As several banks prepare crypto custody services, owners now have to turn an old bitcoin adage on its head: are banks ready to be their own (and others’) bank?
Last week, BNY Mellon, the oldest bank in the US, announced that it would offer custody solutions to escape pressure from institutional investors. Documents from December also show that Deutsche Bank is also planning a custody solution in addition to trading and token issuance services.
While both banks are well established and experienced in handling a wide variety of assets, that doesn’t necessarily mean they’re prepared for crypto custody.
“Digital assets are fundamentally different from traditional assets like bonds, stocks, and Treasury bills. Digital assets are inherently decentralized and their ownership is therefore based on a completely different model that cannot reuse the existing centralized infrastructure of the traditional banking world. In order to store crypto assets, you need brand new infrastructure, ”said Jean-Michel Pailhon, Vice President Business Solutions at Ledger, in an interview with Cointelegraph.
Even for crypto-native institutions, custody is extremely complex. Just last year, the crypto exchange KuCoin suffered from a hack that brought the attacker over $ 200 million. Large sums of money custody creates an attractive honeypot for potential attackers, and according to experts, not even many large crypto exchanges are properly approaching custody security.
“Few crypto exchanges like Kraken, Gemini and Binance invest a lot of money in proving the proper internal control of their personal protocols for managing private keys,” Dyma Budorin, co-founder and CEO of Hacken, told Cointelegraph last year.
If the big banks want to get the right approach to security, they effectively have three options, Pailhon said.
“They can contract with an existing regulated custodian, they can build their own custodian infrastructure and have it regulated, or they can buy custodian technology from a vendor and use it and regulate it.”
In particular, if the banks decide to develop their own solutions, the costs and the time can pile up quickly. Banks need to hire dedicated developers, “make big investments in infrastructure,” including data centers and servers, and run the regulatory area – a process that alone can take “6 to 12 months”.
“The effort and investment required to provide an institution with an enterprise-grade self-custody solution are much higher than for an individual. It takes slightly different technologies and governance processes to secure billions of dollars in digital assets, ”he added.
Regardless of which route banks are taking, Pailhon says it is a sign of the growing legitimacy of crypto that banks like BNY Mellon are looking to offer custody solutions. In addition, as the market capitalization of Crypto and the value of assets increases, secure custody solutions are becoming increasingly important for institutions and even some individuals.
“With a garage-based server or an air-gap computer in a bunker in the Appalachian Mountains, you can’t protect Bitcoin with $ 5, $ 10, or $ 50 billion. You need to have a fully redundant, resilient, secure, certifiable, and auditable custody infrastructure that can scale and empower millions of users and support hundreds of thousands of digital asset transactions in a month. The future success and adoption of digital assets and the digital asset management industry will depend on it. “
