What is Crypto Custody?
Crypto custody refers to solutions that secure cryptocurrencies by managing private keys, either through self-custody, third-party custodians, or institutional-grade services. As the adoption of cryptocurrency continues to grow, so does the need for robust custody options. Unlike traditional finance, where banks, insurance, and government oversight protect assets, digital currencies like Bitcoin require different methods of safeguarding. At the core of crypto custody is controlling access to private keys, which are essential for owning and managing digital assets.
Self-custody, while offering direct control, comes with significant risks. Many investors have experienced the consequences of poor key management, such as losing access to their funds by forgetting their wallet passwords or misplacing their hardware wallets. This risk highlights the importance of secure key management, especially for personal investors.
The Challenge
Third-party custodians offer enhanced protection, but they also require trust in external entities. Many individuals, particularly Baby Boomers, may feel uncomfortable navigating the complexities of setting up hardware wallets, managing seed phrases, or running their own nodes.
The question is: what is the best solution that doesn’t completely relinquish control of crypto assets to an unfamiliar custodian? This challenge emerged from our recent experience with two clients: one, a liquidator responsible for safeguarding a significant crypto portfolio, and the other, a high-net-worth Baby Boomer seeking advice on safely investing in Bitcoin. As practicing attorneys with established trust relationships, we were tasked with providing sound advice that balanced security and responsibility.
The Solution
Drawing from previous experience with a South African company offering crypto custody services, I conducted a due diligence review of their processes, including regulatory compliance, expertise, and security protocols. Satisfied with their credibility, I agreed to a multi-signature arrangement, ensuring control and security over any crypto transactions involving our clients. This setup requires co-signing by myself, one of the company’s directors, and an independent auditor. As a result, no movements of crypto assets can occur without my signature, significantly reducing theft risks and enhancing oversight.
While the Financial Intelligence Centre Act (FICA) or “know your client” (KYC) requirements imposed by the custodian may deter some investors, we view this step as essential for both legal compliance and building trust. The custodian is a registered CASP (Crypto Asset Service Provider) with South African authorities and adheres to strict compliance protocols, ensuring secure and legal management of institutional funds.
Conclusion
As the cryptocurrency market evolves, secure custody solutions are becoming increasingly vital. Whether through self-custody, cold storage, or third-party services, choosing the right option depends on each investor’s needs, risk tolerance, and portfolio size. Proper key management and stringent security measures are critical to protecting digital assets in this rapidly changing landscape.