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The evolution of Bitcoin, and subsequently blockchain technology, since the major cryptocurrency topped out at $20,000 has been fascinating to watch. The price may not even be halfway back to that mark some two-and-a-bit years on, but the growth of the entire industry has been exponential.
The 2017 price boom was purely off the back of individual speculative investors who flocked to Bitcoin, not even sure what it was, with the hopes of making money quick. However, the 2020 market, and its place in the greater industry, paints a picture of strong enterprise and institutional interest and adoption. It could be said that we are sitting on the precipice of another massive move for Bitcoin if we can achieve similar interest and adoption from enterprises and institutions as we saw in December 2017.
So, what do we need to get right to ensure that enterprises and institutions will flood enough money and interest into the entire industry – not just Bitcoin – for there to be critical mass adoption? Again, using Bitcoin’s market price as a metric of the health and interest in crypto and blockchain, we have seen that individual interest alone is not enough anymore.
I spoke with Iqbal Gandham, the managing Director at crypto-friendly trading platform eToro, about what is needed for the cryptocurrency industry to take off in 2020.
There are four components that we need to make crypto work,” he said. First is regulation, and that is happening. We are not running scared of regulation any more, we are embracing it.
Second, we need custody solutions. The likes of Fidelity are looking at custody, and third-party custody solutions are being developed. In Germany, the banks can sell crypto, so the regulation is there and the custody.
Gandham goes on to mention two more components — structured products, such as a Bitcoin ETF — and utilization which he feels is wallet adoption. However, it feels as if these other aspects will only be realized if custody is dealt with sufficiently first.
The first aspect of getting this adoption right is well underway. Regulation is coming, but it is just a matter of time. However, the second aspect sits on the edge. Custody services are around, and available, but they are still niche and the same level of importance has not been put on this aspect in the crypto space, even though it is vital in the institutional space.
More so, custody is a vast aspect as it also extends to the security of coins kept in cryptocurrency exchanges which are hotbeds of reputation-damaging hacks and scams. Thus, this aspect appears to be the next one that needs to be addressed. The cryptocurrency industry needs to prove it can safeguard these assets for institutions and enterprises, as well as for individuals who are using exchanges.
A logical step
Understanding the importance of secure and trustworthy custody is the beginning of understanding why institutions have not jumped into the industry entirely. We have seen individuals flock to crypto weighing up not only the risks of a volatile market, but also one prone to hacks and scams.
Recently, a Chinese cryptocurrency exchange called FCoin shut its doors owing $125 million to its users which it is promising to payback, but without much qualification as to how.. This exchange was labelled as a little suspicious from the outset, when its business model appeared to be producing falsified trading volume numbers.
Risks like this are still high in the cryptocurrency space, especially for individual investors, who are willing to take them on. However, for institutional and enterprise investors, they are far more risk-averse and are looking for the secure custody of cryptocurrency before making a move.
The work and protections that come with trust-worthy custody ticks a lot of boxes for enterprises and institutions who are eyeing out this nascent market, as Rebecca Aspler, Director of Blockchain at Unbound Tech, explains:
Custodians safeguard assets, minimizing for the investor, the risk of theft or loss. As such should-be-trustworthy vendors, institutional investors alongside with the regulator require crypto custodians to follow up on fiat related regulations and guidelines, whether these are KYC and compliance checkups, periodic account status reports, approval of withdrawals according to the ‘segregation of authorities’ guideline and at best, insurance of assets by the custodian vendor.
We have already started seeing companies either picking up the mantle to provide secure custody services to enterprise and institutional customers, such as Fidelity and Anchorage, who are part of the Libra Association.
High demand and growing supply
Evidence of the need for strong custody solutions has already been demonstrated by companies like Anchorage and Fidelity with the former picked up by Facebook for its Libra Association simply for the need of such a service in the enterprise cryptocurrency game.
For Anchorage and Libra, it is about creating a framework that allows the cryptocurrency to work without any hiccups, and for that to happen, there needs to be trusted custody which is comparable to the likes of Visa and Mastercard.
We are creating the financial plumbing, same as Visa, said Diogo Monica, Co-founder, and President of Anchorage. They created the financial plumbing for card networks to be able to process payments, so merchant adoption and card acceptance became worldwide.
Libra is going to be built on top of this new financial plumbing. Libra requires custody services, every single member of the association will require custody services to store Libra and so will any other company that will want to interact with this new digital currency.
But, in the greater scheme of things, the importance of custody is paramount for the next step in cryptocurrency adoption, as Aspler adds:
“As risk-averse institutions, and certainly as custodians of institutional money, leading banks must invest in software solutions that include advanced security and platform management capabilities, integra-table within institution’s service infrastructure and systems, flexible to tailor to the institution’s needs. They also need to deploy on any infrastructure and offer maximum control over security and key management.”
The demand is indeed there for trusted custody as many enterprises and institutions are not prepared to risk it on cryptocurrency exchanges and are rather looking to the likes of Fidelity and others, even the German banks who have been imbued with digital currency asset powers. On the other side of things, the offering of such a service from banks and financial institutions also positions them in a good place for the evolution of this new asset.
It would be safe to assume that banks are looking at the growing market of digital assets and wanting to take a portion of it on one hand, while wanting to not lose market share to the Fintech new players that are becoming regulated experts of digital asset custody, Aspler said.
Bettering the security
Of course, custody is one thing, but secure custody is another thing and the fact that a company like Fidelity, or Anchorage, offer custody solutions does not immediately ensure they are entirely secure. There is a lot of complicated technology that comes in securing cryptocurrency funds, and as one might expect, it comes down to cryptography.
This is why for Aspler, at Unbound Tech, they have been working on what’s been dubbed a virtual Hardware Security Module (HSM), called Crypto Asset Security Platform (CASP,) using secure Multiparty Computation (MPC) in order to better what is already being used as current institutional security measure.
Considering the popular alternatives to institutional security measures, which would usually be multi-sig, HSM, and a Trusted Execution Environment (TEE), or a combination of these, one would want to consider the following security concerns, explained the Blockchain Director.
“With multi-sig, the confidentiality of the key is as strong as the ability of the signers to keep their key confidential – which is very hard. Additionally, multi-sig solutions are usually ledger dependent (on-chain). Thus, multi-sig capabilities require custom coding per each type of currency/token. Any other ledger requires the development of custom code.”
“With TEE, for example, SGX (Software Guard Extensions) and TEEs run together with other software on general-purpose processors and are therefore vulnerable to key extraction via software side-channel attacks on shared resources in the hardware platform.”
“With HSMs, one may want to consider that they were mainly designed to protect key confidentiality, not key usage. An attacker who can compromise the client connecting to the HSM, would be able to perform usage with the key – without ever attempting to attack the HSM itself.”
Aspler hopes that the use of MPC would lead to higher custody security as this technology distributes private keys and transaction approval, validation, and signing, among multiple approvers – including offline participation and bots. This allows custodians and exchanges to predefine transaction approval policies, and to improve their operational efficiency.
Setting up for the next steps
If the growth of secure cryptocurrency custody can grow and expand to a place where enterprises and institutions have a myriad of security options that they can rely upon without having to be hesitant, the next few steps as expressed by Gandham can come to fruition.
Suddenly, if there is an influx of enterprises in the cryptocurrency space, the push for structured products will skyrocket as these businesses will know that their funds are safe and secure. More so, it will also lead to the additional retail interest which can push for an increase in wallets and the betterment of that side of things.
(Sources: Be In Crypto, Reddit, The Daily Chain, Forbes)
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