CipherBC Asset Management Guide: Understanding Third-Party Custody
In recent months, the digital asset industry has experienced extraordinary turbulence. Today, with hacking, theft, and private keys loss becoming increasingly significant threats, safeguarding your digital assets has never been more crucial. So, how can you protect your digital assets effectively?
Why Security Is Critical
Owners of digital assets are increasingly becoming targets of hacking, theft, and fraud, which, in some cases, can lead to the loss of their entire holdings. These emerging cyber threats can affect anyone, from small-scale digital asset holders to the largest digital asset portfolios. According to statistics from blockchain security monitoring platforms such as SlowMist, November 2024 saw a rise in total losses from various security incidents compared to October. More than 30 notable security events occurred in November, resulting in total losses of $203 million due to hacking, phishing, and rug pulls—a 38% increase compared to October. Only $25.2 million of these losses were recovered. Thus, as a digital asset owner, you must not only focus on investing in this alternative asset class but also prioritize its security.
What Are Digital Assets?
Digital assets, such as Bitcoin (BTC) or Ether (ETH), operate on blockchain systems. Blockchains are designed to be decentralized, offering the advantage of allowing digital asset owners to transfer funds without involving third parties such as banks or governments. However, this also presents significant challenges for digital asset owners since, without a trusted central authority, accountability and reliability are lacking.
Digital assets may initially seem confusing to store as intangible entities. Access to digital assets is stored in cryptocurrency wallets, while the assets themselves are kept on the blockchain. Additionally, public keys are generated from private keys. The public key is akin to an IBAN in traditional banking, enabling users to receive cryptocurrency in their wallets.
In traditional banking systems, people can choose whether to safeguard their money or gold themselves or entrust it to a trusted party (the bank). The digital asset system works similarly. Users can choose between different custody types and cryptocurrency wallets, either controlled by a trusted third party or solely by the owner (self-custody).
Third-Party Custody
With third-party custody solutions, private keys are stored by a centralized entity, such as a bank or cryptocurrency exchange. Like a bank account, if users lose access to their digital assets, the third-party custodian retains access to these encrypted keys and can provide emergency access to the funds.
Third-party custody solutions are only useful and meaningful if the service provider is trustworthy, properly regulated, and experienced in handling digital assets. Unregulated cryptocurrency exchanges, storage providers, and financial intermediaries that hold private keys on behalf of users pose significant risks. The lack of global regulation in the cryptocurrency space has led to the emergence of many unregulated entities. To mitigate risks, users should always assess where the custody service is located and whether it holds the necessary financial licenses.
Addressing the Risks of Self-Custody
Generally, the greatest risk of self-custody is losing access to your digital assets. For physical mnemonic backups and hardware cryptocurrency wallets, several precautions can be taken. One approach is to split the seed phrase into different parts and store them in separate locations. This way, even if one area is compromised, the seed phrase can still be reconstructed. For software cryptocurrency wallets, owners should avoid storing passwords or seed phrases on any internet-connected devices.
领英推荐
Why Trusted and Regulated Third-Party Custody Is the Best Solution
Trusted third-party custodians, such as financial institutions, have safeguarded money, gold, and securities for centuries. Today, they provide the same service for digital assets. Although digital assets remain stored on the blockchain, third-party custodians safeguard the private keys on behalf of users.
The Advantages of Third-Party Custody
Banks can serve as trusted third-party custodians for digital assets. Similar to opening a bank account, opening a cryptocurrency account with a regulated third party requires users to undergo Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks.
While self-custody gives you sole control over your assets, tracking your digital holdings can be challenging. With a reliable third-party provider, asset owners can ensure the security of their assets without lifting a finger.
In self-custody scenarios, there is often no dedicated support team—only a community-driven platform—because cryptocurrency wallet providers cannot access passwords, private keys, or seed phrases. With third-party custody, users do not need to worry about these issues, as the custodian can access the funds and assist in resolving any problems.
CipherBC Asset Management
CipherBC, a seasoned asset custodian, uses MPC (Multi-Party Computation) encryption technology to secure private keys and enable secure transactions. Unlike traditional wallets that store private keys in a single location, MPC wallets distribute private keys across multiple parties, eliminating single points of failure or compromise.
This distributed approach significantly enhances the security and resilience of cryptocurrency storage. MPC wallets can withstand various types of attacks, including hardware theft, malware, and phishing attempts. Since attackers would need to compromise multiple devices and gain control of the majority of the shares simultaneously, successfully attacking an MPC wallet is far more challenging. CipherBC has operated for eight years without any security breaches, a testament to its reliability.
Asset Management
As the number of digital asset storage solutions continues to grow, owners face complex challenges in ensuring the safe custody of their assets. While self-custody cryptocurrency wallets offer certain advantages, they still pose significant risks. These risks can be mitigated by partnering with a trusted third-party provider that securely stores digital assets and helps owners navigate the rapidly evolving industry.