I. Introduction In recent years, the rise of blockchain technology and cryptocurrencies has led to an unprecedented investment revolution. Their unique investment value and immense growth potential have sparked a global investment frenzy. In this regard, Fidelity’s global survey report “Institutional Investors and Digital Assets” collected feedback from over 1,000 institutional investors from Europe, Asia, and the United States. The results show that as many as 81% of institutional investors believe that cryptocurrencies should be an essential part of an investment portfolio, with 74% of institutional investors having plans for future allocation to digital assets.
However, despite the tantalizing potential returns of cryptocurrency investment, the specific nature of its investment environment—where legal regulations are still in a gray area and investors’ rights cannot be fully protected by traditional laws—makes the path to cryptocurrency investment challenging for institutional investors. The secure storage and management of digital currency, especially the security of private keys, is undoubtedly the primary problem that institutional investors need to solve. For this crucial issue concerning wealth security, effective and professional private key custody services are of utmost importance. Therefore, this paper will explore different private key custody solutions in detail, providing guidance and recommendations for institutional investors to choose the custody solution that best fits their needs.
II. What Is Asset Custody? Traditional Asset Custody
In traditional financial markets, asset custody services refer to custody institutions responsible for safeguarding and managing clients’ assets, while also providing services like transaction settlement, asset recording and reporting, and ensuring compliance. These custody institutions not only safeguard electronic assets but also physical assets like precious metals, art, etc. For example, they can securely store gold in physical vaults.
Cryptocurrency Custody
Cryptocurrency custody, also known as digital asset custody, mainly aims to provide secure storage services for clients’ digital assets. These digital assets are kept in a controlled environment, typically managed and protected by specialized service agencies that handle the clients’ private keys. Some custodians offer customized custody solutions, allowing clients to have direct control over their private keys.
The core of digital asset custody services lies in how to securely and effectively manage private keys, ensuring that private keys are defended against hacking, theft, or other security risks that may lead to exposure throughout storage, transmission, and use.
When clients opt to use cryptocurrency custody services, the risk of asset security is transferred to the custodian, and these custody services are typically provided by specialized companies responsible for storing and managing their clients’ cryptocurrencies. This model resembles, to a large extent, the custody services in traditional financial markets. However, the key difference lies in the fact that what they are safeguarding is a completely new type of asset—namely, cryptocurrencies.
III. Institutional Custody Needs Analysis For most individual investors, they tend to choose browser wallets and exchange hot wallets for the storage and management of cryptocurrencies. The reason for this is that these tools are simple to operate and easy to get started with, requiring only a username and password, along with two-factor authentication (2FA) to easily access and manage assets. However, when investment amounts rise to the scale of millions or even billions of dollars, how to securely and effectively guard and control these crypto assets becomes a significant problem that all institutional investors must confront and solve.
This issue involves aspects such as the storage method of cryptocurrencies, private key management, asset security, regulatory compliance, and more. For institutional investors, finding a solution that can both meet the needs of large-scale asset management and ensure asset security while complying with legal requirements is particularly crucial. Therefore, the following will delve into the needs of institutional investors when choosing custody providers to help them find the most suitable custody solution in the complex digital asset market.
A.Investment Institutions
For investment institutions that hold client funds, their focus is usually on long-term investments, with a preference for maintaining low-cost asset services, such as collateral. Considering that clients don’t need frequent access to funds, these investment institutions are more likely to opt for comprehensive custody solutions.
However, in the case of traditional venture capital (VC) institutions adopting equity investment models, their business model primarily involves two types of participants: Limited Partners (LPs) and General Partners (GPs). In mature Western equity investment markets, the responsibilities and authority boundaries of LPs and GPs are quite clear. However, in China’s equity investment market, many LPs have limited understanding of equity investment and lean towards short-term investing, so they desire more decision-making participation. Especially in the field of cryptocurrency investment, where legal regulation is still unclear, LPs often worry that GPs might misuse digital assets, or question investment losses, making it difficult to establish a stable investment and trust relationship.
At this point, a single account and private key model clearly cannot meet the LPs’ decision-making needs. Therefore, what they require is an asset custody solution that can satisfy GP’s asset management needs while also allowing LPs to participate in decision-making, thus finding a balance in asset custody and enhancing trust between investment institutions.
