Once they reach a certain level of sophistication, there’s a clear trend for Web3 asset holders to transition their digital asset wealth to self-custody.
Custody of digital assets is evolving, whether it be the technology itself, the plethora of new tokenized investment products, or the risks of leaving assets with service providers like centralized exchanges, whether real or perceived.
Colton Dillion, CEO of Hedgehog Technologies, breaks down the evolutions in digital asset custody, focusing on the shift of wealth to self-custody in the space and how advisors must support this shift.
In Ask an Expert, Jessy Gilger from Sound Advisory answers questions about direct bitcoin ownership within an IRA account.
–S.M.
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Not Your Client’s Keys, Not Their Coins: The Future of Digital Asset Custody.
Web3 rails will eventually swallow traditional finance, and there’s no question about it.
Weighing in at an impressive $2.3 trillion market capitalization, the digital asset industry still has some growing up to do before it can surpass the $110 trillion stock market, but in case you haven’t been paying attention, real-world assets (RWAs) and stablecoins have seen some recent big bets from major players like Blackrock, Stripe, Franklin Templeton and others.
These firms are slowly cloning traditional securities like money market funds and mutual funds for on-chain consumption and seamless peer-to-peer transfers, and it’s only a matter of time before regulators catch up with the market to allow the exchange of traditional securities, such as Fortune 500 stocks or exchange-traded funds (ETFs), in the same exact manner. Eventually every type of traditional asset will also be an on-chain asset. All we need is time.
So, what does that mean for custodians?
Chainalysis reported last June that personal wallets were increasing exponentially even while assets being sent back to exchanges were decreasing quarter over quarter. Both retail and institutional clients are choosing to keep their assets on-chain rather than trust them with custodians who may turn out to be another FTX or otherwise risk their funds in highly interconnected networks of rehypothecation. If you could avoid having your funds locked up in Silvergate’s bankruptcy proceedings, wouldn’t you?
While Coinbase, Kraken and Gemini all support at least one of the spot bitcoin ETFs as a primary custodian, and institutional use-cases are migrating more slowly, there’s a clear trend for Web3 asset holders to start transitioning their wealth to self-custody once they reach a certain level of sophistication. Once insurance methods catch up with wallet compromise, we expect that most individuals and institutions will choose to handle the segregation of their accounts directly and demand control of their own private keys.
As advisors and fiduciaries, it behooves us to be prepared for the day that clients come to us asking to support self-custody solutions. There are many options out there for intrepid self-custodians, from multi-sig accounts to account abstraction (AA) smart contract wallets, from institutional hardware to multi-party computation (MPC) wallets, but each entails their own security and usability tradeoffs, as well as cost considerations.
Multisig
The Gnosis Safe is the...
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