With so many banks preparing cryptocurrency custody services, their owners now have to flip an old Bitcoin on their head: Are banks ready to be their (and the others) bank of their own?
Last week, BNY Mellon, the oldest bank in the United States, announced that it would offer solutions for custody, relieving pressure from institutional investors. Likewise, documents from December indicate that Deutsche Bank is also planning a custody solution, along with trading and token issuance services.
However, while both banks are well established and have experience dealing with a wide range of assets, this does not necessarily mean that they are prepared to hold cryptocurrencies.
Digital assets are completely different from traditional assets like bonds, stocks, and treasury bills. Digital assets are decentralized by design and hence their ownership depends on an entirely different model that cannot reuse the existing central infrastructure of the traditional banking world. In order to hold crypto assets, you need an entirely new infrastructure, ”Jean-Michel Pelhoun, Vice President of Business Solutions at Ledger, said in an interview with Cointelegraph.
Even for institutions with crypto assets, custody is very complicated. Just last year, the KuCoin cryptocurrency exchange suffered a hack that brought an attacker over $ 200 million. Gaining custody of large sums creates an attractive magnet for potential attackers, and according to experts, many cryptocurrency exchanges don’t handle the security of the escort properly.
“Only a few crypto exchanges like Kraken, Gemini and Binance invest a lot of money to demonstrate adequate internal controls over their private key management protocols,” Dyma Budorin, Hacken co-founder and CEO told Cointelegraph last year.
Pelhon said that if the major banks want to handle security properly, they actually have three options.
“They can contract with an existing regulator trustee, and they can build and organize their own conservation infrastructure, or they can purchase preservation technology from a vendor and use it and organize it.”
Especially if banks choose to build their own solutions, expenses and time can quickly build up. Banks will have to hire specialized developers, “to make significant infrastructure investments” including data centers and servers, and to manage the regulatory chain – a process that alone can take “6-12 months”.
“The level of effort and investment required to provide an institution with a self-fostering turnkey solution for enterprises is far above the level of an individual. It requires slightly different techniques and governance processes to secure billions of dollars of digital assets.”
No matter which path banks take, Pailhon says it’s a sign of the growing legitimacy of crypto that banks like BNY Mellon want to provide custody solutions. In addition, as the overall cryptocurrency market grows and asset values increase for institutions and even some individuals, custody solutions will become increasingly important.
“You can’t protect $ 5, 10, or $ 50 billion in bitcoin with a garage-based server or a computer installed in a vault in the Appalachian Mountains. You have to put in place a redundant, resilient, secure, credible, auditable asset-keeping infrastructure that can expand and empower millions of users. Supporting hundreds of thousands of digital asset transactions in one month. The future success and adoption of digital assets and the digital asset management industry will depend on this. ”