Digital asset custody deciphered : A primer to navigating the challenges of safeguarding digital assets

Abstract

The International Securities Services Association (ISSA), Global Digital Finance and Deloitte have co-authored a report on Digital Asset Custody. This paper gives a synopsis of one element of the report and provides a brief explanation of digital asset custody (DAC) and the key facets that should be considered when looking at a DAC solution. DAC is different from traditional asset custody but it is not totally different. There are complexities that occur uniquely within DAC, and it is imperative that managers understand those aspects and the implications, such as permissioned versus permissionless ledgers, key management, etc. There are also a number of familiar terms used in DAC in a different way from traditional markets and is necessary for managers to challenge the existing wisdom for both DAC and traditional custody. To progress the opportunities that DAC — through distributed ledger technology (DLT) and tokenised assets — offer financial markets, however, the industry should not throw away all the learnings from traditional custody offerings. Custodians (in the widest sense) should merge their knowledge of safekeeping principles with the new abilities offered by DAC to ensure that they can manage the risks of operating in this new environment. An example of a new risk is that DLT evangelists will say ‘Blockchain is instant and immutable and therefore guarantees finality’, but is it true in all or any circumstance? Risk management starts with risk awareness and the purpose of this paper is to explain the risks that occur in the scenarios of providing or purchasing DAC.