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Home » Four ways digital assets are kept safe

Four ways digital assets are kept safe

byCCI
April 17, 2024
in Explainers
Keeping digital assets safe is essential to the long-term success of the sector. Here the principles of how this is done are explained.

This article by Alan Leung has been edited and was first published on March 4, 2024, on Coinbase.

Summary

  • Ensuring digital assets are safe is paramount to the long-term success of the sector.
  • To achieve this, high-level scrutiny is required, along with regulation and auditing.
  • Investment is also key, helping to maintain and improve technology and operations.

The growing interest in the safety of digital assets

Crypto custody is in the spotlight, and rightfully so. With the SEC’s approval of spot bitcoin ETFs, many investors, financial advisors, and institutions are exploring the space for the first time to understand how digital assets are stored and protected. This scrutiny is good and welcomed.

When ETF providers select a custodian, they conduct an extensive diligence process – maybe the most rigorous process conducted for any new asset class. 

Coinbase was selected as the custodian of choice for 8 of 11 spot bitcoin ETF mandates. Winning those mandates was a rigorous, competitive process. Here, we outline the foundational principles of our digital custodian. 

Principle one – maintaining a track record of securing customer assets at scale

We have a standard when it comes to our custodial platform: zero tolerance for errors. That standard has dominated our philosophy over 12 years, a track record we compiled without a risk event. Now, we safeguard $193 billion in digital assets, including $101 billion in institutional assets under custody (as of Q4 2023). 

This track record is no accident. We hire top talent. Our team includes world-class and internationally recognized applied researchers. 

We give them the tools and resources they need to continuously invest in technology, processes, and systems to ensure we maintain the leading institutional-grade custodial platform. 

Today, we leverage advanced cryptographic key-sharding techniques to maintain a comprehensive system that combines physical security, consensus computation, and strict, audited process controls.

Our institutional clients are able to further decentralize and tailor access to their operating model by leveraging enterprise security features, such as strict permissioning, multi-user consensus, and transfer policies that ensure no single individual within their organization can act maliciously or be coerced into executing unauthorized transactions or instructions.

Principle two – rigorous regulation and auditing

Coinbase Custody Trust Company, LLC (CCTC), our US-based custodian, is a fiduciary under New York state law and a qualified custodian under the Investment Advisers Act of 1940. It is regulated by the New York Department of Financial Services (NYDFS), which also regulates New York’s chartered banks. 

Our commitment to safeguarding digital assets goes further. As a public company based in the US, Coinbase is also subject to regular audits of our financials. In addition to providing an accurate picture of our business health, audits ensure we properly segregate and maintain separate accounts for our corporate and client assets. 

In February 2020, CCTC became one of the first crypto custodians to complete SOC 1 Type II and SOC 2 Type II examinations, which verify that we have substantial internal processes and controls in place to safeguard client assets. 

The SOC 1 Type II reports test internal controls and systems over financial reporting. 

The SOC 2 Type II tests internal controls and systems related to security of the platform. 

Principal three – ensuring legally segregated and insured custodial funds

CCTC is separate from other parts of Coinbase. Client funds are segregated at the account, sub-account, and on-chain wallet address level, such that clients can independently monitor wallet activities on-chain. 

Legally, client funds are bankruptcy remote. This isolates custodial assets and protects them from the financial position of any Coinbase entity or any other client in the event of insolvency. 

In addition, Coinbase maintains a substantial commercial crime insurance policy that covers theft of fiat currency or digital assets from Prime Trading or Vault. 

Our ability to actively manage the hot and cold wallets of our trading balance based on our insurance coverage provide clients with financial protection against a range of potential security risks. 

We believe our policy is the largest commercial crime policy covering hot wallets of any digital asset exchange or custodian. Over the past eight years, we have significantly increased the size of our commercial crime coverage while securing year-on-year premium decreases over the past two years, which is indicative of our insurance partners’ views of our strong processes and risk profile.

