregulated depositories that effectively have full ownership over the assets in their care.
This direct form of ownership is not only against the ethos of bitcoin, but is ultimately not viable from both a practical and regulatory standpoint.
It should be a no-brainer decision. Distributed ledger technology has the potential to save the asset management industry billions, or even trillions of dollars over decades, by making transactions faster, cheaper and (in theory) tamper proof.
Blockchain revolutionizes the buying and selling of funds by doing away the need for the army of intermediaries (banks, broker-dealers and individual investors) that asset managers rely on to record and check transactions and the ownership of digital assets.
Fans of the technology have even described it as the most significant development in record keeping since double-entry accounting in the late fifteenth century.
So far, despite the boom in crypto-currencies, and a growing number of investment banks investing in blockchain teams and trading platforms, distributed ledger technology has not lived up to its hype.
Why? Risk and trust.