With digital assets gaining more relevance than ever, custodians play a crucial role in safeguarding these assets for their users, prepping the industry for its eventual full-scale adoption. The digital asset industry is gaining acceptance with open arms – institutional interest is at the highest it has ever been.
Retail investors, too, are flocking in droves to benefit from the asset class’s benefits, including rapid wealth generation capabilities, cross-border transaction efficiency, and a whole hose of utility unlocked by the burgeoning Web3 landscape.
These developments are taking a new form thanks to the secureness offered by custodians. Simply put, investor confidence is high thanks to custodians making the industry as safe as the TradFi ecosystem. Web3 native businesses, too, are finding sturdier foundations to work with, thanks to the security provided by custodian solutions.
However, the outlook for the industry was not like this earlier. Mainstream institutional acceptance has only come with the competency with which custodians help industry participants manage risks while interacting with digital assets. And they do that by keeping multiple tenets at the core of their operations, allowing them to drive the digital asset industry toward increased safety levels.
Security
First things first – the main reason behind the existence of digital asset custodians is the security they provide to their clients. Custodians integrate all the measures to ensure highly secure environments for institutional storage and management of digital assets. That includes utilizing cold wallets to store asset bulks and relying on hot wallets to store the minimum required to maintain sufficient liquidity.
Beyond that, custodians provide real-time monitoring round the clock to identify threats as they emerge to take immediate action against attack vectors. They also institute continuous bug bounty programs to stay resilient against emerging risks and undergo rigorous penetration testing and audits to remain fault-proof against hacking attempts.
Risk Management
Custodians implement risk management strategies to ensure institutions deal with digital assets safely through evolving regulatory landscapes, helping them navigate existing financial legislations and emerging digital asset laws. Simultaneously, custodians empower institutions to safely deal with the digital asset market by providing deep liquidity and efficient transaction capability.
Most importantly, custodians enable the needed bifurcations between institutional storage and operations verticals, keeping their digital assets secure from being misappropriated by internal bad actors. Of course, custodians also have checks and balances to avert risks arising through human and systems errors.
Regulatory Compliance
A crucial aspect of offering financial services, whether in the TradFi or digital asset ecosystem, is complying with jurisdictional regulatory frameworks. That is all the more difficult while dealing with digital assets because many jurisdictions lack dedicated crypto regulations. Institutions operating in jurisdictions with established digital asset laws may still find it hard to comply due to the lack of clarity of the laws, and the complexities ingrained with crypto transactions.
Custodians help institutions navigate regulatory hurdles by ensuring their transactions and asset selections comply with regulations. For instance, custodians operate AML (Anti-Money Laundering) and KYC (Know Your Customer) systems to keep institutional activity within the bounds of AML and KYC laws. Similarly, they do not service privacy-enhancing assets widely used in laundering money from criminal activity. Partnering with custodians keeps institutions away from regulatory crosshairs.
Insurance
If one thing is sure with the digital asset space, hacks and vulnerabilities get the better of even the most sophisticated asset storage mechanisms. Sometimes, these incidents are inevitable. However, that does not have to prevent institutions from ever dealing with these assets. Asset loss is a part of operating in this industry, and custodians come insured to protect client value during such unfortunate events.
Insurance coverages offer custodians a recourse to make their institutional clients whole when things go south. In fact, regulators in areas with digital asset laws mandate custodians to be insured. TradFi custodians, too, are insured for the same reasons. Insurance goes one step beyond in keeping institutional value safe when all other measures fail.
Digital Asset-Oriented Technology
Custodians must utilize and build technologies that complement digital asset storage and transaction needs. That includes the obvious technologies that go into keeping wallets robust. It must also include those that provide efficient transaction capabilities, keeping digital asset transactions convenient for institutions when moving funds ranging from the hundreds of thousands to the millions.
The implementation of technologies must also consider the future needs and trends of the digital asset ecosystem relevant to institutions. That will help custodians update and configure their platforms and offerings with changing requirements effortlessly, ensuring minimal maintenance times.
Business Model
Catering to the multi-chain requirements of institutions is a must. Custodians should support a broad range of assets across various blockchain networks. Moreover, they must allow institutions to access applications like staking, DeFi protocols, and more from a single point so that institutions can tap into utility from across the blockchain ecosystem effortlessly. Thus, custodians must integrate auxiliary options alongside their custody solutions to provide an appealing user experience to institutional clients.
Conclusion
Custodians service institutional clients keeping these core tenets at the heart of their operations to provide them a smooth and secure digital asset journey. Solutions like Liminal Custody focus on offering the most secure and convenient custody for institutions by integrating these tenets into all aspects of their functioning. As a result, institutional clients get to utilize digital assets safely and securely, broadening the adoption the asset class will witness.
