Historically, safeguarding your digital assets meant choosing one of two options: self-custody, or working with a third-party custodian. Each model delivers its own suite of benefits and drawbacks regarding agency, security, and ease of access.
Let’s explore these benefits and drawbacks, as well as review a new custodial model that has entered the market: Collaborative Custody. As part of our partnership with Unchained, Bakkt is a key agent in Unchained’s Collaborative Custody model that allows clients to enjoy the autonomy of self-custody with the security benefits of a qualified custodian. This model is particularly advantageous for bitcoin miners, family offices, high net-worth individuals, and any business or individual who wants to retain control of their bitcoin while leveraging robust security controls.
1. Self-custody
Self-custody appeals to crypto owners who wish to maintain full control over their digital assets. Under this model, the owner is the sole party responsible for managing a crypto wallet’s private keys; all risk of loss lies with them. Self-custody might be the best solution for owners who require a high level of flexibility and are knowledgeable in custody technology and keeping assets secure.
However, self-custody may not be the best solution in situations where the owner:
- Doesn’t have the in-house expertise needed to set up self-custody securely while minimizing complexity.
- Needs or works with a client who needs distributed control over digital assets.
- Wants to minimize risks when it comes to malware, user error, storage media decay, phishing, physical attacks, and other security risks.
- Would benefit from robust redundancy measures that mitigate risk in the case of system failures
These situations require technical knowledge in order to successfully navigate, and they come with a steep learning curve.
2. Third-party custody
Those who take advantage of third-party custodial solutions like Bakkt Custody gain access to advanced security features, as well as customer support and assistance when issues arise on their account. When looking for a third-party custodian, it's important to find one that complies with all relevant regulations and takes significant steps to mitigate risk — such as employing multi-signature technology for verifying transactions. A Qualified Custodian like Bakkt* can offer multiple unique benefits, including:
- Comprehensive controls and regular SOC reports
- Segregated wallet management
- 24/7 security operations
- Robust physical and cyber security controls
- Thorough Disaster Recovery plans
Ultimately, deciding how you want to custody your digital assets is largely dependent on your technology expertise and security needs. But what if you could get the best of both models?
Introducing Collaborative Custody
Unchained has introduced a new, hybrid model that combines the agency provided by self-custody with the airtight security of a third-party custodian. The term “Collaborative Custody” was coined by Unchained in 2018. Six years later, billions of dollars' worth of bitcoin is custodied under this model. What makes it such a popular form of bitcoin storage?
The solution operates on shared control mechanisms, distributing private keys in a decentralized manner in order to decrease risk and enhance operational efficiency. Typically, Collaborative Custody has been arranged in a hub and spoke configuration, with providers storing one key and clients the other. However, a more secure and collaborative arrangement is picking up traction: a network of keys. Here’s a brief rundown of how it functions:
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Three private keys are generated, with only two of them needed to perform a transaction. Under this framework, clients retain control of one key while the others are held by two separate third-party custodians, known as key agents. Responsibility is thus spread across the three parties, eliminating any single point of failure. Funds can’t be accessed or moved without the consent of at least two keyholders, and can still be recovered if any one agent loses access to their key.
How Collaborative Custody distributes risk
The biggest innovation brought by Collaborative Custody lies in its distribution of risk across the three keyholders. Essentially eliminating the ability of any one entity to make a calamitous mistake, Collaborative Custody safeguards against human error and enhances the overall security of the network.
From a psychological standpoint, clients also avoid the obligation and resulting stress of storing all keys themselves – yet still retain fundamental dominion over their own funds. Since they can rely on Unchained for recovery in the event of a missing key, the chances of any permanent loss of capital are vastly reduced.
The checks and balances that come from a distributed authority also create opportunities for intentional organizational collaboration. Transactions aren't hastily executed on a whim, but rather must be strategically decided upon and actively consented to by multiple responsible parties. While clients cannot unilaterally perform transfers of funds, they still retain full autonomy and may initiate transactions at will.
In this way, the system provides investors with control over their own bitcoin, while keeping in place vital protections that guard against fraud.
Who benefits from Collaborative Custody?
With its unique blend of features, Collaborative Custody is an attractive option to a variety of stakeholders.
Family offices are a natural audience for Collaborative Custody solutions. These groups manage large amounts of wealth and prioritize asset safety — so Collaborative-Custody's baked-in security features present a huge draw. Family offices see value in bitcoin as a growing part of their portfolio, both to help them prepare for retirement, as well as an asset to be passed on generationally. It is critical that their bitcoin is kept safe and remains in the family. In some cases, keys could even be delegated to multiple family members.
Bitcoin miners also gravitate towards Collaborative Custody for slightly different reasons. Miners excel at generating vast amounts of bitcoin, but they may not have the infrastructure and in-house expertise needed to set up self-custody securely while minimizing complexity and risk. In addition, miners generally have multiple operators and desire distributed control over funds. Collaborative Custody can serve as a turnkey solution for them, providing much of the operational overhead and enhancing security.
Bakkt as a key agent
“Public companies holding billions of dollars of bitcoin in treasury need key agents with enterprise grade security, sophisticated key management programs, and a history of financial and security audits” - Unchained
As a fully regulated and compliant NYDFS-Qualified Custodian, Bakkt is the standout choice against other custodians who lack the right licensing and multi-layered security to custody your bitcoin. The process is simple: your company delegates one key to Unchained, another to Bakkt, and maintains control of the third.
View Data Sheet: Collaborative Custody
Whether you’re looking to remove the burden of setting up a secure self-custodial wallet, or you want to leverage institutional-level security and still have access to a key, Collaborative Custody through Bakkt and Unchained can help. Our institutional-grade platform already custodies millions of dollars’ worth of digital assets, and we have the operations and infrastructure in place to ensure adherence to the utmost standards of security. We offer comprehensive controls and regular SOC reports, segregated wallet management, and 24/7 security operations.
Interested in Collaborative Custody, and looking for a key agent? Connect with our team.