The digital appeal
17 September 2019
Ledger Vault’s Loic Jeanjean and Alexandre Lemarchand discuss the growing appetite for digital assets from institutional investors
Image: Shutterstock
Has the appetite to hold digital assets across institutional investors increased in the past few years?
Loic Jeanjean: Institutional interest in digital assets is steadily increasing. The Harvard Management Company (the largest academic endowment in the world) put something between $5 and $10 million into cryptocurrency. In May, a Fidelity survey asked institutional investors including pensions, hedge funds and endowments what they thought about digital assets. Just under half, 47 percent of respondents, reported an “overwhelmingly favourable” opinion of digital assets while 72 percent of respondents said that they prefer to buy investment products that hold digital assets. The study indicated that “institutional investors are finding appeal in digital assets and many are looking to invest more in digital assets over the next five years”.
What are the primary considerations with the buying/selling/holding and custody of digital assets?
Alexandre Lemarchand: Proper custody of digital assets is not as easy as locking up gold or paper currency in a bank vault. Since cryptocurrencies like Bitcoin and Ethereum exist completely digitally on a blockchain and are by nature maintained in a decentralised environment, they present an enticing target for hackers. Further, institutions dealing with public and private keys on such a large scale isn’t easy. Secure storage of large digital asset funds is complex, and institutions need safe, comprehensive and integrated storage solutions.
Industry reports have shown that some $1.7 billion in cryptocurrency was stolen last year. The threat landscape faced by investors is similar to those facing security professionals in all tech spaces and will only become broader as the industry grows. From social engineering to traditional cyberattack methods like site clones, phishing and SMS hacks, to basic hardware tampering, there are many entry points in this new frontier.
Cryptocurrencies and other digital assets present unique challenges to custodians. What are these challenges? And, does this present the custodian community with commercial opportunities?
Lemarchand: Effective cryptocurrency custody solutions should ensure there are no single points of failure within an organisation. Think about the QuadrigaCX case in which $163 million disappeared. While that’s now developing into a matter of extreme fraudulence and one bad actor, it showed on a tremendous scale that the danger lies in trusting single points of failure.
For the cryptocurrency industry to truly mature, institutional investors are going to have to get involved. Exchanges, brokers, asset managers, over-the-counter (OTC) traders, custodians and others must enforce institutional-grade controls on all transactions. It’s the only way to bring about a new era of stability and trust in this new era of digital asset management.
What is meant by ‘hot storage’ and ‘cold storage’ and which is best suited to the institutional investors?
Jeanjean: The distinction between the two of these is that hot wallets are connected to the internet while cold wallets are not. Leaving your crypto on an exchange is an example of hot wallet storage. Naturally, cold wallets are considered safer than hot wallets, as they spend little (or no) time connected to the internet.
Hardware wallets of the cold variety are generally considered the best and safest option for storing cryptocurrency. These are typically in USB format and can be temporarily “hot” in that they can be connected to the internet to facilitate a crypto exchange, but primarily remain offline and disconnected with assets fully isolated and inaccessible to hackers.
While USB-based hardware wallets are undeniably the best way for individuals holding cryptocurrency to protect their investment, they’re not practically viable for enterprises handling millions of dollars’ worth of crypto. In the early stages of institutional investing, asset managers would find themselves securing massive amounts of wealth on hardware wallets with no convenient and efficient way to implement meaningful segregation of duty.
The financial industry really needs custody solutions that are more holistic in their approach, combining both hot and cold approaches, and encompassing both hardware and software
technology solutions.
Loic Jeanjean: Institutional interest in digital assets is steadily increasing. The Harvard Management Company (the largest academic endowment in the world) put something between $5 and $10 million into cryptocurrency. In May, a Fidelity survey asked institutional investors including pensions, hedge funds and endowments what they thought about digital assets. Just under half, 47 percent of respondents, reported an “overwhelmingly favourable” opinion of digital assets while 72 percent of respondents said that they prefer to buy investment products that hold digital assets. The study indicated that “institutional investors are finding appeal in digital assets and many are looking to invest more in digital assets over the next five years”.
What are the primary considerations with the buying/selling/holding and custody of digital assets?
Alexandre Lemarchand: Proper custody of digital assets is not as easy as locking up gold or paper currency in a bank vault. Since cryptocurrencies like Bitcoin and Ethereum exist completely digitally on a blockchain and are by nature maintained in a decentralised environment, they present an enticing target for hackers. Further, institutions dealing with public and private keys on such a large scale isn’t easy. Secure storage of large digital asset funds is complex, and institutions need safe, comprehensive and integrated storage solutions.
Industry reports have shown that some $1.7 billion in cryptocurrency was stolen last year. The threat landscape faced by investors is similar to those facing security professionals in all tech spaces and will only become broader as the industry grows. From social engineering to traditional cyberattack methods like site clones, phishing and SMS hacks, to basic hardware tampering, there are many entry points in this new frontier.
Cryptocurrencies and other digital assets present unique challenges to custodians. What are these challenges? And, does this present the custodian community with commercial opportunities?
Lemarchand: Effective cryptocurrency custody solutions should ensure there are no single points of failure within an organisation. Think about the QuadrigaCX case in which $163 million disappeared. While that’s now developing into a matter of extreme fraudulence and one bad actor, it showed on a tremendous scale that the danger lies in trusting single points of failure.
For the cryptocurrency industry to truly mature, institutional investors are going to have to get involved. Exchanges, brokers, asset managers, over-the-counter (OTC) traders, custodians and others must enforce institutional-grade controls on all transactions. It’s the only way to bring about a new era of stability and trust in this new era of digital asset management.
What is meant by ‘hot storage’ and ‘cold storage’ and which is best suited to the institutional investors?
Jeanjean: The distinction between the two of these is that hot wallets are connected to the internet while cold wallets are not. Leaving your crypto on an exchange is an example of hot wallet storage. Naturally, cold wallets are considered safer than hot wallets, as they spend little (or no) time connected to the internet.
Hardware wallets of the cold variety are generally considered the best and safest option for storing cryptocurrency. These are typically in USB format and can be temporarily “hot” in that they can be connected to the internet to facilitate a crypto exchange, but primarily remain offline and disconnected with assets fully isolated and inaccessible to hackers.
While USB-based hardware wallets are undeniably the best way for individuals holding cryptocurrency to protect their investment, they’re not practically viable for enterprises handling millions of dollars’ worth of crypto. In the early stages of institutional investing, asset managers would find themselves securing massive amounts of wealth on hardware wallets with no convenient and efficient way to implement meaningful segregation of duty.
The financial industry really needs custody solutions that are more holistic in their approach, combining both hot and cold approaches, and encompassing both hardware and software
technology solutions.
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