5 Killer Governance Features for Institutions Investing in Crypto
Crypto’s revolutionary characteristics raise new operational challenges and business risks for organizations used to managing traditional assets. We explore how Qredo’s governance features help institutions to solve these issues, bringing new levels of security, operational efficiency and compliance oversight to crypto investment.
Alongside crypto-native institutions like Grayscale and Bitwise, more and more traditional asset managers are getting into crypto.
But there’s a hitch.
Whilst these institutions have massive infrastructure and experience around the administration and trading of traditional assets, crypto is a totally new asset class.
Its revolutionary characteristics bring new operational challenges and business risks: How to control the risk of employee access to private keys? How to ensure compliance with fast-changing crypto regulation? Where to collect and store accurate data for reporting?
These and other important issues come under the heading of “governance”.
Digital asset governance is the system and standards by which an investment organization manages its crypto asset operations, and the mechanisms by which it, and its people, are held to account. Risk management, reporting, compliance and administration are all elements of good digital asset governance.
This post illustrates five important ways that Qredo’s radical new infrastructure helps institutions to ace digital asset governance and combine it with a robust crypto capability.
“Governance may not be as exciting a topic as Dogecoin or the latest DeFi release, but it’s an important area of focus in a maturing crypto scene. For large investment institutions, managing their digital assets efficiently and with the minimum of operational risk is as important as controlling investment risk." - Ben Whitby, Qredo Head of Regulatory Affairs, Twitter | LinkedIn
Qredo's 5 killer governance features:
1. Bring Your Own Governance 🧰
Qredo allows an investment organization to expand its digital asset footprint with no compromise to its existing governance models.
This is achieved through Qredo’s flexible account structure which enables an institution to set-up and run their digital asset activity in a way that aligns with existing team structures and controls:
- Versatile Qredo account building blocks include different role types (Fund Manager, Trader, Administrator, Custodian) each with their own activity and access rights.
- Team members can be assigned the power to originate transactions, approve them, or run reports, and an unlimited number of signers can be appointed with any M of N threshold scheme.
- If someone leaves the team or firm, it’s simple to disable their access and reconfigure the signing process. Adding new team members is just as easy.
- Each Qredo account can be configured to hold an unlimited number of funds and sub-wallets. These can be used for different digital asset types, investment strategies, and/or client portfolios.
2. Reduced threat of rogue employees 🔒
One of the most important issues from a governance point of view is who has access to -- and therefore control over -- the private keys.
Despite this, many investment teams share cold storage devices between them, or take them home each night for safe-keeping.
This risk of an employee flying off to Mexico with a firm’s keys and client assets is magnified in larger organizations that employ thousands of people and where staff turnover is higher.
It does this by transferring the authority to sign a transaction away from an employee with access to a private key, to the organization’s own “governance layer”.
This layer controls a decentralized network of MPC nodes and, once the organization’s transaction approval thresholds are met, the nodes then collectively authorize the transaction without ever producing a private key.
3. Risk-free transaction signing 🛡️
Whenever a third party holds a key share and is involved in signing a transaction, operational risk is introduced into the process.
This could be a delay, or even worse if a key share is lost.
Qredo’s implementation of decentralized MPC allows an organization to manage the signing process in-house, with no external control over activity.
It also means there is no need for a third party disaster recovery service in case a key shard is ever lost or deleted.
“By using Qredo, an institution can control the signing process, without adapting their own governance to fit. This enables firms to avoid the problems and delays that can arise when key shares are distributed amongst internal and external parties who need to come together to sign a transaction.” - Ben Whitby, Qredo Head of Regulatory Affairs, Twitter | LinkedIn
4. Accurate, audit-ready data & reporting 🔍
The possibility that an institution can’t produce an accurate record of its investment activity is now a major business risk.
That’s because any organization investing in crypto faces a growing burden of record-keeping and reporting.
The importance of recording crypto transactions accurately increased after a landmark decision in 2019 which recognized cryptographic signatures and smart contracts as enforceable legal agreements in a court of law.
Asset managers now also have to comply with the growing spread of government oversight -- from the EU’s future Regulation on Markets in Crypto Assets (MiCA), to the FinCEN Travel Rule which requires financial institutions to collect and retain information related to transfers and transmittals of cryptoassets between VASPs.
Despite all this, many investment institutions still record their crypto holdings and trades on vulnerable, error-prone spreadsheets, or centralized databases.
Qredo removes this risk by recording all digital asset activity on-chain, in an accessible and immutable audit trail.
Whether it's for regulatory oversight, internal review or client reporting, Qredo delivers live reporting on wallet holdings and market values. It also offers a detailed audit trail showing who signed a transaction, when, and where. Custodial policy changes are also recorded.
5. A better way to access licensed custody 🏛️
Whilst some institutions want to self-custody their assets, others are required to use a licensed custodian.
Reasons for this include the ongoing conversation about how the SEC Custody Rule should be applied to crypto.
This regulation mandates that SEC-registered asset managers and investment advisers deemed to have custody over clients assets need to keep them with a “qualified custodian”.
However, traditional crypto custody solutions can impact operational and investment processes in a number of ways.
This includes private key risk and loss of control, assets held in inaccessible cold storage or vulnerable centralized databases, and sometimes lengthy asset transfer windows that can impact timely trade decisions.*
Institutions can overcome these issues by creating their own organizational account on Qredo and then assigning signing rights to a licensed custodian that is already part of the Qredo Network.
In this way, the institution can meet its governance and regulatory requirements but in a more secure and capital efficient way:
- Rather than holding a private key or keyshare, the licensed custodian can simply fulfill its duties via the signing permissions assigned to it via the institution’s bespoke governance layer on Qredo.
- Assets held by the custodian enjoy the extra level of crypto asset security made possible by Qredo’s unique implementation of multi-party computation (MPC) and the Tier-1 bank security it offers.
- Because assets held with a Qredo-based custodian are freely able to move within the network and not locked away, they can be used more efficiently. This includes lending and staking opportunities, risk-free exchange access, and instant OTC trading via Qredo’s new Liquidity Hub.
“Using Qredo’s infrastructure, there is no longer a trade-off for institutions between good governance and asset management best-practice. Qredo means that assets aren’t locked-up and instead enjoy instant, secure access to the growing Qredo ecosystem of trading, liquidity, and DeF opportunities. Welcome to Licensed custody 2.0!" - Ben Whitby, Twitter | LinkedIn
* You can find a very interesting exploration of some of the issues around custody and crypto assets here.