The Importance of Qualified Custody in Digital Asset Holding

When it comes to holding digital assets, it is crucial to have a trusted and reliable custodian that can provide qualified custody services. In this blog post, we will explore why holding your digital assets with a qualified custodian is the most secure way to keep your digital assets protected. Additionally, we will discuss the significance of utilizing a technology offering that is decoupled from the qualified custodian. We will also discuss the drawbacks of self-custody in comparison to holding your digital assets with a trusted financial institution.

Qualified Custodians: Delivering Enhanced Investor Safety & Security

A qualified custodian is a financial institution approved by regulators that has the legal authority, regulatory oversight and expertise to custody client assets. This designation is essential for safeguarding the assets and ensuring their proper management. Here are two key reasons why qualified custody is the safest way to hold digital assets.

1. Regulatory Compliance: Qualified custodians adhere to strict regulatory guidelines set by governing bodies, such as the Securities and Exchange Commission (SEC) in the United States. By entrusting your assets to a qualified custodian, you can be confident that they are operating within the legal framework, providing you with protection against fraud and malpractice.
2. Expertise and Infrastructure: Financial institutions that qualify as custodians have built robust systems and infrastructure to handle the storage and management of assets. They possess the necessary experience and knowledge to ensure the safekeeping of client holdings, including implementing comprehensive security measures and employing dedicated professionals who understand the intricacies of asset custody.

One of the most important elements of a qualified custodian is the requirement that all client assets be held separate from the assets of the firm. This ensures that these assets are not commingled with those of the firm and lent, invested, or otherwise put at risk.

The Importance of a Decoupled Solution

Having a decoupled solution that isn’t reliant on a specific custodian or liquidity provider (LP) is crucial. Here is why:

1. Proof of Reserves: The tech layer that is decoupled from both liquidity and custody has greater ability to provide oversight at a technical level, for example, by analyzing and reviewing proof of reserve metrics that ensure on chain wallet balances are correct.
2. Flexibility and Customization: By not being tied to a specific custodian or LP, services can be tailored to meet unique client needs. This flexibility allows for easy adaptation to market changes, exploring different custody options, and choosing custodians that provide the best security and services for our clients' assets.
3. Mitigating Single Point of Failure: Relying on a single custodian or LP can expose investors to risks associated with a potential failure or malpractice of that entity. With a decoupled solution, we reduce the reliance on a single point of failure, offering investors greater peace of mind and risk diversification.

An added benefit of a decoupled solution is the unstated pressure applied to both the custodian and liquidity provider to keep services and costs at best-in-class levels.

Self-Custody vs. Custodial Solutions

While self-custody is an alternative to conventional custodial solutions, it comes with its own set of drawbacks. Here are some reasons why self-custody may not be a great option compared to custodial solutions:

1. Security Risks: Self-custody requires individuals to handle their assets directly, which increases the risk of theft, loss, or unauthorized access. Custodial solutions, on the other hand, provide professional security measures to protect assets, minimizing the probability of such incidents.
2. Lack of Regulatory Compliance: Self-custody may subject individuals to potential regulatory violations, especially concerning securities laws. Custodial solutions provided by qualified custodians ensure compliance with regulatory requirements, reducing legal risks.
3. Complexity and Expertise Requirements: Effective self-custody requires individuals to have a deep understanding of asset management, security protocols, and regulatory compliance. For most investors, it is challenging to acquire the necessary knowledge and expertise, making custodial solutions a more practical and reliable option.

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Qualified custodial solutions offer a secure and reliable way to hold assets. Choosing a decoupled approach prioritizes flexibility and risk diversification while avoiding the drawbacks of self-custody. To learn more about our custody partner and how their practices align with the topics discussed in this blog post, watch our latest webinar, “Digital Assets, Credit Unions, & Custodians."

We look forward to providing you with valuable insights and answering any questions you may have regarding custodial solutions and asset holding.