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Cold storage is marketed as the best way of storing crypto assets, but this security model must be accompanied with strict custody methods and stringent audited control processes to be even remotely secure.

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Storing private keys offline in air-gapped wallets is a throwback to the old paradigm of physical asset custody, and bringing this paradigm forward into the age of digital assets creates a flawed solution which can't compete with cryptographic custody.

 

Compliance

Regulators around the world are slowly turning their attention to the cryptocurrency ecosystem, and jurisdictions like Malta, Japan, and Wyoming have already drafted the first laws.

Compliance with these emerging regulations is of utmost importance for cryptoasset custodians catering to institutional investors.

As the ecosystem evolves and links between cryptocurrency and legacy finance get stronger, these regulations could only be expected to get more comprehensive.

There is a danger that regulations mandate existing technologies such as cold storage instead of mandating outcomes. Regulations typically evolve much slower than technology and as such can stifle innovation if drafted without careful consideration.

Wyoming has pioneered laws that recognize direct property rights for individual owners of digital assets, and a proposed custodial framework where investors will still own the digital assets held with the exchange as a bailment. This means that although control over the assets is given up, ownership is retained — just like leaving your car with a valet.

This form of custody is not possible with cold storage, where asset holders must effectively surrender ownership of the asset by handing over the private keys.

When defined in the nomenclature of traditional financial services, institutional cold storage is not really a custodial arrangement, but a depository arrangement — as the custodian effectively has full control and ownership of the digital assets.

Lack of transparency, and shared custodial accounts, also make it more difficult for custodians using cold storage to provide the audit-ready records that can immediately satisfy regulators, and more difficult to demonstrate systems for the detection and reporting of suspicious transactions.

Qredo uses a transparent decentralized network for digital asset custody, making it much easier to meet regulatory requirements.

The digital signatures of all participant activity across the network are stored in a permanent record that can be evidenced immediately on the request of regulators.

Instead of acting as a depository and taking effective ownership of the digital assets, Qredo enables the asset holders to have authority over a segregated custodial account.

Find out how Qredo is moving crypto asset custody beyond hot wallets and cold storage in our white paper.

Get the white paper

 

Security

Cold storage is marketed as the most secure method of crypto custody, but it comes with its own set of risks.

To mitigate these risks, investors must resort to convoluted methods of key distribution, like the Winklevoss twins that safeguard their bitcoin by scattering paper fragments of their private key in multiple deposit boxes.

But even the most cumbersome cold storage systems can't guard against human error, and research by insurance company Willis Towers Watson found that 90 percent of all cyber attacks are caused by human error. The findings showed that a data compromise is more likely to come from an employee accidentally leaving a laptop on the train than from a malicious criminal hack.

The lines between human error and malicious intent can often be blurred, as demonstrated by the QuadrigaCX case, which shows the critical problem of placing private keys in the hands of an imperfect human custodian.

In the event of a major catastrophe, funds held in cold storage may be rendered impossible to access.

Qredo replaces private keys with a governance process backed by a combination of distributed post-quantum cryptography, zero knowledge proofs, and multi-party computation to reduce the attack surface to impossible odds.
Private keys controlling custodial accounts don’t exist, as such, they are impossible to steal!

In a force majeure event, assets within a custodial account can still be recovered via a disaster recovery procedure.

 

Liquidity

Cold storage takes crypto assets completely offline, making it difficult to generate liquidity from holdings on short notice.

For the cold storage withdrawal process to be secure, crypto assets must pass over several speed bumps along the way. This might involve multiple parties checking the assets, different levels of authorization, or the fulfillment of multi-signature requirements in a specific order before assets can be transferred.

All in all, the process can take up to seven days, and prevent traders and investors from taking advantage of time sensitive trading or commercial opportunities.

Qredo offers immediate redemption and real-time access to liquidity. As soon as the redemption conditions that safeguard the custodial accounts are cryptographically completed, then control over the custodial account is transferred immediately.

This quick transfer allows institutional investors to take advantage of immediate opportunities that would be impossible with cold storage.

 

Participation

Cold storage can restrict crypto asset holders from participating in crypto-economic networks, preventing holders from benefiting from voting and staking.

As cryptocurrency evolves and the dominant use case shifts from speculation to utility, we could expect these governance and security networks to carry more weight, but those with funds held in cold storage may be unable to participate.

Qredo allows crypto asset holders to enjoy their full technological potential by participating in onchain governance.

 

Transparency

Cold storage custodians demand excessive levels of trust from customers because they are unable to deliver real-time third-party consensus on their operations. Getting an accurate real-time picture of custodian operations, or even verifying that the digital assets truly exist in the custodial account, is impossible.

Qredo allows any party to instantly receive cryptographic assurance of all operations of a custodian, and verify without doubt that all assets placed within a segregated custodial account are aligned to the underlying asset’s ledger.

 

Support

Cold storage has struggled to keep up with the number of new cryptocurrencies, and most hardware wallets can't accommodate more than a handful. This is inconvenient for investors, who are forced to use several different wallets to store funds.

Qredo’s Custody Network offers support for the widest range of cryptocurrencies and security tokens on the market today.

Find out how Qredo is moving crypto asset custody beyond hot wallets and cold storage in our white paper.

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