What Will Move Crypto Into the Institutional Realm?

Facebook recently made its entry into the world of institutional blockchain and cryptocurrency with the announcement of Libra. It garnered so much attention that lawmakers in the United States are holding hearings to review the project. Walmart has been flirting with crypto and blockchain for years. At the time of writing, the top crypto exchange handles a volume of around $50 billion, and Bitcoin (BTC) is holding steady around $8,000.

This is clearly a new “mainstreaming” of crypto to the masses, but a growing number of major banks, hedge funds and family offices are also turning to digital assets to build out their traditional investment portfolios.

Academic endowments — including the Harvard Management Company (the largest in the world), the University of Michigan, MIT and others — are diversifying their holdings with cryptocurrency. In February, JPMorgan Chase launched its own JPM Coin. While its token is in the prototype phase and is being tested solely with JPMorgan institutional investment clients, it is the first U.S. bank to create a digital version of fiat currency.

According to a Fidelity survey in May, 47% of institutional investors have an “overwhelmingly favorable” opinion of digital assets. The firm surveyed hundreds of institutional investors including pensions, hedge funds and endowments. The Fidelity study showed that “institutional investors are finding appeal in digital assets and many are looking to invest more in digital assets over the next five years,” but institutional investment into cryptocurrency can be tricky — especially when it comes to security.

Proper custody of digital assets isn’t as easy as locking up gold or paper currency in a bank vault. Since cryptocurrencies like Bitcoin and Ether (ETH) exist completely digitally on a blockchain, and are by nature maintained in a decentralized environment, they present an enticing target for hackers. Moreover, institutions dealing with public and private keys (more on that later) on such a large scale isn’t easy. Secure storage of large digital asset funds is complex, and institutions need safe, comprehensive and integrated storage solutions.

Industry reports have shown that some $1.7 billion in cryptocurrency was stolen in 2018. The threat landscape faced by investors is similar to those facing security professionals in all tech spaces and will only become broader as the industry grows. From social engineering to traditional cyberattack methods like site clones, phishing and SMS hacks to basic hardware tampering, there are many entry points in this new frontier.

Tight security is crucial to anyone involved with digital assets, whether you’re dabbling in altcoins or an insitutitional investor overseeing fortunes in Bitcoin. In the cryptocurrency world, there are several ways to store your holdings, but they all generally involve some form of wallet. Basically, a “crypto wallet” is a device on which your private keys are stored. Your private keys are a critical piece of information used to authorize spending and selling crypto on the blockchain. The wallets in which you hold them can be physical devices, software- or solution- based, or simply the online exchange from which you’ve purchased your currency.

Of these wallets, there are two forms: hot and cold. The distinction between the two of these is that hot wallets are connected to the internet while cold wallets are not. Leaving your crypto on an exchange is an example of hot wallet storage. Naturally, cold wallets are considered safer than hot wallets, as they spend little (or no) time connected to the internet.

Hardware wallets of the cold variety are generally considered the best and safest option for storing cryptocurrency. These are typically in USB format and can be temporarily “hot” in that they can be connected to the internet to facilitate a crypto exchange, but primarily remain offline and disconnected with assets fully isolated and inaccessible to hackers.

While USB-based hardware wallets are undeniably the best way for individuals holding cryptocurrency to protect their investment, they’re not practically viable for enterprises handling millions of dollars’ worth of crypto. In the early stages of institutional investing, asset managers would find themselves securing massive amounts of wealth on hardware wallets with no convenient and efficient way to implement a meaningful segregation of duty. The financial industry needs custody solutions that are more holistic in their approach, combining both hot and cold approaches, and encompassing both hardware and software technology solutions.

The most secure way to manage crypto assets is through an end-to-end, multi-authorization governance infrastructure. Secure storage of large digital asset funds is complex, and exchanges and institutions need safe, comprehensive and integrated solutions. An effective approach employs a multi-authorization, self-custody system of management and gives financial institutions security, control and speed of execution. A reliable governance framework provides instant access to funds without compromising security whether data is at rest or in transit.

Effective cryptocurrency custody solutions should ensure there are no single points of failure within an organization. Think about the QuadrigaCX case in which $163 million disappeared. While that’s now developing into a matter of extreme fraudulence and one bad actor, it showed — on a tremendous scale — the danger that lies in trusting single points of failure. 

For the cryptocurrency industry to truly mature, institutional investors are going to have to get involved. Exchanges, brokers, asset managers, over-the-count traders, custodians and others must enforce institutional-grade controls on all transactions. It’s the only way to bring about a new era of stability and trust to this new era of digital asset management.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.