MPC Wallet Custody: The Bridge for Blockchain Institutional Investors to Enter Web 3.0

Source: ChainUp

The report titled "The Current State of Digital Asset Custody," published by PwC in collaboration with Aspen Digital, delves into how digital asset custody helps institutional investors in Asia achieve wealth growth, while also providing professional insights on how to seize the emerging opportunities within the digital asset ecosystem.

From this report, we can see that the demand for institutional-grade digital asset custody services from family offices, high-net-worth individuals, and external asset managers is rapidly increasing due to the growing prevalence of digital assets.

As a result, competition among digital asset custody service providers is gradually intensifying. As of April 2023, over 120 digital asset custody service providers are already offering diverse services for this multi-billion-dollar industry.

1. Why is Digital Asset Custody Important?

Grayscale Investments' report "Reimagining the Future of Finance" defines the digital economy as "the intersection of technology and finance increasingly defined by digital spaces, experiences, and transactions." In this wave of transformation, the importance of digital asset custody is becoming increasingly evident.

From BNY Mellon to BBVA, and from U.S. Bancorp to Ninepoint Digital Asset Group, more and more traditional financial institutions are joining the ranks of digital asset custodians. They believe that digital asset custody is crucial for the secure safekeeping of clients' digital assets. It lays the foundation for the creation, management, and exchange of digital assets, enabling services such as trading, banking, and prime brokerage.

At the same time, custody also addresses the two biggest challenges institutions face in the custody and appreciation of digital assets: security and accessibility. As of early 2022, the total assets under custody (AUC) grew by an astonishing 600%, exceeding $200 billion. Therefore, we have reason to believe that digital asset custody has undoubtedly become an important part of shaping the future of finance.

2. Evolution of Digital Asset Custody Demand

The development of digital asset custody has gone through three distinct stages:

Custody 1.0 was primarily self-custody, where users managed their own private keys and were responsible for their digital assets. This method is simple and decentralized but lacks security and efficiency. The emergence of centralized digital asset exchanges (CEX) provided convenient access and custody services for digital assets but made them vulnerable to hacking, resulting in irreparable losses for users.

Custody 2.0 lasted approximately four to five years starting in 2016. During this period, institutions began using offline cold wallets, offering customized strategies for clients, and a number of regulated digital asset custodians emerged. Additionally, regulated custodians adopted technologies such as hardware security modules (HSM), multi-party computation (MPC), and multi-signature to provide compliant and secure custody solutions.

Custody 3.0 sees digital asset custody service providers helping institutions engage more deeply in the evolving Web3 ecosystem. At this stage, institutions have raised the demand for more flexible asset custody methods beyond security.

3. How to Choose the Right Digital Asset Custody Provider?

By reviewing the development of digital asset custody over the past decade, we find that a good custodian should provide institutional digital asset holders with low-risk solutions that simplify complexity, enhance security, pursue asset recourse, and improve operational efficiency. With a quality digital asset custody provider, investors need not worry about tracking or storing private keys, nor the risks associated with centralized exchanges facing bankruptcy, financial instability, or government regulation. A quality digital asset custody provider should also store digital assets in a secure and regulated environment, with robust potential remedial measures to provide certainty and insurance solutions for institutional clients.

We have outlined six key reference factors for institutional users to consider, analyzing them based on their importance.

Security and technical support are paramount. Some custodians build and maintain their own infrastructure, while others utilize the infrastructure of qualified technology providers. However, institutional investors must carefully assess the technical capabilities of custodians.

Audit and compliance: In certain jurisdictions like the U.S., traditional financial custodians and some custodians are regulated. However, most digital asset service providers are still unregulated, lacking clear legal oversight and contract standards, which poses significant risks and compliance challenges for investors. In this context, regular or frequent audits can ensure custodians continuously fulfill their security obligations.

Flexibility and efficiency can be seen as newly emerging requirements for custodians in recent years. Institutional investors not only seek asset security but also need custodians to reasonably allocate and operate their assets for profit.

Industry track record reflects the custodian's credibility and service capabilities. The historical record in the digital asset custody space (or across the entire digital asset industry) demonstrates the custodian's reliability, risk resilience, and understanding of client needs.

