What does institutional crypto adoption actually look like?

Behind the smoke screen of memecoins and NFT hype , the pillars of a new and integrated financial system are being built. As it relates to institutions entering the game, the question is more “when” than “if.” Last month, CoinDesk reported Goldman Sachs and other top-tier banks were exploring Bitcoin-backed loans, meaning they want to use Bitcoin as loan collateral, without actually touching the Bitcoin itself. 

Translation? These banks know they will have to adopt crypto, even if they are reaching toward it with one hand holding their nose. But what will this adoption look like, and how can banks go about securing digital assets?

Custody

Custody, or actually holding the private keys for large amounts of crypto, is exactly what banks like Goldman seek to postpone while flirting with Bitcoin-backed loans. And that’s because there is still a large amount of risk. Crypto regulation is in its infancy, and so is the market for institutional custody solutions. Most solutions today are vulnerable to attack (and hacks), so it makes sense for institutions to buy time and craft the best possible ‘game plan’ for adoption day—because adoption day is coming.  

And custody involves a lot more than just holding large amounts of crypto. There are reasons digital assets are different from stocks and other traditional assets—Decentralized Finance (DeFi) features, such as staking, uncollateralized borrowing and lending on the blockchain, and tokenization of assets. In addition to ensuring the security of investors’ assets, banks and other traditional financial institutions have to figure out how to make such services usable enough to, well, allow for an actual user experience. Furthermore, if they want to ‘peel away’ at the client base of Decentralized Exchanges, perhaps creating a superior user experience will be key to their approach.

But back to security. We’ve established that many options on the market are frankly too dangerous for institutions to adopt. But what exactly are the options?

What’s on the market today?

As it relates to digital wallets, there are generally two alternatives. One is the hot wallet, which is always connected to the Internet. An example is a MetaMask wallet, or the personal wallets that store investors’ crypto on exchanges like Coinbase and Binance. For institutions, the ‘hottest’ hot (pun intended, not sorry) option is an MPC — a solution that includes multiple computers, each of which hold ‘a shard’ of the private key, required to sign every transaction, forcing prospective hackers to go after more than one target. Then there are cold wallet solutions that come in the form of hardware—essentially a physical wallet that isn’t connected to the internet and therefore can’t be hacked. Hypothetically, at least, since to sign off a transaction, they still need to go online, and the moment they go online, they are no longer cold.

Institutions looking to take custody of digital assets can’t use hot wallets, whether MPC or not, alone, as they are vulnerable to attack. Cold vaults, too, have the disadvantage of being less dynamic. That’s why GK8 offers a hybrid solution including both—the only truly secure and effective solution on the market. The idea is the majority of the assets are held in a cold vault (an actual cold vault, which can only transmit data, without inputting data from the internet) and a smaller portion on an MPC for easier access to assets for trading, staking, and other DeFi mechanisms. Because the majority of the assets are held in the cold vault, and the only thing a hacker can ever hope to break into is the MPC, the GK8 solution totally eliminates the ROI underlying prospective cyber theft.

Third-party custody, an alternative to self-custody sought by many banks, requires the institution to hand over its private keys (controlling its assets) to a dedicated custodian. This may look like a safer option in that it transfers the onus of risk somewhere else, but that’s like trying to hide from the boogeyman under a blanket—and hackers, as opposed to the boogeyman, are very real. A mistake or a vulnerability on behalf of the third-party custodian can lead to a security incident, and when that happens, the bank will end up with a price tag that goes above and beyond the value of the stolen assets. Its own reputation will be marred, and in the race of the novel digital ‘eco-space’, it will end up biting the dust for years, if not decades, to come. Missing out on new revenue streams, new partnerships, and new projects. With self-custody, banks can cut off this risk, taking full ownership of their venture into the blockchain ecosystem.

Good, cost-efficient, and safe self-managed custody tools are like the small bricks building the base of the walls surrounding this market. Such a wall, when completed, will protect the users and institutions in the market, protecting their ability to trade safely, privately, and on a much larger scale.