The custody of the tokens lies behind the cryptoasset operations. Each type has advantages and disadvantages, and some are more suitable for certain types of investors. Understand better what they are and the positives and negatives of the main types of custody of cryptoassets.
Why is custody of cryptoassets necessary?
To make a cryptoasset transaction, the investor needs a private key. However, to give more security to resources —often large ones—keys are long, random combinations of letters and numbers. That is, they are practically impossible to memorize.
Therefore, it is necessary to think about this information’s custody because the loss of the code or its theft by hackers means to lose access to digital assets.
In self custody, the investor himself is responsible for safeguarding the key in any way he chooses best. In general, the person writes down the code on paper or uses a ledger, a kind of pen drive, explains Julian Lanzadera, head of Business Development Latam at Transfero Swiss.
However, the task is not easy. After all, you have to consider a lot of things when choosing how to store that information, Lanzadera notes.
“It is a risky option for a person with no familiarity with the area because it involves a security risk. Imagine if there is a fire in the place where the key is. Besides, this key cannot be saved online because there is a risk of hacking. A backup is also required, but there can be no photo of the numbers”, he adds.
As a positive aspect, the executive cites a market saying: not your key, not your token. In other words, if the investor does not have the key, he also does not own the token. Thus, self custody would allow greater control over the assets.
“The person can also opt for other features, such as a trust wallet or edge, but it is not self custody because the key is not 100% with you”, the executive said.
Custody on exchanges
There is also custody on exchanges, a “consequence of leaving the tokens on the platform to be traded”, Lanzadera explains. According to Transfero executive, this can be a good option for those who move the assets a lot.
“If the investor moves tokens a lot and trades them frequently, it is difficult to do self custody because he needs to do several processes. So it’s more interesting to leave the assets on the exchange itself since there is the expectation of doing business in the short term”, says Lanzadera.
However, he stresses the previous saying: “not your key, not your token” to remember the company’s risk of being targeted by hackers. “In this case, if it does not have equity to cover the assets, the investor may suffer losses”, he warns.
This type of company offers specific services for the custody of assets. According to a KPMG report, the formal definition and requirements for a qualified custodian are still evolving. But in general, they are banks or trusts subject to a regulatory authority.
“These are companies that have invested in proprietary technology or licensed third-party technology for crypto storage. This storage can be online, in hot wallets, or offline, in cold wallets, that is, when you take that information from the internet system”, says Lanzadera.
Therefore, they offer an advantage over exchanges because they focus on the custody of cryptoassets. Conversely, exchanges’ end-activity is “promoting a user-friendly environment with tools for appealing trading and appealing assets for investors. In addition, custodians often have insurance — which most exchanges don’t have”, he adds.
The best type of custody of cryptoassets depends on profile
Lanzadera concludes that the choice of the type of custody of cryptoassets should consider the investor’s aim and characteristics. “If he wants to buy that asset and hold it as equity to look at it again within three years, it makes no sense to leave it on the exchange. But if you don’t want to negotiate it in a few weeks or months, it makes sense to look for the custodian”, he says.
“But if beyond the long-term view he also has ease with technology or an interest in making his custody, that should be an option. In that case, he’s not at risk of any credit because he’s got his assets. But then there is the security issue. There is always checks and balances to be considered. With self custody, you will be able to eliminate credit risk, but you’ll have the security concern, which may be more critical than than the credit risk”.