Principle four – ensuring trading is operationally efficient

Our custody solution fits seamlessly into institutional needs for trading and settlement. With integrated trading, financing, and custody, ETF providers and institutional clients can easily and quickly move funds to take advantage of Coinbase Prime’s advanced trading algorithms and execute a variety of different order types, including TWAPs to target a reference rate. They can also tap our advanced agency trading desk for customized order execution strategies or fixed price block execution with third-party counterparties, settling those trades directly on Prime. 

All of this cuts down on the complexity and cost of trading, settlement, and custody, as well as the risk for ETF providers. 

Outlook – continuous investment required

Crypto is always evolving, and as such, continuous investment is required to improve technology and operations, ensuring that clients’ digital assets remain safe and secure. This leaves them free to confidently take part in the crypto economy.

A version of this article appeared on Coinbase.

Tags: cryptodigital assetsexplainerfinancial inclusionGeneral Explainer
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Saskia Seidel is the Policy Fellow at CCI, conducting legal and policy analysis on crypto regulations and legislative developments across key jurisdictions. She examines bills and regulatory proposals as well as case decisions, providing insights into the evolving landscape of digital assets policy.

Saskia holds a Master of Laws in International Business and Economic Law from Georgetown University Law Center. Originally from Germany, she earned a Bachelor's degree in Law and Economics and passed the First German State Exam in Law to qualify in the legal system.

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He has developed a pragmatic approach to building relationships with key decision makers and navigating nuanced policy issues. Before joining CCI, Peter served on the government relations team at the digital mortgage startup Better.com, where he led the organization’s state government relations strategy. He began his career at the Health and Medicine Counsel, a boutique healthcare lobbying firm on Capitol Hill,

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He graduated Williams College with a BA in both Political Science and History.

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Patrick Kirby

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Yele Bademosi is the co-creator of Onboard, a community-first onchain neobank designed for creators and builders. Onboard's goal is to expand the onchain economy, making it accessible to anyone, anywhere, and empowering people to live radically better lives.

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Sean Lee

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He is currently leading the efforts at VSFG, a global financial services platform and the first licensed virtual asset manager in Hong Kong, to develop the regulated HKD stablecoin for programmable payment and cross border use cases across Asia and beyond. Before entering into crypto and blockchain, Sean spent 10 years and held global leadership positions in cloud computing and open source software development companies.

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Matthew Homer is the Founder & General Partner of The Venture Dept. Previously, he was an investor at Nyca Partners, a $1B+ AUM fintech VC firm, where he remains involved as an Operating Partner in an advisory capacity.

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Earlier in his career, he worked as a federal regulator at the FDIC, focusing on policy development and new technologies. Matt has also held operating roles in fintech startups, starting at Quovo and continuing at Plaid after its acquisition.

Laura Navaratnam

UK Policy Lead

Laura is a digital assets policy expert, and serves as the UK Policy Lead for CCI. Laura is a fintech policy expert, specializing in digital assets. Laura has worked in financial services policy for over 15 years. She worked at the UK Financial Conduct Authority for 7 years where she ultimately served as the Head of the FCA’s Innovate function,

which included all aspects of cryptoasset policy and fintech (sandbox, firm support, international engagement and strategy). She is also a Director at bespoke fintech consultancy Gattaca Horizons, supporting a broad range of US and UK based fintech clients and leveraging her experience to provide policy, regulatory and strategy advice.

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She developed and scaled strategic social good programs for leading tech companies, including Amazon, Microsoft, Adobe, Intuit, and VMware, leading the development of program delivery and marketing strategies.

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She led C-suite media relations and content for IHS Markit research divisions across Europe, the Middle East and Africa. As a strategic communications advisor to CEOs, heads of state, and policymakers, Amanda worked on the World Economic Forum’s Public Engagement leadership team as Head of Media Content. Amanda started her career as a terrorism and intelligence analyst.

