Top Risks in Digital Asset Custody and How to Avoid Them

Investing in tokenized assets like cryptocurrencies and NFTs is not a risk-free activity. Financial markets can take a dip anytime, and cybersecurity threats have become more sophisticated than ever. 

On top of everything, not all digital asset custodians are equal. Some focus on compliance, while others only offer an easy-to-navigate platform. Thinking about potential risks is completely valid and somewhat beneficial because it will help you filter out unreliable organizations right away. Here’s a short guide explaining the top risks you should know and what you can do about them:

Limited Range of Wallets

Digital asset custodians have emerged as a savior for individual investors and financial institutions, who wish to protect their assets. These third-party organizations store the private keys of clients’ digital assets and manage their wallets. But what happens when your custodian offers a limited range of wallets?

The three types of wallets include:

• Hot wallets
• Cold wallets
• Warm wallets

If you wish to make frequent transactions, a hot wallet is the right option. It is always available on the Internet and can facilitate smooth and fast transactions. On the other hand, if you plan to hold onto your digital assets for a long time, a cold wallet is more suitable. 

Make sure the custodian offers both hot and cold wallets. This will ensure maximum risk management.

Operational Inefficiencies

Digital asset custody solutions do more than just hold your keys. They become a part of your financial strategy. Many custodians scale their services with your needs and can even integrate third-party trading platforms. 

This is why it’s important to choose a custodian that has a smooth operational structure. We’re talking about well-managed teams, verifiable industry reputation, and accurate records. Review different custodians’ services to assess their offerings. 

Security Risks

There is nothing more damaging than partnering with a digital asset custodian who doesn’t provide complete security. A reliable custodian like BitGo will offer the following features:

• Threshold Signature Schemes (TSS)
• Multi-Party Computation (MPC)
• Trusted Execution Environments (TEE)
• Hardware Security Modules (HSM)

Moreover, look for authentication protocols, multi-signature access, and encryption tools. 

Regulatory Non-Compliance

Choosing a compliant digital asset custodian is incredibly important for financial institutions and cryptocurrency exchanges. Make sure the organization complies with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

Lost Keys and Theft

Despite taking robust security measures, the risk of losing your keys and investment is always there. Network breaches, DDoS attacks, and server failures are quite common. 

The best thing you can do is choose an asset custodian that offers insurance and provides fraud protection. This will ensure peace of mind.

Choose a Qualified Custodian

A digital asset custodian and a qualified asset custodian are not the same. Many organizations simply offer a hot wallet software solution and claim to be a qualified custodian. Remember that a reliable custodian meets the standards set by the Securities and Exchange Commission (SEC).

A little proactive research can save you from partnering with a non-compliant custodian.