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Custody

Crypto custody means securing the private key held within your crypto wallet. In traditional banking, all custodians are financial institutions, as required by law. With crypto, however, holders can become their own custodians. Using gold bars as an analogy, you can either store them under your bed to keep them safe yourself or pay a third-party custodian to lock them in a vault protected by security guards.

Table of Content

Self-Custody

Self-custody is when you hold the private key to your own wallet. This means you are the only one who can prove ownership of your funds and access your holdings. Being your own custodian means having complete control over your wallet, but it also means you also bear all the risks. If you lose access to your physical device (cold wallet) or forget the private key, your crypto will most likely be gone forever.

Pros:

  • You own the keys and have direct access to the crypto assets. Only you have access to the account;
  • No counterparty risk. There is no third party between you and the crypto assets. Defaults of crypto exchanges do not affect you directly.

Cons:

  • Losing the keys means losing the crypto assets, and the assets are not insured
  • Risk of exposing the keys to hackers, which can lead to loss of fund

Multi-Signature Wallets (MS)

A Multisig wallet is a type of digital wallet used to secure and manage cryptocurrencies or digital assets. It incorporates the concept of multiple signatures to authorize transactions, providing enhanced security and control compared to traditional single-signature wallets.  Usually two of three signatories will be required to sign off on any given transaction, this will be the case in respect of this Fund.  If this is not possible due to any reason, then the transaction must be signed off by using a physically stored and secured computer.

Hardware Wallets (HW)

Hardware wallets are physical devices specifically designed to securely store private keys and facilitate the secure management of cryptocurrencies. It provides an offline, isolated environment for key storage and transaction signing, offering an added layer of security compared to software or online wallets.

Overall, hardware wallets provide a convenient and secure way to store cryptocurrencies, offering protection against online threats such as hacking, malware, or phishing attacks. They are particularly recommended for individuals who hold significant amounts of cryptocurrency or prioritize robust security measures for their digital assets.

Multi-Party Computation (MPC)

Multi-Party Computation (MPC) transforms the traditional storage of private keys and sensitive information by breaking up and encrypting them, distributing the encrypted shares among multiple parties. This eliminates the vulnerability associated with a single point of compromise, where a complete private key is stored. In MPC, each party independently computes its part of the private key share, producing a signature without revealing information to others. The private key is never consolidated in one location, ensuring a fully decentralized and liquid form.

MPC prevents reliance on a single secure device or party, reducing the risk of theft. Rather than trusting one entity with the private key, MPC decentralizes it across various parties or devices, ensuring each remains oblivious to the others. When needed, MPC verifies approvals from all parties or a predetermined subset before utilizing the key.

This approach significantly raises the difficulty for potential hackers, as they must now target multiple parties across diverse platforms and locations simultaneously to gain control over a user's wallet. MPC addresses the challenge of secure key storage and allows more personnel to access a wallet without risking rogue behavior. Additionally, with the private key secure, users can hold assets online, eliminating the need for cumbersome cold-storage devices. This enhances the fluidity of transferring digital assets without compromising the balance between security and operational efficiency.

Third-party Custody

Those who do not want to take the responsibility of managing their own accounts or find it too intimidating to deal with the tech might want to turn to a third-party custodian. These are registered, regulated financial institutions that have acquired a state-level or national license to act as a custodian.

This type of crypto custodian holds clients’ private keys to their wallets in a safe manner and ensures the security of their holdings. From the user's point of view, it is similar to having a checking account with a bank. When you register to open an account, you must undergo know-your-customer and anti-money laundering checks. When you store crypto with a third-party custodian, you’ll be expected to complete the same sort of checks to make sure your cryptocurrency was not acquired through illegal means.

Pros:

  • The service provider takes care of managing the keys and provides insurance on the crypto assets they hold
  • Easier to access for beginners and who doesn't have the technical skill so secure the wallets

Cons:

  • Not your keys, not your coins. The custodian ultimately controls your wallet
  • Third-party risk, the custodian can be hacked, or go bankrupt
  • The fees can be high

Choosing one over the other needs to be carefully weighed, considering how familiar the fund's members are with working with crypto wallets and how important the self-custody is in principle for the members.