Institutional considerations for digital asset managers

The cryptographic key, which gives control of a digital asset to its owner, is the basis of this technology in its simplest and broadest sense. The private key – which is essentially a very large series of random numbers – is used mathematically to obtain a unique public address, similar to what is done for a bank account. Thus, the nature of this association makes it very easy in terms of calculations to prove who controls a digital asset, but makes it very difficult for those who want to guess the associated private key. This complicates the illegal acquisition of digital assets. However, despite the mathematically secure ratio, it makes many demands on the security of the private key.

While traditional finance relies on an identity-based structure, thus supporting individuals or businesses, digital assets rely on private key storage and control. Generating, controlling and managing these private keys is very different from traditional methods of controlling and managing assets. It is the control and management of these private keys that has created the framework that supports the safekeeping of digital assets as a separate and specialized service offering.

Although keeping a private key secure is primarily a technical need, including special hygiene protocols, as soon as it is included in the commercial offer of services, potential users of this service should consider the conditions under which the service is offered, the regulatory framework for the depositary, any necessary or existing insurance contracts, as well as the legal basis on which the assets are held. All of these factors are crucial not only in the context of the security of the assets themselves, but also in the broader context of setting sound, well-established standards that reflect current thinking across the sector.

An institutional investor looking for a custodian of digital assets to store their digital assets should look for a custodian who is able to maintain the types of digital assets that are consistent with their investment strategy. Thus, the institutional investor will need to determine whether to use a digital asset custodian with appropriate authorizations or licenses and controlled by regulators (such as a custodian or “qualified custodian”) or a storage infrastructure provider. is used only to protect public and private keys, as well as to afford to keep their own digital assets. Not all jurisdictions allow custodian decisions or allow them for all types of investors.

Institutional investors should consider several things when evaluating digital asset custodians, including the following, published in the latest AIMA Digital Asset Storage Guide:

  • Asset safekeeping: What structure or mechanism does the digital asset keeper use to protect customers’ property rights and to prevent the client’s assets from being used by the digital asset keeper for his own account or to prevent them from being added to the package?
  • Record: How long a digital asset keeper keeps the appropriate type of digital asset. Does he do this on a large scale and has he ever reported losing assets entrusted to clients? And what is the share of this type of digital assets among the assets entrusted to him?
  • Financial Strength: What Financial Resources Can a Digital Asset Keeper Raise to Fulfill Its Commitments to Customers?
  • Insurance: What is the size, type and quality of the digital asset custodian insurance program?
  • Security: Does the custodian of digital assets have physical and cybersecurity capabilities and security-oriented software development techniques, including, for example, the ability to mitigate human error through strict controls and the separation of customer keys?
  • Disaster recovery or similar protocols: Does the custodian of digital assets provide an opportunity to recover assets in the event of a serious technical or operational problem on the part of the custodian or investor?
  • Asset service: whether the customer wins forkedofAirdrops of attitudemanagement and loans?
  • Third Party Supervision: Are there independent third parties (such as regulators and auditors) that oversee the custodian of digital assets?
  • Support Range: How many level 1 blockchains and digital assets are supported and how often are new assets added?
  • Availability: how quickly can customers retrieve and move their assets?
  • Control: Can a digital asset custodian unilaterally control assets? If so, under what circumstances and what contractual protection applies to the investor?
  • Reporting: Does the digital asset keeper offer features such as NAV, balances, transfers, and orders?