The Cryptospace has grown by leaps and bounds, particularly in the last couple of years. This has seen many branches of crypto being explored and gain attention. One such area has been the storage and security of the tokens. This facet has gained particular attention recently, due to the reports surrounding the sudden death of QuadrigaCXs 30-year old owner, Gerald Cotten, were published. This sad news was compounded when it was found that the death meant that the codes to access nearly $150 million worth of cryptocurrencies, held in the company’s “cold storage” system, is now inaccessible.
This has made a dent in the general Canadian cryptocurrency market as almost 100,000 customers had kept their assets with the company. In an attempt to stem the growing fear of inevitable loss, the Supreme Court of Nova Scotia has stepped in and enacted a freeze. This gives the cryptocurrency exchange temporary respite, granting them legal protection from creditors while a solution is being sought. Yet, the initial damage to the reputation of both the exchange and the industry has already been dealt.
Banks and the general community alike opine that the decade-old industry should, by now, have a better mechanism in place for the storage and use of private keys. Especially when one considers digitization of actual assets has been in place for a long time now. Banks don't have actual cash sitting in vaults but a user has access to the required funds when needed. And crypto assets are the next step in this evolutionary cycle.
Key Takeaways for Bitcoin and Crypto Asset Users
This issue comes under the microscope because of what has happened but it also deserves a deeper dive simply because the industry is undoubtedly still a wild west. With a lot of regulations and controls still being debated and worked on, the onus is on the owners of bitcoin and digital assets to do their due diligence before entrusting a third party with their tokens, Some major ones to keep in mind are:
Insurance: One aspect that lends itself to higher trust is the knowledge that the user's assets are covered in case of any mishappenings. This is where most banks score. While Crypto assets don't usually have such a luxury, a recent startup in Europe has started a trend that will surely catch on, of ensuring the assets they store. Thus it is important to know if the storage firm has such a mechanism in place. The first step should be to ask for coverage information. The company should have this information available for discrimination readily available.
Audits and accreditations: An exchanges performance and reputation does not account for much in this sector. It needs to be periodically assessed to ensure all proper checks and backups are in place. Before one decides to entrust one's assets to a storage keeper, it is imperative to ensure there have been independent audits to check on the security of the system. This should also be bolstered by any accreditation that the company might have gone for. Both these along with information about compliance and any oversight documents should be available on request.
Wallets track record: Any company with no track record is a bit of a gamble as a lack of any operating history is a red flag. A new concern has little to show in terms of performance and more importantly how crisis events are handled. This is where audits and accreditation also help to present a clearer picture. Furthermore, the platforms operating history gives one an idea of the sort of volume traffic they handle regularly. All this also provides an insight into the way the business operates, after all the infrastructure needs of say a cold wallet as opposed to a hot wallet are quite varied.
A business continuity strategy: As the decades have rolled by, technology has continuously evolved. This has necessitated a change in the way companies operate. While people might leave, the company needs to stay and carry on. It is important to see if the firm is prepared to adapt to this truism. This aspect is brought into sharp focus due to the recent turn of events at QuadrigaCX. While protection and safeguards of assets and keys are the fundamental objectives, transfer and recovery need to be thought of and implemented as well.
Protection mechanism: As is the case with most things, too much power concentrated in one hand is a recipe for disaster. Thus, a common protection against the owner doing a runner is to simply have a multi-signature process. This hands over multiple keys to different people; when one needs to access the asset all those keys are required. This also adds a layer of oversight and governance which provides further security.
Social trust: While it is always recommended to do one's own research, a good sign is seeing who all are using the same service. After all, any large crypto holders would have also done a bit of work before trusting this firm with their assets. That thought lends a lot of trusts and is good social proof. Yet, it should always be remembered that some of the biggest Ponzi schemes have been executed like this, the heard mentality certainly has its downsides.
It should be recognized that the crypto industry is still in its infancy and the custody sector is quite a niche product. Still, there are reliable providers who are already implementing rigorous standards and continuously improving on them. This is certainly needed as the cryosphere gains more maturity and gains more traction from the mainstream. While one awaits clarity in practices and regulations, following such simple checks should be enough for businesses and investors to secure their assets.