Understanding crypto custody
Crypto assets present unique custody challenges. The most consequential is how to secure private keys, the alphanumeric identifiers that provide proof of ownership. Because the key holder owns the crypto asset, protecting private keys is the core goal of crypto security.
There are three basic approaches to crypto custody:
Self-custody can be as simple as using an external hardware device or writing a private key code onto a piece of paper. Those who self-custody are responsible for key security in the same way they are responsible for cash in their pocket. Self-custody carries significant risks. Because blockchain transactions cannot be altered, there are no chargebacks with crypto. An estimated 3.7 million self-custodied bitcoin have been permanently lost.
Partial custody refers to third-party software wallets that manage private keys. These services are typically called hot storage, meaning they are connected to the internet. To prevent unauthorized transactions, hot wallets often provide two-factor authentication or “multi-sig” protections that require more than one person sign off on transactions. Wallets provide varying levels of security, so it’s important to understand the steps a provider takes to protect assets.
Full service third-party custody
Full service third-party custody solutions provide the highest degree of security and customization. This approach includes the utilization of cold storage, which involves offline devices separated by “air gaps” that prevent network or software-enabled connectivity.