The EUCUS Working Group aims to promote the relevance of crypto custody and to facilitate standards in the nascent field of crypto assets. But what is crypto asset custody exactly? How does it work? And what types of crypto custody exist? We spoke with Philipp Sandor, Senior Manager Sales & Business Development at Tangany and Sebastian Winkelmann, Corporate Development Manager at Nyala – both founding members of the EBA Custody Working Group – about custody 101s and the challenges ahead in the light of the FTX meltdown.
For a quick overview of crypto asset custody check out our infographic here.
Philipp, Sebastian could you summarize in a few sentences what crypto custody is and why it is so important?
Sebastian: Crypto custody is a term used to describe the process of securing digital assets. With virtual assets, the safeguarding is more complex compared to traditional assets like money or gold; digital assets are not technically stored because all data and transactions exist on a public blockchain ledger. Instead, what custodians guard are users’ private keys – the important part of a crypto wallet that grants access to the funds held in it. Hence safeguarding the keys privately or putting them on a central exchange bears tremendous (counterparty risks) in terms of losing the keys.
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Philipp: The importance of crypto custody and the digital asset custodians keeping the assets secure are twofold. Firstly, crypto custodians can leverage their blockchain-, technical- and regulatory know-how to empower companies, investors and many different ventures to build ideas, products and services based on blockchain technology. Additionally, institutional investors who want to enable their third party customers access to the digital asset market, may only do so through a regulated digital asset custodian. Finally, new regulatory steps such as the upcoming European MiCA regulation, prove themselves of growing importance with the recent incidents occurring. Key drivers for mass adoption are fundamentally clear regulations and convenience in technology. Even the most supposedly trustworthy institutions, most recently FTX, can collapse due to missing regulation and consequently shady actions of individuals in power being able to take billions of customer funds with them.
With all the troubles that we have already had throughout the year, it is important to highlight that the recent problems around FTX are based on fundamental malpractice outside of any blockchain technology. Incidents like Terra/Luna earlier this year, on the other hand, were triggered by flaws in the protocol, which in turn was created and operated by centralized institutions.
You mentioned the latest trouble and insolvency surrounding the crypto exchange FTX. What are the consequences for the crypto asset industry and for custody providers?
Sebastian: The FTX case shows that various – supposedly trustworthy – players in the industry have violated the trust of their customers and haven’t secured their customers’ funds as securely as promised. Regulators will step in and also customers will require more regulation and some sort of assurances before they invest or store their digital assets. On the other hand, this is a great chance for regulated custodians to capture market share. Especially traditional financial institutions could leverage their solid reputation and offer secure and regulated services to attract not only early adopters but also the majority of investors, who will gradually enter the digital asset space.
Philipp: With all the troubles that we have already had throughout the year, it is important to highlight that the recent problems around FTX are based on fundamental malpractice outside of any blockchain technology. Incidents like Terra/Luna earlier this year, on the other hand, were triggered by flaws in the protocol, which in turn was created and operated by centralized institutions. Both are very serious incidents and prime examples of a lack of regulation and risk management. Setting the priority of creating innovative but clear regulations that prevent all kinds of misuse of funds in the future and at the same time being mindful of not suffocating any growth potential of the digital asset market behind a lack of understanding of lawmakers and overbearing regulations. In the long term, we believe custody providers will help establish a new layer of trust, in partnership with traditional financial institutions that bring digital assets to the masses. But most importantly, on the back of a properly regulated and fully established digital asset market.
Where do you see the future and maybe room for improvements for crypto custody providers?
Sebastian: The trade-off between safeguarding the digital assets and using them (e.g., staking or trading). Investors want to interact as conveniently and profitably with their assets as possible. Therefore, custodians who can offer a safe solution while customers are able to interact with their assets in a convenient way will probably have an advantage. To build up such an integrated platform that also entails the upcoming regulations will probably be the next milestone on a longer roadmap.
Philipp: Creating one platform for investors and traditional financial institutions that covers their digital asset needs, not only in terms of services they can provide to their customers but also covering their regulatory and compliance requirements, will be a big step forward. Convenience is key and being able to have one partner covering all needs may prove to be incredibly valuable from a custodian’s perspective. Already now more institutions, companies, start-ups and public authorities are utilizing the DLT technology and are therefore in need for regulated secure crypto custody solutions.
How can companies or individuals who are interested in these topics join the working group?
Philipp: We are open for everyone to join. So, if you are already working in the field of custody or want to look into the space, just send us an email at wgeucus@eublas.org and let’s discuss how we can work together for the benefit of the industry!