Introduction

In traditional finance, custody is a service offered by financial institutions to manage and protect clients’ securities. These custodians are instrumental in safeguarding assets, overseeing financial transactions, and ensuring accurate reporting and record-keeping for the accounts.

In the digital asset industry, custody refers to the safeguarding of crypto assets. Crypto custodians do not physically store assets, as all data and transactions are recorded on the blockchain. Instead, they focus on securely storing users’ private keys, which allow users to access and manage crypto funds.

Significance of Crypto Custody

The significance of crypto custody cannot be overstated, especially in today’s environment where hacks and security breaches have become increasingly prevalent.

Custodians acts as a shield against potential risks, such as hacking, fraud, and unauthorized access, ensuring the safety and integrity of your digital assets. As the popularity of cryptocurrencies continues to soar, the need for robust security measures becomes increasingly essential for widespread adoption.

Types of Crypto Custody

There are three main types of crypto custody: self-custody, partial custody, and third-party custody.

Self-Custody

Self-custody allows individuals to hold and manage the private keys to their own wallet(s). This approach provides a higher level of control and autonomy but requires a profound understanding of security best practices. Users need to be vigilant in safeguarding their keys against potential threats. Some examples of self-custody include holding your crypto in a Metamask or Ledger wallet.

Pros:

• Complete control over your funds

• Costs are less expensive than partial or third-party custody

• Privacy in financial transactions

• Never face counterparty risk

Cons:

• Responsible for the security of your assets

• Loss of funds due to hacking or lost private keys

• Assets aren’t insured

Partial Custody

Partial custody involves splitting the responsibility of securing private keys among multiple parties. Two popular solutions are multisignature (multisig) and secure multiparty computation (MPC).

Multisig employs a collective approach where individuals possess distinct keys, configured to require a specific number of these keys for a transaction to occur (e.g., 2 out of 3 signatures). This prevents a single point of failure and is common among centralized platforms with multiple stakeholders overseeing significant assets.

Secure MPC distributes the private key function among separate parties, allowing computation on encrypted data without disclosing individual inputs. Like multisig, a predetermined number of key shares must agree to a transaction, but secure MPC operates completely off-chain, keeping details private from other blockchain users.

Pros:

• Enhanced security without a single point of failure

• Flexibility and customization for transaction rules

Cons:

• Complexity in setting up MPC / multisig wallets

• Will incur various fees

• Dependence on other parties can cause transaction delays

Third-Party Custody

On the other side of the spectrum, third-party custody involves entrusting cryptographic keys to specialized custodians. These custodians, equipped with advanced security measures and protocols, alleviate the burden on individual investors and institutions to safeguard their private keys. While relinquishing control, investors gain peace of mind knowing that their digital assets are in the hands of dedicated professionals. However, trusting custodians necessitates thorough due diligence to ensure they have a proven and successful track record.

There are two distinct categories of custodians: qualified custodians, which adhere to higher and stricter regulatory standards (e.g., BitGo, Anchorage), and non-qualified custodians, which operate without meeting those specific regulatory criteria (e.g., Gemini, Blockchain.com). The differentiation between the two lies in their regulatory compliance and the level of oversight they undergo.

Pros:

• Peace of mind knowing your funds are secure

• Insurance on assets under custody

• Trading and staking facilitated via custodian

• Simplified crypto estate planning

Cons:

• Custodian controls private keys can lead to asset freezing or transaction blocking

• Will incur various fees

Key Players in Crypto Custody

Several key players have emerged as trusted custodians, offering secure and reliable solutions for safeguarding digital assets:

1. **BitGo:** BitGo is a pioneer in the crypto custody space, offering multi-signature wallets and institutional-grade security features. With a focus on transparency and risk management, BitGo has earned its reputation as the leading custodial service.

2. Arch Custody: Partnering with BitGo, Arch has launched institutional grade custody services designed specifically for individual investors at a significantly lower cost than qualified custodians.

3. Anchorage: Anchorage boasts a robust security infrastructure, insurance coverage, and a user-friendly interface for institutions.

4. **Coinbase Custody:** A subsidiary of the popular cryptocurrency exchange Coinbase, Coinbase Custody offers institutional-grade solutions, providing a secure and compliant environment for the storage of digital assets.

5. **Ledger Vault:** Ledger Vault is known for its hardware wallet solutions, providing a secure and innovative approach to crypto custody with a focus on cold storage and secure multi-signature technology.

6. Fireblocks: Fireblocks allows clients to securely custody their customers’ digital assets with custodial MPC wallets or provide customers full control of their keys using non-custodial wallets.

Third-Party Crypto Custody Fees

Crypto custodians impose various fees for their services, with the specific charges depending on the provider and the amount of assets held. It's important to note that many custodians have minimum holding requirements, potentially limiting accessibility for most individual investors.

These fees fall into the following categories:

• Platform fee: A flat, yearly fee associated with opening and maintaining an account with the custodian.

• Custody fee: Typically a percentage of the total assets under custody, usually below 1%.

• Withdrawal fee: Often times you may incur a flat rate or a percentage of the withdrawn value.

• Trading / Staking Fees: Most custodians offer the ability to trade and stake assets, with fees being a percentage of the trading amount or staking rewards.

While opting for self-custody can save you from some of the fees above, it comes with the inconvenience and stress of securely managing your wallet(s).

Choosing the Right Custodian

Selecting the right custodian for your digital assets involves careful consideration of various factors, including security features, insurance coverage, supported assets, and ease of use. Conducting thorough research and due diligence is crucial to ensure that your chosen custodian aligns with your specific needs and preferences.

At Arch, we recognize the importance of securely managing your assets. That is why we partnered with BitGo to offer accredited investors access to institutional-grade custody services. You can have peace of mind knowing that your assets will remain securely held in leading qualified custodians for a fraction of the price.

If you want to learn more about Crypto custody through Arch, please book a call with our team here. If you’re ready to get started, sign up here.