Meet Australia’s first insured high security cryptocurrency vault
Digital assets are an entirely new frontier in storage and insurance needs.
Custodian Vaults, an Australian firm owned by the Pallion precious metals firm, received an ongoing wave of requests from customers looking for a way to securely store digital currencies.
As other firms have noticed, ongoing customer demand for cryptocurrency solutions is hard to ignore.
Here, the solution took the form of a partnership with another Australian firm, the blockchain advisory firm Decentralised Capital to produce specially designed vaults for digital assets.
Decentralised Capital founder Stephen Moss described the system as "a solution for the next phase of the industry."
"It gives real security," he said. "You can't hack your way into the safe."
The concept of high security physical storage for digital goods was one of the peripheral results of cryptocurrency's boom. One of the best-known companies operating in the space is probably Xapo, which focuses on ultra-security bitcoin key storage in former military bunkers around the world. Xapo is estimated to hold about 7% of all bitcoin in existence.
This new Custodian Vaults solution might be broadly similar, with physical security, biometric identification, pin codes, CCTV monitoring and other physical security elements wrapped around offline servers clusters, which can only be accessed through an internal network in the vault itself.
Xapo, however, uses specially designed physical cables to transmit the data between clients and the servers, while Custodian Vaults uses a "private Wi-Fi room" according to Moss.
Another difference is that Xapo is designed by bitcoin purists for bitcoin purists, and won't touch any other digital assets. Moss is less convinced of bitcoin's position in the long term, but remains wholly convinced by blockchain technology itself.
"In my opinion bitcoin will not be remembered as the bubble, but the pin," he said. "While the short-term future of bitcoin may be debatable, the blockchain and its benefits are not."
"While traditionally we have offered secure vault services for clients storing precious metals and other assets, we are increasingly receiving interest from clients searching for solutions to store cryptocurrency," said Pallion director Janie Simpson.
A brand new problem
Securely storing digital assets is proving to be one of the most challenging aspects of cryptocurrency for traditional financial institutions. Physical assets can be stored, tracked and secured with a very high degree of confidence, backed up by insurers who know exactly how to measure the value of the assets and the risk of loss.
But cryptocurrencies are almost a polar opposite on all counts.
The assets themselves live ephemerally on a blockchain, so in most cases the vaults just store what are essentially complex passwords. It's not safe to write it down anywhere, there needs to be redundancies and backups in the event of hardware failure and no one can be trusted to just remember the passwords – although it's fun to imagine a high security vault that just contains someone with a photographic memory.
And there's no getting it back if it's gone. It will typically not be possible to track where funds actually went, even if you can see the perpetrator's address, and no authority in the world can order a blockchain to reverse a transaction. At the same time, funds are accessible and held in a legally compliant way (eg, customer funds can be withdrawn almost immediately, kept separate from company funds, etc) while remaining secure.
And leaving digital assets on Internet-connected servers or on any device that cab be accessed by unauthorised external devices such as guest USB sticks is naturally not an option. There are always hardware wallets to bring physical security to crypto, but they still require seed keys in case the devices are lost or damaged, so it's back to square one.
For obvious reasons, many insurers are hesitant to touch digital assets. It's just too hard to calculate the risks, and the volatility of cryptocurrencies makes it almost impossible to accurately put a dollar value on the assets. According to Moss, the digital currencies held in the companies' possession are insured, although he didn't give the provider's name.
So far there are no 100% bulletproof ways of solving these problems, and for users, the best solution often boils down to using a convincing-looking and trustworthy third-party service, letting them handle it as they will and hoping that they're rich enough or insured enough to reimburse you if things ever do go wrong – much like any traditional centralised financial institution.
So far high security digital asset storage is very much unexplored territory. Strict legal guidelines have yet to emerge anywhere, although some countries are requiring cryptocurrency exchanges to demonstrate that they follow certain industry best practices.
As a more diverse range of digital assets start appearing and becoming widely used, there will eventually be a need for strict and formalised digital asset storage requirements and more custodial services. Decentralisation is nice, but in most cases, most people will probably find being their own bank to be a stressful nightmare, especially when a significant chunk of their personal wealth is held in digital form.
These formalised requirements can help pave the way for accessible digital asset insurance, which might be one of the less appreciated stepping stones for wider uptake of cryptocurrencies.
The ability to sustainably and cost-effectively pool risk, through reliable and regulated digital asset insurance, will open the door to more storage solutions and actual use and help the world find a suitable compromise between the benefits of decentralised systems and the convenience of entrusting assets to centralised third parties.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and XRB.
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