Should institutional investors consider self-custody of crypto assets?

In the realm of digital assets, the crypto community often advocates the principle: "not your keys, not your coins". This aphorism articulates the concept that entrusting a third-party with your digital asset custody might compromise your control over your assets. However, for institutional investors, the self-custody of digital assets is typically neither feasible nor appealing. To summarize why this is:

• Third-party custody services, such as institutional crypto custody, present the sole functional solution for financial institutions necessitating a regulated custodian partner. Such a partner can assure the appropriate management of the fund and can promptly detect any suspicious activity.
• The secure and safe custody of digital assets still demands substantial technical proficiency and engagement with technology providers, bringing additional costs. Even utilizing a wallet provider compels asset managers to learn new skills to navigate the operational specifics associated with the blockchain.
• Collaborating with a qualified custodian like Aplo, a leading provider of digital asset custody solutions, facilitates easy transferability and connectivity to trading platforms. This allows investors to center their efforts on executing their strategy, rather than contending with operational concerns.

So what should institutional investors look for when picking a qualified custodian?

Make sure they provide a wide range of services

If you’re planning on trading crypto assets, ensure your third-party custodian offers a wide range of services so you do not need to change providers. Check if they support a range of tokens, access to different markets, staking services and optimal payment and settlement infrastructure. So you can ensure you're not missing out on certain opportunities.

Look closely at the jurisdiction they operate within and their regulatory obligations

The custodian should be based in a jurisdiction with a robust regulatory framework that ensures the safety and security of investors' assets. Not all regulatory approvals are equal; make sure your custodian is registered in a quality jurisdiction with respected regulators who enforce company obligations.

Assess their track record of delivery and financial strength

As we have seen recently, past performance is no guarantee of future results - nevertheless, the custodian should be financially sound, with a strong balance sheet and track record of delivery. Ideally they should be audited by a respected and accredited accounting firm. Check and corroborate as best you can that this is the case.

How does custody work at Aplo?

Aplo is registered by the Autorité des marchés financiers (AMF) and Autorité de contrôle prudentiel et de résolution (ACPR) as a Digital Asset Service Provider to offer services as a qualified custodian. There are a number of requirements we have to meet to maintain our status as a qualified custodian, these include, but are not limited to:

Segregation of customers' assets

We are compelled to keep our customers' assets separate from our own. This means that even in the event of bankruptcy or other financial difficulties, the assets belonging to our customers are protected and would not be used to cover any losses or debts.

Minimum capital requirements

We are required to operate with full 1:1 reserves. This requirement ensures that we have enough liquid assets to meet our full obligations as a custodian. In addition to this our capital is held in liquid assets $ and €, not tokens - which was not the case at FTX.

The opportunity to mitigate ‘on-exchange’ risk

In addition to the above, we offer our customers the opportunity to trade across multiple venues. Assets deployed for trading across exchanges are split across venues, reducing customer exposure to a single venue and therefore minimizing risk.

Customers have control of their crypto assets with Aplo and can choose to deploy them for ‘trading’ or into a dedicated ‘custody’ account - when assets are placed in our custody they are held in cold wallets for a small fee. When held in our custody crypto assets are safe and secure even if, for some reason, Aplo became insolvent - this is not the case with unregulated providers.

Aplo also now offers customers the opportunity to safeguard against counterparty risk when trading. In essence, the service allows clients to remove any counterparty exposure to exchanges by paying Aplo a fee (calculated by APR) to guarantee protection of their crypto assets.

'Institutional-grade’ security management and governance

At Aplo, we uphold a stringent approach to security management and governance, reinforced by the utilization of hardware security modules. We are bound by law to segregate our customers' assets from our own, ensuring a high level of safety for digital assets under our care. The process for moving customer funds outside of Aplo is safeguarded by requiring multiple signatories, further enhancing security.

Moreover, we take the extra step of securing a contracted insurance arrangement through our wallet providers, Fireblocks and Copper. This insurance coverage protects assets in our custody against technical failures, cyberattacks or theft of private keys, and issues related to the signing process. The inclusion of hardware security modules in our custody solutions significantly enhances the security profile by safeguarding the cryptographic keys and providing a highly secure environment for these operations.

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If you’d like to find out more about Aplo’s approach to custody or our other prime brokerage services please drop us an email: contact@aplo.io.