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Digital Asset Custody Solutions: Should You Build Or Buy? | Opinion

May 10, 2021 7:02 pm
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Digital Asset Custody Solutions: Should You Build Or Buy? | Opinion

This column does not necessarily reflect the opinion of the editorial board of Benzinga.

Banks and governments have had centuries to improve the quick transfer of traditional currency. 

In the fifteenth century, the Medici bankers of Florence offered letters of credit, good at any branch of their family’s empire. Western Union made the first wire transfer, via telegraph, in 1872. 

Digital wire transfers have existed since the 1970s. And more recently, Paypal and Apple Pay have revolutionized the payments space to change the way we use money to how we pay with our smart devices.

After hundreds of years of innovation, traditional money transfer is seamless and accessible, for the most part.

By contrast, cryptocurrencies and digital assets emerged just a decade ago with goals to speed up the transfer of money between parties across state lines and give people around the world control of their identity, data, and capital.

Now, as interest in this new paradigm of finance grows amongst financial professionals and investors, many traditional institutions have recognized that the next stage in the quest for mainstream digital asset adoption is to implement a robust security infrastructure to safeguard these assets.

In the digital asset security industry, offline “cold storage” for digital assets is classified as secure but comes with significant drawbacks in terms of accessibility and liquidity. 

Someone with a small amount of cryptocurrency in cold storage might be content to let their funds sit immobile during non-active trading times, but institutions or individuals holding large amounts of cryptocurrency are more likely to need instantaneous access to funds for trading activities, thus cold storage would not be the best option for these activities

With digital assets secured in cold storage, activities such as lending, staking, settling, and converting are all effort-demanding and time-intensive, not to mention yield generation is practically impossible with funds held in cold wallets.

Retrieval of assets may be measured in hours, not minutes.

Simply put, thawing assets from cold storage is a hassle at the best of times. Today, with a pandemic raging across the world, it’s an even greater problem. New health protocols, while good and necessary, can further slow liquidity. 

Though the cryptocurrency industry is still young, its security technology has advanced by leaps and bounds over the last few years.

With modern custody technology, holders of cryptocurrency no longer have to make a stark choice between security and liquidity.

Just as money transfer protocols like SWIFT and Fedwire accelerated banks’ financial movements in the mid-twentieth century, contemporary digital asset custody solutions match the security of cold storage with instant access to funds.

Any institution or person with sufficiently large digital asset holdings will want to take advantage of modern custody solutions.

The question then becomes: Should institutions build their own system or collaborate with an established custody platform provider? 

To remain competitive and respond to the market demand, financial institutions that want to engage in digital assets must provide new offerings that do not compromise security, promote low risk, and are fully compliant.

To make this happen, institutions have three options: build their own solution – a highly-costly endeavor, rely upon third-party partners to outsource the service or purchase solutions. 

The attraction of building an in-house custody system is apparent to those skilled in infrastructure technology.

First, large financial organizations may prefer to run proprietary systems and may even imagine custody as a potential business opportunity: If you build your own system, you might be able to license it to smaller firms.

Second, establishing a digital asset custody tool would encourage growth in cryptocurrency expertise across large swathes of the organization. For a few of the largest institutions, in-house development and deployment offer some proprietary benefits.

Nevertheless, they would be at a disadvantage compared to third party specialists who have already established standards such as compliance, security validations and certifications, and token support, as well as the overall maintenance of the technology infrastructure. 

While building an in-house custody solution appeals to the deep-pocketed, many institutions will likely conclude that the decision really comes down to a combination of purchasing an already built, certified, and insured security product and partnering with an established player as the most efficient decision, especially if scaling operations is a priority.

Few organizations will have all the in-house expertise in coding, digital assets, risk and insurance, and in regulation that would enable rapid development.

More often, any project would begin with a costly hiring push, which could take many months to assemble a team and just as many to have a working product.

Subsequently, once offline governance and online code have been checked for points of failure and the program has launched, maintenance would continue to draw on the institution’s time and talent. 

Development and implementation never really finish with a truly binary decision: to buy or to build.

When regulators pass a new rule, coders and experts must update processes, procedures and deploy tests.

And while in-house solutions are by definition designed for the organizations they serve, custody vendors strive to provide options for customization and variation of workflows and secure robust governance protocols.

Overall, the buying of a tailored solution comes with several often overlooked benefits, such as advisory on the evolving and complex landscape of digital assets.

One of these overlooked benefits is the advisory and regulatory services accompanying solutions.

In the digital asset industry, the pathway to mainstream adoption will come when there is more regulatory clarity on a global basis.

Yet, keeping up with those agencies like the Office of the Comptroller of the Currency’s (OCC), which recently gave the green light for banks to conduct payments via stablecoins, the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC) is a tremendous undertaking and a full-time legal job.

We have also seen an acceleration of digital money adoption in Europe through Central Bank Digital Currency pilot programs.

In fact, European Central Bank President Christine Lagarde envisions a digital Euro being a reality within the next five years. 

As the governance expands, there is value in having a partner that is well-versed in regulation, and more importantly, one that can advise on how to scale within the boundaries of regulation.

We are living in a time where Bitcoin is rapidly gaining traction and is on track to become the gold of the future, commonly referred to as “millennial gold." 

And, while many institutions are working on security tokenization offerings (STO) and asset securitization, there has been a historical demand for Bitcoin as more companies and investors seek portfolio diversification with the popular cryptocurrency.

In order to respond to this increase in market demand, financial institutions must continue to provide new offerings that are compliant with regulators. 

Today, there are proven solutions available that come equipped with strong expertise that will help institutions build their services and deliver a “plug and play” option.

Institutions know that speed is key to keeping their market share, as well as both attracting and retaining customers. 

Knowing all the components, each company has unique needs to fill, expectations to meet, and resources to expand.

The decision companies need to make is whether they have the internal resources and time to build a solution from scratch and whether or not these solutions have the potential to be more advanced and innovative than what already exists on the market.

Some firms will decide that owning their solution, no matter the time or cost, is of primary importance, while others will conclude that a quick set-up of an existing and customizable system is the superior option as it saves time and financial sources and ultimately allows the company to focus on the customer needs while growing their core business. 

Nevertheless, with the suite of advanced technology already battled-tested and available on the market, thorough due diligence may be all it takes before buying and deploying a reliable, secure solution that can help scale your business, all the while keeping your clients’ digital assets safe.

Whatever path is chosen, decision-makers in the organization can take pride in being on the cutting-edge of financial development.

By Alexandre Lemarchand

Alexandre Lemarchand is the VP of Global Sales & Partnerships at Ledger Enterprise Solutions. He is a strategic leader with over two decades of experience in FinTech, effectively growing and managing sales and customer retention. Alexandre joined Ledger following 12 years at Microsoft, where he was most recently a Director of Partner Strategy and Business Development. Prior to his time at Microsoft, he spent time in the U.S. working for software sales companies where he focused on business development. Alexandre is now responsible for driving revenue, developing partnerships, and executing Ledger Enterprise Solutions worldwide business strategy.

Image: Courtesy of Ledger

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