Buying and selling crypto coins and other tokens has never been as easy as it is today. This convenient and fast access is impressively mirrored by the rapid growth and developments in the digital assets space. However, the fast-growing market around digital assets does not only attract investors but also some illicit activity. Digital asset owners increasingly become victims of targeted hacks, thefts, and frauds, which can lead to a complete loss in some cases. This newly emerging cyber threat can affect anyone, from the smallest digital asset owner to the largest digital asset fortunes. Chainalysis, a blockchain analytics company, has reported that around USD 1.9 billion in crypto has been stolen by cybercriminals in the first half of 2022. Therefore, as a digital asset owner, it is crucial to not only think about the investment perspective of this alternative asset, but also to consider the security side.

What is digital asset storage?

In the traditional banking system, people can choose whether to safeguard money, gold, etc., by themselves (self-custody) or give their assets to a trusted party (bank) for safekeeping. This is similar in the digital asset system. The user can decide between different custody types and crypto wallets, which can either be controlled by a trusted third party (third-party custody) or just by the owner (self-custody).

Third-party custody

With a third-party custody solution, the private key is safely stored with a central party, such as a bank or a crypto exchange. Like a bank account, if the user loses the access to the digital assets, the third-party custody provider still has the information and can access the funds.

Risks of a third-party custody solution

Third-party custody solutions are only useful and meaningful when the service provider is a trusted party, duly regulated, and highly experienced in digital assets. Unregulated crypto exchanges, storage providers, and financial intermediaries holding the private key for the user can pose a high risk. users should always analyse where the respective custody service is located and if the necessary financial licenses have been obtained.

Self-custody

Self-custody providers often advertise their services with the motto “not your key, not your coin”, which means that only the owner of the private key can access the funds and nobody else. There is a variety of self-custody solutions available. The most common ones are:

What are the risks of self-custody?

The highest risk of self-custody is losing access to the digital assets. This can happen when the user loses the private key or the seed phrase. As there is no backup, like a third party knowing the seed phrase or private key, the user of a self-custody wallet is responsible for safekeeping the seed phrase and private key.

Physical inscription and hardware crypto wallets

Physical inscription and hardware crypto wallets tend to offer the highest level of privacy and security, but the usage is expensive and less convenient. They do not offer perfect peace of mind either, as they could be stolen, lost), damaged by water, or destroyed in a fire. General hardware degeneration over time, malfunctions or storing digital assets on an old ledger are additional risks to be considered when looking into hardware crypto wallets.

Software crypto wallets

Software crypto wallets are quite convenient as they provide easy access to the digital assets. Yet, this easy access comes with the risk that software crypto wallets are always online. Losing the mobile phone or computer while it is connected to the internet can result in giving thieves access to your login credentials and thus access to your funds. Also, software crypto wallet providers themselves increasingly face the threat of being hacked. Falsely coded software and applications pose an additional risk of losing digital assets when one is holding an online crypto wallet.

Why is third-party custody with a trusted and regulated provider the best solution?

There is no shortage of news on how digital assets have been stolen; crypto wallets have been hacked; crypto exchanges suddenly had to file for bankruptcy; and lost passwords prevented users from accessing their funds. Digital asset users want to secure their assets and ensure their ownership. Trusted third-party custodians, such as financial institutions, have been safeguarding money, gold, and securities for centuries and now offer the same for digital assets. While the digital assets are still stored on the blockchain, third-party custodians safekeep the users’ private keys.

The lack of security has kept many people from engaging in digital assets. Today, thanks to regulated third-party custodians, this problem can be fixed:

• A bank can act as a trusted third-party custody provider for digital assets. Similar to opening a bank account, when opening a crypto account with a regulated third party, the user is required to go through Know-Your-Customer (KYC) and the necessary Anti-Money-Laundering (AML) checks.
• While self-custody gives you the sole control of the assets, setting up the solution and keeping track of your digital assets can also be a challenge. In comparison, with a reliable third-party provider, the owner does not have to lift a finger to keep the assets safe.
• In addition, with self-custody, there is usually no support team or customer service, but rather a community-driven platform as crypto wallet providers have no access to the password, private keys, and seed phrase. With a third-party custodian, the user does not have to worry about this as the third-party custodian can access the funds and assist with any questions or concerns.