At the Dubai Fintech Summit this week, the CEO of Fireblocks, Michael Shaulov, appeared for a fireside chat. Fireblocks is one of the world’s leading institutional crypto platforms. They aim to offer any business the security and infrastructure to support adoption of digital assets. The company’s technology allows firms to have self-custody over their crypto, with secure private keys, API credentials, and zero deposit addresses.
Self-custody wallets are different to custodial wallets, which refer to those held by private centralised exchanges, such as Coinbase. In these cases, owners of digital assets are essentially trusting the exchange to look after their crypto for them, who charge a fee for doing so. However, Shaulov argued that “there is almost a theological debate within crypto – which of the models will prevail in the future?”
The Fireblocks CEO argued that the collapse of major exchanges such as FTX, as well as crypto hedge funds such as Three Arrows, have damaged the reputation of custodial wallets. Put simply, people don’t trust them as much as they once did because they have seen that there’s a real risk of them losing their assets. Better, perhaps, to look after them yourself rather than entrusting them to potential criminals like Sam Bankman-Fried?
“The collapse of FTX, Three Arrows and so on […] the direction of travel is definitely self-custody,” Shaulov argued. “Because there is a saying in crypto which goes, “not your keys, not your Bitcoin; not your keys, not your crypto.” This means that you shouldn’t fully trust or outsource to third parties.”
It seems like a straightforward – and sensible – idea. But the current regulatory regime isn’t conducive to this way of operating. Regulators, particularly in the United States, have long emphasised the idea of having a “qualified custodian,” encouraging consumers to outsource to financial professionals wherever possible.
“The concept of a qualified custodian was coined by the SEC in the 1930s, before we had computers,” Shaulov explained. “That definitely doesn’t take into consideration that today you can have very sophisticated self-custody schemes, and that’s the direction of travel in the industry.”
Shaulov’s interviewer, Henri Arslanian, Co-Founder and Managing Partner at Nine Blocks Capital Management, also pointed out that “in the hedge fund industry, in many jurisdictions, self-custody is actually illegal.” Particularly in the US, where the SEC takes a very stringent view on self-custody, the balance is tilted very much in favour of custodial wallet despite the risks that have been exposed over the last twelve months.
“The core issue for the regulator is to understand all the different ways keys can be deployed and how counterparty risk can be managed,” Shaulov said. “But cryptography is definitely something that is currently beyond the understanding of most regulators.”
Author: Harry Clynch
#Crypto #DigitalAssets #Web3 #SelfCustody #CustodialWallets
