How your business can safely store crypto
If you or your business own any crypto, you know how vital it is to store it properly. Unlike storing money at the bank, there's no outside protection, so it's important to make sure you are taking the necessary steps to keep your crypto secured.
Crypto storage revolves around securely storing your crypto keys. When you purchase crypto, you are given two keys—a public key and a private key. The public key is like an email where others can send you crypto. The private key is the password that gives you access to your crypto. These keys can be stored and managed through various platforms to help keep them secure from hackers.
Some crypto owners choose self-custody as a way to store their digital assets. However, this approach comes with some drawbacks, especially for those new to crypto. Forgoing a middleman, or custodian, can leave your crypto vulnerable to attacks. Furthermore, if you lose track of your key, your assets are gone. Those in search of more security often opt to use a third-party crypto custodian.
In fact, there are a few ways you can safely store crypto. Here are some things to consider as you decide how to keep your digital assets secure.
Storing crypto in a cold vs. warm wallet
There are generally two ways to store crypto keys—in a cold wallet and a warm wallet.
With a cold wallet, your private keys are stored somewhere not connected to the internet. This can be a disconnected hard drive, writing or printing your keys on a piece of paper and manually putting that in secure location like a safe, or storing them on a USB drive. There are also hardware wallets designed specifically to store crypto keys, sometimes with extra security measures such as additional password protections and pin numbers.
A warm wallet, on the other hand, is connected to the internet. There are a number of warm wallet services available, but most refer to software that is installed on a device and stores crypto keys. These can include desktop wallets that are downloaded onto your computer, a mobile app wallet so you can access your crypto on the go, or an online wallet where your keys are stored remotely on a third-party server.
While warm wallets are the most popular and easiest way to store crypto, they are more prone to hacking.1 That's why many people are turning instead to third-party crypto custodians.
How crypto custody works
Crypto custodians work similarly to how banks store and manage your money. With crypto custody, your keys are stored, managed, and protected from theft. Institutions that manage large amounts of money often work with custody partners to keep their clients' crypto secure, as required by regulators.2
Third-party custodians are registered, regulated financial institutions that hold either a state or national license as a custodian. These custodians hold the private keys of clients to ensure their safety. They also undergo Know Your Customer (KYC) and anti-money laundering checks, as required by regulators.3 For the client, it's like having a checking account at a bank that is secured and, in some cases, even insured.
There are a few different types of crypto custodians. Exchanges can act as a custodian or outsource it to an external custody provider to ensure the security of the crypto. Since July 2020, custodial banks in the U.S. can also be a custodian of crypto.4 There are also regulated and licensed digital asset managers that can hold crypto for customers. Users of Bakkt, for instance, can buy, sell, store, send, or spend their cryptocurrency with the app, which is regulated and licensed.
Crypto custodial regulation
Crypto custodians are regulated and licensed on a state level.5 There are no federal regulations around crypto or crypto custody.
For example, the custody solution, Bakkt Trust Company, LLC, is regulated by the New York State Department of Financial Services (NYDFS) and is a qualified custodian of bitcoin and ether. Bakkt Trust utilizes both warm and cold digital asset storage to ensure that client's crypto is secure and utilizes strategies to minimize risks from warm storage.
NYDFS is considered the gold standard of crypto regulation and has been regulating crypto since 2015.6 Other states may have other laws regarding crypto and crypto custody.
Store your crypto carefully
Whether you choose to store your crypto with a custodial account or use another warm or cold wallet, it's important to make sure that your crypto keys are secure. Research each option to verify that it meets your needs, as each wallet has its own advantages (and drawbacks). And of course, make sure to keep up to date with any regulatory developments on both the state and federal levels.