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The cryptocurrency and broader digital assets evolution has continued to grow in earnest, showing promising signs of maturity through 2021 as industry-wide regulatory bills have reached the Senate floor in Washington D.C. while prices have appreciated to new all-time highs. Although price appreciation tends to lure attention, price has become an increasingly less significant metric for measuring the strength and health of the broader digital asset space compared to transaction volumes, throughput capacity, unique user addresses, and funds locked in smart contracts.
Near-term price volatility has been a risk; however, the number of core investors and users who have long-term investment horizons and are willing to hold through these conditions continues to grow. As this core of investors grows, so does the need for digital asset solutions that provide a secure product, customer services, and follow regulations.
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Bridging the gap with custodial solutions
Digital asset custodial solutions are some of the most important market solutions to address the security and risk concerns of institutions and other investors who are waiting to explore the newest asset class. They are important to bridging the gap to mainstream and institutional adoption. Let’s take a look at two types of custodial solutions.
Storage of private keys via wallets (hardware and software) provide better security comparatively. Albeit as anything in life there are drawbacks. With self-custody, the burden of taking care of your own keys leads to vulnerabilities and potential loss of assets. An example of this is exchange wallets: a solution in which investors trust an exchange for controlling and managing public and private keys. The exchange holds ownership of private keys, and the digital asset. Therefore, you have counterparty risk and commingling for custody of digital assets.
These provide storage and safekeeping of digital assets on behalf of their customers and typically charge a fee. We’ve found more institutional investors are using third-parties as opposed to retail due to the enhanced security and insurance. Advantages of this type of custodial solution are flexibility and additional security — but those too come with a cost.
Digital asset custodial solutions look to offer the same peace of mind to institutional investors when transacting in traditional capital markets through their prime brokers as those solutions for everyday retail investors and their custody wallets. There is an explicit understanding that the bank is responsible for the security of an investor’s money as well as the privacy of their financial and personal information.
Industry trends in the digital asset custody space
Digital asset custodians are faced with similar responsibilities in a highly innovative market where horror stories exist about individuals who have lost access to their assets as well as the tools used to protect sensitive information, such as private keys. While there is truth to some of these horror stories, there has also been incredible innovation in the custodial space to safeguard accounts, making digital asset storage and access more secure than ever before.
Different categories of custody services serving different clients include:
- Institutional only
- Retail/institutional hybrid
- Hardware/tech providers
The number of digital asset custodians continues to grow with financial and fintech companies joining in. Like services for traditional capital markets, services will be needed for the new asset class across institutions, retail, and exchanges as well as hardware providers. Given unique incentive structures across the wide range of tokens, long-term holders are increasing and in need of secure custodial solutions, which will rely on collaboration with a trusted partner like IBM.
Corporations and institutions are also establishing the necessary infrastructure and strategies for long-term exposure. Regulatory compliant solutions will be a key focus for market participants, and so these custodians will be best positioned to handle institutional and corporate capital.
Driving adoption and investor confidence
IBM continues to expand its presence and expertise in blockchain technology, recently announcing a partnership with METACO, a provider of comprehensive digital asset security infrastructure solutions. METACO is now leveraging the secure computing capabilities of IBM Cloud and IBM Cloud Hyper Protect Services to further enhance its infrastructure and offerings for financial services clients. IBM Cloud Hyper Protect Services on LinuxONE keep apps and private keys secure yet accessible with enclaves backed by FIPS 140-2 Level 4 hardware security modules. Protect against external threats by running in a large, trusted execution environment with fully encrypted data at rest and in flight.
Digital assets have attracted a new wave of investors and innovators who, although may have different strategies when it comes to the digital assets markets, have the need for secure custodial solutions. With new digital assets custody solutions and brands appearing, seemingly every day, it can be tough for new participants to navigate the market for the right solution provider that will protect their interests and personal information. IBM and its partners put security first when it comes to solution hosting, infrastructure, and compliance to provide clients custodial solutions that they can trust.
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