We live on the cusp of the digital asset economy. Every day we hear about new assets and value being tokenized and moved onto distributed ledger platforms. From cryptocurrencies to fractional asset shares to new investment vehicles, the possibilities seem endless.
However, the real turning point will come when investment professionals with trillions in dollars under management enter the market - and right now there’s still some way to go before they have full confidence in the secure storage and custody of decentralized digital assets.
A history of insolvent exchanges and a lack of cybersecurity solutions tailored for decentralized systems has led to massive theft and asset management fraud.
This history presents a significant barrier that keeps mainstream market participants from adopting, holding and trading significant amounts of tokenized digital assets.
Regulated institutional investors - mutual funds, pension funds, 401(k) plans, endowments, foundations, and insurance companies - cannot take the open-ended legal and financial risks that investing in digital assets brings with it today.
Until the fundamental issues of secure storage and custody meet the requirements of the modern financial regulatory regimes, the largest investors will not enter this new market.
Of course, this also presents an opportunity:
Any financial services firms that successfully address these challenges will become the trusted providers of choice for a whole new set of services: services that support the trading and exchange of existing and emerging tokenized assets.
To date, most efforts to deliver digital asset custody to regulated financial institutions have involved a delicate balance between the use of hot wallets and cold storage. This is not viable for a number of reasons.
Cold storage accounts for around 95% of digital assets held in custody, yet cold storage is:
Cold storage, while notionally secure, is expensive, manual, creates days of liquidity delays, and can’t scale cost-effectively.
In the same way, legacy hardware encryption solutions (HSMs) are costly and complicated to scale. Also, while they promise security they still don’t protect against encrypted key theft and the resultant public breach disclosure.
Hot wallets account for between 2% and 5% of digital assets held in custody and are:
Designed to hold cryptocurrencies online to allow for rapid liquidity and settlement, they are riddled with multiple attack surfaces. As a result, exchanges typically keep between two and five per cent of total digital assets in hot wallets.
This paradigm puts even more significant strain on the financial operations and risk management of the exchange. Customer's account funds are routinely commingled to balance available funds in hot wallets with movements in the market and liquidity requirements of customers.
What’s more, neither hot wallets or cold storage even begin to address some of the emerging regulatory requirements in the cryptocurrency industry.
Regulators worldwide are calling for assets to be handled in segregated accounts, under the customer’s policy controls, with transparent governance and a full audit lifecycle.
The cryptocurrency industry’s reliance on hot wallets and cold storage prohibits the delivery of new, revenue-generating services for existing and emerging tokenized digital assets. Services that will attract institutional investors to the market.
The irony of the situation? Both hot wallets and cold wallets represent centralized solutions to the problem of custody for decentralized assets.
Decentralization creates trust.
So far, attempts to address digital asset security and custody have been to develop and deploy centralized solutions. This contradicts the founding ideals of decentralized systems, where no single entity has control of your digital assets.
The fallacy has become clear over the past ten years: 15% of all digital assets have been stolen - evidence that a centralized custodial system cannot secure or deliver trust over a decentralized digital asset.
Trust is compromised when digital assets are delegated to a centralized custodian. For a custodian of decentralized digital assets to be trusted, it too must be decentralized.
Once digital asset custody is decentralized, the emerging regulatory requirements of institutional investors are easy to meet.
Meet the Qredo Custody Network: a decentralized network that provides a real-time, quantum-secure custodian for digital assets.
The Qredo Custody Network enables financial institutions who trade and hold digital assets to provide to their customers and regulators:
To achieve this, Qredo has recognized that a decentralized custody network must have two halves to deliver on the promise:
Qredo’s custodian service leverages quantum secure-cryptography and distributed computing so that cryptographic keys only exist at the point of liquidity. All network operations within the service are isolated, and leave no trace of existence, reducing the attack surface to impossible odds.
Zero-knowledge proof of identity enables multi-party participants to certify and approve trades while eliminating the risk of leaking confidential identity information.
In addition, the open-source Qredo Custody Network broadcasts all transactions in the order lifecycle to ensure complete transparency and consensus of all the activity of the underlying digital assets. Any entity that operates a Qredo Custody Network client enjoys access to Qredo's custodian service.
It's easy to directly integrate this crypto-asset custody capability into an existing trading platform with minimal modification to existing systems or processes. By bringing together both the custody service and the decentralized network, we move the vault to the network.
Financial institutions who leverage the Qredo Custody Network leave behind the vulnerable centralized digital asset custody solutions in use today.
Decentralized custody makes it possible to rapidly offer and scale new, differentiated crypto-asset services that provide mainstream investors with the confidence they need to invest in, trade and hold tokenized digital assets.
They become a trusted provider of choice for new and emerging financial services and an emerging financial giant of the digital asset economy.