Digital Asset Custody Agreement
When establishing a digital asset custody agreement, it’s important to consider the specific risks you’re taking. The digital asset custody services industry is a rapidly growing industry with ever-changing regulatory requirements. New laws and initiatives aim to foster responsible growth, but companies must also ensure that they maintain adequate risk controls.
The security risks associated with digital assets make digital asset custody a necessity for those who own them. Choosing the right service provider means considering the level of expertise and technology needed to properly handle the assets. Crypto assets are especially complex due to their governing and protocol systems, including proof-of-stake, proof-of-work, smart contracts, and more. Choosing the right digital asset custodian is important for protecting your investment.
The SEC has requested comments on the custody of digital assets by broker-dealers and the OCC has already made a decision on the custody of these assets. The SEC was scheduled to amend the Custody Rule in 2020, but the current composition of the commission does not seem to be interested in making changes. However, this could change with the appointment of a new chairperson.
A cryptocurrency wallet is a tool that stores private keys. The keys often include encryption and signing information. A custodial can take control of a wallet on behalf of an owner, or they can involve the owner in key management. The latter method is the most convenient option for most people.
Digital asset custody is similar to the custody of traditional financial assets. It involves a custodian providing secure storage space for users. Additionally, it protects users and offers a range of services. However, the immutability of blockchain technology poses additional responsibilities for custodians. In addition to providing secure custody, custodians must also provide security and liquidity to users.
Establishing a Digital Asset Custody Agreement
Because of these risks, digital assets require specific safeguards to protect investors, consumers, and businesses. This can protect against illegal activities and promote responsible development of digital assets. In addition, it protects personal privacy and shields against arbitrary surveillance that could contribute to human rights violations. This means that the digital asset regulations must evolve to address these issues.
For institutional investors, using custody solutions reduces operational costs. For example, custodians can protect private keys and allow institutional investors to focus on the core business of their businesses. Furthermore, if something goes wrong with their assets, they can quickly and securely recover them by turning to the custodians.
Digital asset custody brokers must disclose the risks and conditions of holding digital assets, including any associated security network. They must also account for those risks in their customer agreements. If a broker-dealer does not do this, it is not permitted to provide custody of the digital assets. Further, brokers must limit their business to digital asset securities.
Typically, a digital asset custody broker will facilitate transactions on the secondary market. A secondary market transaction occurs in which a broker-dealer introduces a buyer and a seller. The two parties settle the transaction bilaterally. The broker-dealer will then instruct the issuer to issue the digital asset security to the customer.