While 2021 was the year of crypto, 2022 will be the year of custody. Central banks across the globe are racing to develop and release their own CBDCs, and surveys show that investment in digital assets shall continue to grow. Digital assets, powered by blockchain technologies, have the ability to totally realign how we interact with the financial system. However, one fintech CEO says that in order for the entire ecosystem to reach its potential, we must begin to pay more attention to custody.
“I know that sounds boring. In traditional finance, custody is mostly an administrative function. However, with digital assets, custodians are tasked with keeping assets safe from hackers and guarding against losses related to other forms of malfeasance and incompetence. Currently, many of the biggest players in the custody arena have major flaws in their security infrastructure,” said Richard Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges.
Fireblocks, which is among the best known providers, found itself embroiled in a lawsuit with StakeHound, which alleges the custody company lost roughly $70MM of Ethereum, after the key vanished. As a result, StakeHound could not access over 38,000 ETH.
“That is far from the only security issue at play in the custody segment. In 2022, expect the market to correct this with the entrance of more security-minded firms in the space, making it more competitive and leaving the future of cryptocurrencies and digital assets more secure,” said Gardner. “Institutional investors are starting to pay attention to custody, but Main Street hasn’t really seen the same interest. Expect that to change over the coming year.”
“Currently, most Main Street investors don’t even conceptualize custody. It just happens. That means leaving their assets in a wallet or exchange account. The problem with such storage mechanisms is that it leaves them open to hacks or other malfeasance. Some exchanges are beginning to put more emphasis into custody, but they have a long way to go. Even those who have brought in outside firms which specialize in custody, many are using vendors with a poor track record — or no meaningful record in the custody industry at all,” noted Gardner.
Modulus is known throughout the financial technology segment as a leader in the development of ultra-high frequency trading systems and blockchain technologies. Modulus has provided its exchange solution to some of the industry’s most profitable digital asset exchanges, including a well-known multi-billion-dollar cryptocurrency exchange. Over the past twenty years, the company has built technology for the world’s most notable institutions, with a client list which includes NASA, NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.
“Right now, the problem that the industry faces is that Main Street investors aren’t thinking about the important role which custody plays in digital asset investment. That’s all about to change. In Africa in particular, especially in countries like Nigeria where cryptocurrency is being used as a value store against inflation, investors are using the platforms which are available to them. That’s understandable, but it leaves a lot of questions about the security of the custody in place. That concern may be secondary to other macro factors which direct the investments, but it leaves many investors potentially unprotected,” said Gardner.