4. ChainUp Custody Has Helped Clients Securely Transfer Over $10 Billion in Digital Assets

Founded in Singapore in 2017, ChainUp leads enterprises in thriving with its outstanding blockchain technology. As an end-to-end blockchain technology company, ChainUp provides diverse services to clients through its innovative and transformative approach in the evolving digital economy. Notably, its ChainUp Custody team, with years of experience and deep expertise, has securely transferred over $10 billion in digital assets for more than 300 institutional clients worldwide. The ChainUp Custody team has set a new benchmark in the digital asset custody field with its four key advantages.

First, ChainUp Custody is backed by ChainUp, which has a solid reputation in the industry and has always been a leader in the technology service sector. Whether in terms of professionalism, industry ecosystem, or global layout and planning, it possesses high industry barriers and brand advantages.

Second, the multi-layered security architecture of ChainUp Custody is one of its key strengths. In the custody of digital assets, security is an essential factor that cannot be overlooked. ChainUp Custody understands this well and ensures the secure storage and flexible use of digital assets through multiple security layers, including hardware protection, encryption technology, and real-time monitoring, thereby protecting clients' assets from risks in an increasingly threatening environment.

Third, its flexible custody solutions provide clients with a high degree of customization. ChainUp Custody understands that each institution has its unique needs and risk tolerance. Therefore, they offer a variety of custody options and can even help clients explore and participate in new opportunities and asset classes to meet the specific requirements of different institutions. Whether for long-term custody or flexible asset transfers (including but not limited to buy-and-hold, liquidating major positions, active trading, participating in staking, and governance), tailored solutions are available.

Finally, professional and efficient technical services are another advantage of ChainUp Custody. Its team consists of experienced and skilled professionals (who have obtained SOC2 Type1 certification) providing 24/7 technical support and services to clients. Whether for daily operations or emergencies, clients can always rely on their expertise, making asset custody easy and effortless.

5. Challenges and Future of Digital Asset Custody Services

Messari's annual report has described digital asset custody as "the intersection where digital assets meet the traditional financial world." As the importance of digital asset custody in the financial ecosystem continues to rise, a series of significant challenges have emerged, covering multiple aspects such as security, regulatory environment, and the flexibility of solutions.

First, digital assets are a combination of finance and technological innovation, and their security relies on the technical capabilities and safeguards of the custody platform. In recent years, frequent attacks on digital asset exchanges by hackers have led to substantial losses, raising deeper concerns among financial institutions regarding asset security. Moreover, the security of exchanges themselves is heavily influenced by their reputation and infrastructure. The collapse of FTX is a vivid example that exposed the risks of significant client asset losses due to a lack of credibility and risk control at exchanges. Consequently, institutions are increasingly inclined towards self-custody solutions or reputable digital asset custodians to ensure asset security. ChainUp Custody integrates leading technologies such as MPC (multi-party computation), hardware isolation, offline signing, and on-chain auditing to ensure the secure storage and transfer of digital assets. Its system security is exceptionally robust, making it one of the most reliable choices in the market.

Second, while the global legal environment for digital assets has become more accommodating, the regulation of digital asset custody remains relatively fragmented, lacking unified and clear regulations. Qualified custodians must obtain the necessary licenses and permits, and the platform itself must meet the highest industry standards in internal risk control, anti-money laundering compliance, and technology, especially for family offices and investment funds with global operations, making the selection of suitable digital asset custody services a challenging task across different jurisdictions.

Third, the flexibility of solutions is also a key issue facing digital asset custody. Custodians need to provide diverse options to ensure that institutional clients can customize the most suitable custody solutions according to their strategies and risk tolerance. This flexibility not only enhances client satisfaction but also helps better respond to market changes and emerging opportunities. ChainUp Custody is committed to simplifying the digital asset operational process, providing customized deposit, withdrawal, and freeze automatic approval processes, along with portfolio management tools to easily manage blockchain operations. Additionally, ChainUp Custody offers API interfaces for quick technical integration, achieving full automation of transaction processes and eliminating unnecessary complexities in the development process.

In the future, the inevitable growth trend of the digital asset market has become a foregone conclusion. In this field, ChainUp Custody, through years of deep cultivation, is at the forefront of the industry in both the comprehensiveness and cutting-edge nature of its technology. We believe that through the implementation of its digital asset management and technology solutions, it will provide all institutional clients with higher security standards and inject new vitality into the progress and development of the entire industry.