For example, Cregis, a comprehensive Web3 asset management collaboration platform. While designing its solution, the Cregis team fully took these needs into account and developed a cryptocurrency management solution based on multi-party computation. This solution, with its robust permission management capabilities, not only meets the investment institutions’ needs for secure custody services but also provides a sturdy payment infrastructure and rich financial management collaboration features, thereby achieving a breakthrough in balancing the interests between GPs and LPs.
（Cregis Create/Join Team）
Moreover, Cregis’s unique innovation lies in providing robust financial collaboration management features, allowing corporate clients to equally share or limit sharing of signing authority, enabling complex financial management behaviors such as financial approval, intelligent payment management, etc. Along with transaction flow statistics, transaction currency statistics, and other functions, users can enjoy an unprecedented digital asset collaboration management experience.
(Cregis Business Collaboration)
B.Hedge Funds
The core strategy of hedge funds is to fully exploit market volatility to gain profits, so their operational characteristic is the frequent and rapid investment or withdrawal of capital from the market. This requires them to quickly transfer assets when needed, typically done by allocating hot wallets to specific traders. However, for fund security, they also need to consider storing some assets in cold wallets. This necessitates that the custody service provider offers a solution that is both fast and safe for asset transfer and storage while meeting their frequent trading and fund management needs. Thus, choosing a custodian that can provide fast asset transfer services and secure asset storage services becomes an essential requirement.
C.Cryptocurrency Venture Capital Funds
When seeking asset custody service providers, cryptocurrency venture capital funds focus more on the flexibility, efficiency, and connectivity offered. They expect to conveniently access decentralized finance (DeFi) and other emerging areas of the cryptocurrency ecosystem. Therefore, they tend to choose custodians offering a range of rich service features, such as supporting asset collateralization, lending, and participating in blockchain governance. This choice is based more on their pursuit of business flexibility and deep engagement needs in emerging cryptocurrency market areas. Hence, custodians must offer a solution that is both technically advanced and satisfies their business needs and risk control.
D.Financial Market Infrastructure Operators (Financial Management Information Systems)
As cryptocurrencies are gradually being widely accepted, financial market infrastructure operators (FMIS) are also beginning to venture into this field to provide relevant services. To ensure quality and security, they may choose to integrate battle-tested technologies like private key custody into their service systems. This strategy not only helps them better control technological risks but also enables them to provide safer and more stable cryptocurrency custody services. They will likely choose providers with extensive experience and mature technology to ensure the best protection of their clients’ assets.
E.Banks/Cryptocurrency Banks
In the gradual acceptance of cryptocurrencies, both traditional banks and emerging cryptocurrency banks seek technological solutions to integrate into their service systems to enable customers to hold and manage cryptocurrencies. For example, emerging small “cryptocurrency banks” like Celsius and Nexo may choose to entrust some or all assets to one or more professional cryptocurrency custody service providers to meet requirements for customer identification (KYC) and anti-money laundering (AML) compliance. They value the provider’s understanding and compliance with industry standards and the professionalism and security of cryptocurrency technology.
F.Exchanges
Meeting the multifaceted needs of fund security, high liquidity, stable long-term storage, and technological support, cryptocurrency exchanges increasingly lean towards choosing comprehensive custody service providers. They need not only a provider that can offer standardized custody products to meet daily operational needs but also seek related technological support to respond to the rapidly changing and continuous innovation in the cryptocurrency market, thus enhancing their business efficiency and service quality. A one-stop-service provider with excellent technical strength that understands and meets the diverse and complex needs of exchanges is undoubtedly the ideal partner.
Cregis, as a comprehensive Web3 asset management collaboration platform, fully meets the above requirements. It supports the creation of an unlimited number of HD hot wallets for over 20 mainstream public chains and allows customers to carry out batch operations on hot wallet addresses through the API interface. Additionally, Cregis offers real-time synchronous processing of address transaction requests, real-time synchronous notifications of address transaction status, on-chain AML, and risk warnings. Cregis can also provide standardized private deployment services, shortening the regular 2-3 months deployment time to just 1-2 weeks.
(Cregis API Integration)
(Cregis Withdrawal Approval)
G.Custody Service Providers
As cryptocurrency custody service providers, their primary responsibility is to ensure the safety of assets, particularly their customers’ cryptocurrency assets. Although many custody providers have their independent asset custody technology, some choose third-party technology providers to safeguard their customer funds. This choice is not merely based on trust in third-party technology but rather values the maturity, security, and real-time nature of the third-party technology. Hence, choosing efficient, secure, and reliable third-party technology providers not only enhances their service quality but also wins more trust and satisfaction from customers.
