The characteristics that set crypto assets apart from other asset classes such as private keys, which are those long, sophisticated alphanumeric codes necessary for accessing crypto, and public, trackable transactions have until recently made cryptocurrency custody – the storing and securing of crypto assets – a challenge. In most cases, these characteristics have kept banks and other traditional financial institutions wary of or simply unable to offer custodian services as they customarily do with other asset classes, such as equities, commodities, and fiat currency.
Until recently, financial institutions suffered losses when trying to create secure and effective cryptocurrency custody methods, further reason they may have had for keeping away from crypto. Hacking and other scams were known to afflict custodians, causing hassle-wary and risk-averse institutions to back away from cryptocurrency, judging crypto assets as too potentially problematic to deal with.
Understanding both the potential issues together with the benefits to its users – and all the while meshing a regulated and compliant platform with the traditional security that an institutional custody model brings – eToro has created the next step in crypto custody: eToroX’s Custody as a Service (CaaS).
Complete Compliance – the Context
Created as an alternative to the familiar industry of money and banking, Bitcoin was born just when reforms were taking hold in the financial world, with new regulations changing the face of finance, especially in terms of the custodianship of assets.
Some 10 years ago, an amendment to the Advisers Act of 1940 was introduced to prohibit institutional investors, such as hedge funds, from taking over the custodianship of their clients’ assets. As established in the Dodd Frank Act of 2011, institutional investors were now obligated to engage third-party providers to handle these assets. Mostly considered a success, the reform has implications on how crypto-adopting institutions hold assets, requiring them to use a “qualified custodian” who is responsible for customers’ crypto assets.
Despite Bitcoin’s entry into the financial world over 10 years ago, qualified crypto custodians remain a rare breed. Few mainstream banks are equipped to handle crypto’s cryptographic keys. Additionally, this new species of cryptocurrency custodians generally do not have the infrastructure, strict regulation or capability to satisfy regulators’ requirements in terms of auditing and reporting.
“Custodians are necessary as the next step towards crypto-assets being seen as a safe and attractive financial asset option for large FIs and perhaps for market confidence in general… Major institutional custodians providing a secure place to store large amounts of crypto-assets could provide the protection necessary to reduce the risk of hacks and increase the trust of the investing public in crypto-assets.” — Attorneys at Perkins Coie
eToroX’s CaaS is within the strict regulations of the pioneering DLT provider license authorized by the Gibraltar Financial Services Commission. One of only a handful of cryptocurrency custodians regulated by Gibraltar’s industry-leading distributed ledger technology license, eToro is committed to the same professional rules and specifications as traditional custodians. Moreover, as part of an elite group of licensed DLT providers, eToro is at the forefront of the industry, ideally positioned to rapidly respond to updates and changes in custodial issues as they impact cryptocurrencies.
The two sides of third parties
An important pillar of cryptocurrency is boosting the security of transactions by eliminating third parties, the exact opposite of what financial institutions need to legally offer custodial services – a third-party custodian.
As a remedy, institutional cryptocurrency trading platforms such as eToro can improve security with the addition of more players, impartial and independent third parties who offer vital services acting as certifiers, auditors, and reviewers.
In addition to the DLT provider license, eToroX has a variety of other certifications including international standards ISO 27001 and ISO 27032. The exchange is also audited regularly by the Gibraltar Financial Services Commission (GFSC) whose checks are considered to be at the same standard as those performed on traditional institutions.
Customer custodial assets held as a part of eToro’s custodial service (CaaS) are insured against a variety of loss and damage, including internal and external theft, and the destruction of assets by insurer Aon. This protection safeguards traders should their assets be compromised.
Custodians and cryptographic security
Crypto custodians are faced with a choice: keep crypto in cold wallet storage with its inherent inaccessibility, or utilize hot storage with its easy accessibility albeit a recognized vulnerability to hacking, and other scams and attacks. Given this untenable choice, many cryptocurrency custodians store the bulk of crypto funds in cold storage even though withdrawing funds from conventional cold storage can be both time consuming and costly as withdrawals initiate transactions on the underlying blockchain. In the typically fast-moving and volatile cryptocurrency market, this decision can also lead to missed opportunities, something no trader wants to contemplate.
To counter the drawbacks of both storage options while optimizing security as well as accessibility, eToro’s regulatory-compliant and professionally managed CaaS utilizes an innovative custody mechanism letting institutions trade directly from inside the cold storage with real-time settlement.
The CaaS package uses the most up-to-date cybersecurity protocols to protect customer assets as well as encouraging hackers’ non-destructive foray into the system by offering a $250,000 bounty program to creative hackers who find holes in the security.
Cryptocurrency Custody as a Service
For crypto investors, eToro’s regulatory-compliant CaaS custodian model delivers the traditional security of institutional custodians to cryptocurrency. eToro’s CaaS allows institutions to hold cryptocurrency assets safely and securely via a familiar custodian structure, providing the highest standard in the vital link between exchanges and custodians.