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Hot wallets are typically used by exchanges to provide a pool of liquidity for day-to-day operations.

On average, exchanges store from two to five per cent of customer's digital assets in hot wallets, which are connected to the internet and offer fast withdrawal speeds.

But the cost of this convenience is insecurity. Hot wallets represent a big red target for hackers, and the vast majority of stolen funds have been taken from hot wallets.

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Security

Hot wallets are the source of almost all catastrophic losses in the history of cryptocurrency.

Since the original Mt. Gox hack where missing bitcoins were stolen straight out of the hot wallet, awareness of this critical insecurity has grown, and exchanges have minimized the amount of funds kept in hot wallets.

But even a small proportion is too much of a liability for institutional investors, who have thus been hesitant to venture onto major exchanges

Qredo doesn't run the risk of private key theft because the private keys controlling custodial accounts never exist. As they do not exist, they are impossible to steal!

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

Get the white paper

 

Compliance

Hot wallets have caught the attention of regulators, and more progressive jurisdictions have started to clamp down on this vulnerable custody method.

Japanese financial regulators have restricted the use of hot wallets in favour of cold storage, which is subject to high levels of oversight in the country. Under new regulations that could set a global benchmark, Japanese exchanges holding user funds in hot wallets must have the ability to instantly reimburse users with “the same kind and the same quantities of crypto assets” in the event of theft.

Even in jurisdictions where the coverage of cryptoassets held in hot storage is not required by law, exchanges are beginning to adopt this practice to win the trust of their customers.

Other emerging regulations are calling for customer assets to be handled in segregated accounts with transparent governance and a full audit lifecycle. But, cryptocurrencies held in exchange hot wallets are anything but segregated or transparent. To ensure there is enough liquidity to cover customer withdrawals, assets are commingled — mixed together in the same wallet, and tracked with an opaque internal book-keeping system.

Qredo offers a secure custody method, which means there is no need to hold vast amounts of funds as insurance. Unlike the commingled assets held in hot wallets, funds held using Qredo remain segregated, allowing compliance with increasingly stringent regulations.

 

Liquidity

Hot wallets are intrinsically insecure, but the liquidity benefits they provide are often perceived to outweigh the risk.

To minimize the security threat, exchanges keep a minimum allocation of commingled funds in hot wallets. But, this means facing long withdrawal delays during periods of high demand as funds are transferred from cold storage.

Even during periods of low demand, funds withdrawn from hot wallets are slowed down by
operational procedures designed to keep the funds secure. Custodians are now touting ringfenced walled gardens of liquidity in an effort to remove the delays.

Qredo custodians have no need to commingle funds to provide liquidity. Instead of delaying transactions with operational processes, Qredo grants immediate control over the custodial account as soon as cryptographic redemption conditions are met, allowing institutional investors to quickly take advantage of time-sensitive trading opportunities.

 

Transparency

Hot wallets cover liquidity requirements by commingling customer assets in a single wallet.
This commingling complicates risk management and obscures the operations of custodians to outsiders, making full transparency 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. As assets are on chain they can be transferred and cleared instantly.

 

Support

Hot wallets are usually designed for specific cryptocurrencies, and most can't accommodate more than a handful. This is often inconvenient for investors, who may be forced to use several different custodians to store funds within their portfolio.

Qredo’s 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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