Traditional or crypto?
With crypto and digital assets on the rise, you might be asking yourself how the safekeeping of crypto assets works, what challenges are in store, and what you should be discussing with your counterparties and auditor.
Let’s start by taking a look at the similarities between the safekeeping of “crypto assets” and “traditional assets”. For both asset classes, a custodian keeps records of the assets and will prove their existence to counterparties, investors and auditors.
Asymmetric keys
So, how does record keeping for crypto assets work? In comparison to the safekeeping of traditional assets, crypto custodians use specific technology to store crypto assets like Bitcoin (BTC) or Ether (ETH).
Storage is based on the principle of asymmetric keys. Simply put, there is a “key pair” consisting of a “public key” and a “private key”. Access to the crypto assets can only be obtained when you know the key pair. A crypto custodian is the keeper of the private keys and ensures your crypto assets are hard to access.
This is the main difference compared to the safekeeping of traditional assets, as crypto custodians don’t store the asset itself; they store the private key that grants access to the virtual asset. A “key” represents a hash function whereas a “hash” can simply be seen as a “digital fingerprint.”
Some like it hot
You might have heard about “hot” and “cold” wallets. If your crypto assets are held at a crypto exchange, this is called a “hot wallet”. The advantage? Without a doubt, direct accessibility to your assets.
Your custodian will usually transfer your crypto assets to a cold wallet (where there is no direct access via the internet). While the level of security is high, usability or customer experience is rather poor.
As you can see, there is always a trade-off between usability (direct access to crypto assets) and security. This is a determining factor when it comes to the set-up of your crypto fund. Knowing how many coins and crypto assets are “in custody” is crucial, to ensure your crypto fund accounting is complete and your auditor can verify their existence.
Questions? Reach out to our team of KPMG crypto experts!
