[Coinlive Talk] Digital Asset Security For Institutions: The Backbone of Crypto?

• Digital Asset Custodians such as Cobo have been pushed into the spotlight in the wake of recent high-profile attacks and exploits against major crypto institutions
• Institutions need to take extra precautions and pay attention to their workflow and delegation of authority for team members to keep their assets safe
• Institutions however, play a key role in pushing for mass-market adoption by providing the necessary resources for R&D, as well as signaling a push towards more trust in crypto

Digital asset security has become all the more significant in the crypto space, especially in light of recent attacks and exploits that have seen as much as $1.9 billion in crypto being stolen by cybercriminal hacks, according to Chainalysis’ “Mid-year Crypto Crime Update”. October itself saw around $718 million worth of cryptocurrency being stolen across 11 different DeFi protocols, making this the most significant month in this year so far with regards to crypto exploits and hacks.

Indeed, security has always been a notable point of consideration for many to enter the space, especially with U.S. Securities and Exchange Commission (SEC) chair Gary Gensler famously coining the industry as the “wild west” of finance. To find out more about the importance of asset security, we spoke with Lily King, the Chief Operations Officer for Cobo, a crypto custody company.

“Institutions in web3 need a way to store and interact with their digital assets,” she says. “A custodian platform is oftentimes their first gateway into accessing their assets.”

Cobo, which offers various custodian products to cater to the different needs of their clients, provides semi-centralized and multi chain cross-layer decentralized custodian chains for their clients. For traditional institutions, Cobo also boasts centralized custody solutions that are partnered with Metamask Instituitional to offer hybrid solutions.

Despite having custody solutions however, threats are still proliferate in the crypto space. Phishing, a malicious attack that employs social engineering tactics to get users to expose their private keys and passwords, is one of the most common and deceptive methods that has resulted in the hacks of uncountable wallets.

“For individuals, management of their private key is incredibly important,” Lily tells us. “However, very little retail investors understand this. More time and capital need to be invested into the educational side of things to ensure that users are aware of this. This is the key towards future mass adoption.”

Indeed, private keys are the lifeblood of every crypto user’s wallet. Care and due diligence is absolutely necessary to ensure that private keys are kept safe and protected, whether be it through secure asset custodians or even MPC (Multi-Party Computation) software, wherein the user’s private key is ‘fragmented’ into shards such that security will not be breached even if one key shard is compromised.

“Retail investors need to understand that even current leading crypto firms still only have a very short history of business,” Lily elaborates. “You need to look at the management, nature of business of the platform, read their white paper carefully, and focus more time and commitment to learning more about the security side of things. Instead of looking at APY for DeFi protocols for instance, study the team members and understand the firm’s tokenomics.”

Many in the industry are still donning the lens of profitability and quick money-making, and while this may not necessarily be a bad thing per se, it has arguably shifted the optics away from significant other factors such as security and sustainability. The truth is, not every new shiny DeFi protocol or project will be able to generate yield – it takes a steady hand to not only protect one’s own funds from external attacks, but also to ensure that investments are being made in the right places. Yet even on the security side of things however, the difficulty level is upscaled for institutions and ensuring asset security gets even more complicated, as Lily tells us.

“Besides the standard precautions undertaken by individual retail investors, institutions also need to pay attention to role and authority delegation on a team level,” Lily opines. “The institution needs to be aware of what each team member’s role is in terms of protocol interaction, and designate member authority accordingly.”

Just as Lily says, institutions are far more complex in terms of corporate structure as opposed to individual retail investors. Should a single team member overstep certain boundaries or interact with protocols in a wrong way, the institution as a whole could be compromised by risking dangerous exposure to external attacks.

This is precisely why institutions also need to be proactive in designing proper workflows and designating appropriate role delegation authority to each individual member, such that security can be sustained, Lily explains.

Traditional, or web2 institutions, play a key part in sending a signaling effect towards the general public, paving the way for future mass adoption. While we are already observing more web2 businesses enter into the space, such as Starbucks’ newly-launched NFT rewards program for its members, there still remains work to be done to onboard more web2 companies into the space. These companies not only provide the funds for further R&D in the space, they also bolster confidence levels amongst the populous, as Lily tells us.

COO of Cobo, Lily King

“Institutions generally have access to vast resources,” she says. “Their participation in this space would be the key to mass adoption for sure, because their participation and interaction with digital assets can send an important signal that you can be sure will initiate the mass adoption of web3.”

If institutions, regardless of their web2 or web3 moniker, are able to create more accessible, friendly, and safe tools to bridge the general public into web3, then that most surely plants a firm foot towards the future of mass adoption. Additionally, greater institutional participation in the space is also likely to incentivize further innovation in the space. Where smaller platforms may lack the necessary resources to truly push cutting-edge research, having institutions develop the ground work and prove usability is likely to galvanize even greater traction towards innovation.

Even for smaller DeFi projects, Lily suggests that there is room to learn from web2 institutions.

“Generally, web2 institutions have more experiences with their customers and have a greater history and volume of interactions with them, such as studying their behavioral patterns and optimizing user engagement,” Lily says. “So, their [web2 institutions] data and experience can help web3 projects with their product designs.”

However, greater institutional adoption may not necessarily be a good thing, I argue. Anxieties regarding censorship and centralization have been running high, especially with Ethereum’s recent merge that saw up to 30% of total staked ETH landing in the hands of a mere three institutions. Founder Vitalik Buterin was even quoted suggesting that validators on the chain opting to censor certain content “should be tolerated”. Concerns regarding censorship surged earlier this month in particular, where 51% of blocks on the Ethereum chain were found to be compliant with the United States Office of Foreign Assets Control (OFAC) as of October 14.

Lily counters this quickly.

“I agree that centralization or high concentration is a severe problem right now,” she says.

“However, institutional participation does not necessarily mean censorship. While the permissionless nature of blockchain technology itself needs to be guaranteed and protected, applications running on blockchains can still have different priorities.”

There is always a trade-off to be made, Lily explains. Institutions who are looking to encourage mass adoption will naturally and unavoidably have to pay for compliance.

“In fact, web3 institutions looking for mass adoption still require a centralized structure to ensure process efficiency,” she adds. “That being said, institutions who want to run on a Decentralized Autonomous Organization (DAO) structure may have room to navigate on this front, but only if they can prove that they are genuinely decentralized first.”

At the end of the day, Lily is still right in advocating for a necessary trade-off between decentralization and efficiency. She echoes the sentiment of other significant industry players on this front as well, such as Yoshi from Klaytn, who posits that he “can’t fathom a metaverse or web3 ecosystem that is both efficient and yet fully decentralized”.

If institutions truly hold the key towards a greater uptake of crypto, ensuring asset security is undoubtedly the first step. Not only will this send a strong signaling effect to the masses in restoring faith and confidence in the industry, it will also ensure sustainable growth for those already within.

“Crypto cannot exist in silo,” Lily says as we close off the interview. “For crypto to truly grow, real use cases need to be encouraged, alongside interaction with the real world and economy.”

This is an Op-ed article. The opinions expressed in this article are the author’s own. Readers should take the utmost precaution before making decisions in the crypto market. Coinlive is not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.