Yaya J. Fanusie

Director, Policy, AML & Cyber Risk

He spent seven years as an economic and counterterrorism analyst in the CIA, briefing federal law enforcement, military personnel, White House-level policy makers and the President. After government service, he joined the think tank world and as Director of Analysis at the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance led research on sanctions evasion and terrorist financing threats.

In 2016 he began tracking the illicit use of crypto and wrote some of the first public analysis on a terrorist crypto crowdfunding campaign. He later published a major study on efforts by Russia, Iran, Venezuela, and China to build national blockchain infrastructure. Yaya is currently an Adjunct Senior Fellow at the Center for a New American Security (CNAS) and Visiting Fellow at Georgetown's Psaros Center for Financial Markets and Policy.

He is a frequent media commentator and has testified before Congress multiple times on illicit financing issues. He is considered a leading expert on China’s CBDC.

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In his role, Ji led the legal, policy, and regulatory affairs teams and also set and implemented Gemini’s global strategy for engaging with regulators, policymakers, and the government. Prior to that, he was a senior attorney at Kraken, another global digital asset exchange. In prior roles, he was an attorney at Willkie Farr & Gallagher LLP and served as Federal Judicial Law Clerk to the Honorable Robert D. Drain of the Southern District of New York, U.S. Bankruptcy Court.

In prior roles, he was an attorney at Willkie Farr & Gallagher LLP and served as Federal Judicial Law Clerk to the Honorable Robert D. Drain of the Southern District of New York, U.S. Bankruptcy Court.

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Sheila began her career as a Wall Street attorney at Cravath, Swaine & Moore LLP after earning her J.D. at Harvard Law School. She graduated magna cum laude from Harvard College with a degree in Economics. She is the co-host of Money Reimagined, a CoinDesk podcast.

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Senator Gardner honorably represented the state of Colorado from 2015 to 2021 after two terms in the United States House of Representatives. During his tenure, Cory was consistently recognized as one of the most bi-partisan members of the Senate, sponsoring and passing milestone legislation like the Great American Outdoors Act,

America COMPETES Act, the Asia Reassurance Initiative Act and the 988 Suicide Prevention Hotline. He served on the Senate Committee on Foreign Relations, Senate Committee on Energy and Natural Resources, and the Senate Committee on Commerce, Science, and Transportation.

Mark Foster

EU Policy Lead

Mark has over 20 years of experience advising public and private sector entities on EU policy and politics. He started his career in Brussels as a European Parliamentary Assistant from 2003 to 2007. He later developed expertise in EU financial services as a Senior Official in the UK Permanent Representation.

In 2011, he moved to Kreab, a global public affairs and consultancy firm, where he became Partner in the financial services practice. He has held elected roles in trade associations including vice-chair at the financial services committee of AmCham EU and he retains a role as vice-chair for the EU/UK task force at the British Chamber of Commerce to the EU.

Mark was VP of Government Relations at Barclays from 2019-2021 before establishing his own business – Strategic Advisory Management - at the start of 2022.

Alison Mangiero

Senior Director, Staking Coalition & Industry Affairs

Alison Mangiero is the Executive Director of Proof of Stake Alliance (POSA), a CCI project that advocates for clear and forward-thinking public policies that foster innovation in the rapidly growing, sustainable, multi-billion dollar staking industry.

Alison began working in the industry in 2018, when she founded the Tocqueville Group (“TQ”), an entity that created open-source software and other public goods for Tezos, one of the first proof-of-stake blockchains to launch. Before founding TQ, she spent a decade in public policy and academia, and has broad experience fundraising and growing membership associations.

A passionate advocate of the liberal arts, Alison also teaches courses on leadership at the College of the Holy Cross and is on the Executive Board of Advisors for the University of Richmond's Jepson School of Leadership Studies.An alum of the University of Richmond and Boston College, Alison lives in the New York City suburbs with her husband and two young daughters.