IV. Types of Cryptocurrency Custody Service Providers In the field of cryptocurrency custody, service providers mainly fall into three categories: Pure Custody Service Providers, Custody Technology Providers, and Comprehensive Custody Service Providers. Next, we will discuss the features and differences of these three types of service providers.
Pure Custody Service Providers
Pure Custody Service Providers are a type of third-party service provider whose primary responsibility is to securely and conveniently store and manage customers’ private keys within a secure and often regulated environment. These providers usually offer services through their own custody wallets and possess the authority to transfer and control client funds. Similar to traditional asset custody institutions, they may also charge corresponding fees for their services.
Custody Technology Providers
Unlike Pure Custody Service Providers, Custody Technology Providers do not directly manage customers’ private keys; the control over private keys remains entirely in the hands of the customers. They primarily provide the technological infrastructure for custody services, including functionalities for funds transfer and settlement (such as establishing their governance rules, verifying transaction rules), as well as various custody options like self-custody and hybrid custody. The main difference between custody service providers and technology providers is that the latter does not have the authority to transfer or control client funds, while the former does.
Comprehensive Custody Service Providers
Comprehensive Custody Service Providers play two roles: on one hand, they act as custody service providers, managing customers’ private keys; on the other hand, they are also custody technology providers, offering professional custody technology services. The advantage of this approach lies in its flexibility, enabling it to meet various types of custody needs, whether it’s full custody, self-custody, or a hybrid form. Based on the needs of partnering organizations, comprehensive custody service providers can offer customized services. If an institution requires full custody services, they can adopt the comprehensive custody service provider’s custody scheme. If the institution opts for self-custody, they can also utilize the professional technology services provided by the comprehensive custody service provider. Thus, comprehensive custody service providers may be the most flexible type of custody service provider.
Cregis is one such comprehensive custody service provider. It offers mature and stable payment infrastructure and a wealth of financial management collaboration features while also providing custody technology services, allowing for personalized one-stop solutions for its clients. After six years of secure operations, Cregis has serviced over 3,200 Web3.0 projects and institutions, providing 5.78 million blockchain wallet addresses to end-users. The types of serviced organizations cover centralized exchanges, OTC service providers, blockchain gaming projects, e-commerce platforms accepting digital currencies, cross-border trading merchants, etc., fully satisfying the custody needs of various types of institutions.
V. Types of Institutional Cryptocurrency Management Technology In institutional-level cryptocurrency management, custody service providers primarily employ two main asset control management techniques: multi-signature and multi-party computation. These technologies enable the distribution of authority over a private key or shards of a private key to multiple participants, thereby mitigating the risk of asset damage due to single point failure while fulfilling various financial management requirements.
Multi-Signature (Multi Signature)
Multi-signature is a technology that requires multiple private key holders to sign collectively to initiate a transaction. These private key holders may either be a mix of institutional actors and custody service providers or entirely owned by one party. Multi-signature technology is an on-chain technology, and applications such as Bitcoin script-based wallets and Ethereum smart contract wallets are based on this technology.
Multi-Party Computation (MPC)
In a multi-party computation wallet utilizing Distributed Key Generation (DKG) technology, there is no complete private key. This technology operates by distributing shards of a private key and using these shards to calculate the complete public key address. The shards of the private key may be jointly held by the institution and the custody service provider, or completely owned by one party. When a transaction is needed, the shards are brought together to initiate multi-party computation. Each shard holder computes the signature of its shard independently, resulting in the final complete signature to sign the transaction. This mechanism means that the “private key” never exists in its entirety at any given moment, further enhancing asset security.
Cregis leverages both multi-signature and multi-party computation technologies to offer clients a secure and flexible cryptocurrency custody solution. In the field of MPC wallets, Cregis achieves a balance between security and flexibility with advanced technology, providing both institutions and individual customers with ideal solutions tailored to their needs on its platform.
VI. Conclusion In the world of digital currencies, the storage and management of private keys is a critical task for institutions. By understanding their needs, recognizing the services and types of custody service providers, and the ways in which private keys are stored, institutions can choose the private key storage solution that best fits them. This ensures the security of their digital assets while meeting their business and compliance requirements.
