If institutional finance is to enter the crypto space, private keys need custodians to ensure the safety of investors, says accounting firm.
The cryptocurrency market must develop more secure means of storing digital assets to win over institutional investors, according to a report by KPMG. The accounting firm claimed that the private keys used to access users’ wallets are a fundamental security flaw:
“Institutional investors especially will not risk owning crypto assets if their value cannot be safeguarded in the same way their cash, stocks and bonds are”.
Losing a wallet’s private key causes its contents to become inaccessible. Many holders have lost millions of dollars’ worth of cryptocurrency after misplacing their key. In one case, the death of a Canadian exchange’s CEO last year lead to the loss of an estimated $145 million.
The KPMG report proposes that private keys are entrusted to institutional custodians to safeguard them on investors’ behalf. This would potentially allay some holders concerned with misplacing their key; however, the solution offered would arguably be a return to centralised authorities holding financial assets, like banks do today with fiat currencies.
This raises questions about the function of a cryptocurrency. It can be argued that a traditional safety deposit box for a private key would be a safer means of storing digital assets than entrusting it to a custodian. Bearer instruments, such as cash, bonds and more recently cryptocurrencies, are owned by whoever has physical possession of the asset (or private key). It does make sense to entrust a custodian with cash—rather than under the mattress—due to the potential for loss or theft. However, bearer bonds and cryptocurrency keys can be worth entire fortunes, requiring only a safe place for storage.
Hacks and Private Keys Raise Questions about the Long-Term Viability
However, the problem presented by KPMG’s report is certainly troubling. An estimated $9.8 billion has been stolen by hackers since 2017, leading to concerns over the long-term viability of the sector’s growth if a solution is not found. Using cold wallets, those not connected to the internet, and spreading holdings over numerous wallets could be a safer means of protecting investor’s assets from hackers by not putting all of one’s eggs (or coins) in one basket.
But what of the assets already stolen by hackers? In the case of Bitcoin, there is some speculation that bearish price-action is sometimes caused by hackers selling off their stolen bitcoin, thereby flooding the market and crashing the price as some speculated in the Bitrue hack last year.
However, exchanges were swift to respond to the Bitrue hack, offering reassurance for how the crypto space will deal with hacks in the future. Binance quickly developed an anti-fraud system, a measure only possible thanks to the blockchain allowing the stolen bitcoin to be identified and blocked.
“As crypto-assets proliferate,’ KPMG argue in their report, “custodians have a tremendous opportunity to profit — both by earning management fees for delivering straightforward custodian services, and also by offering adjacent services only possible in the emerging crypto ecosystem.”
KPMG’s proposal could put some investors’ minds at ease but will do little to entice those wary of handing over their private key to a third-party when they can take the chance of storing their keys themselves.