Crypto for Advisors: Digital Asset Custody’s Future

Custody
of
digital
assets
is
evolving,
whether
it
be
the
technology
itself,
the
plethora
of
new
tokenized
investment
products,
or
the
risks
of
leaving
assets
with
service
providers
like
centralized
exchanges,
whether
real
or
perceived.

Colton
Dillion,
CEO
of

Hedgehog
Technologies,
breaks
down
the
evolutions
in
digital
asset
custody,
focusing
on
the
shift
of
wealth
to
self-custody
in
the
space
and
how
advisors
must
support
this
shift.

In
Ask
an
Expert,

Jessy
Gilger
from

Sound
Advisory
answers
questions
about
direct
bitcoin
ownership
within
an
IRA
account.

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Web3
rails
will
eventually
swallow
traditional
finance,
and
there’s
no
question
about
it.

Weighing
in
at
an
impressive
$2.3
trillion
market
capitalization,
the
digital
asset
industry
still
has
some
growing
up
to
do
before
it
can
surpass
the
$110
trillion
stock
market,
but
in
case
you
haven’t
been
paying
attention,
real-world
assets
(RWAs)
and
stablecoins
have
seen
some
recent
big
bets
from
major
players
like

Blackrock,

Stripe,

Franklin
Templeton
and
others.

These
firms
are
slowly
cloning
traditional
securities
like
money
market
funds
and
mutual
funds
for
on-chain
consumption
and
seamless
peer-to-peer
transfers,
and
it’s
only
a
matter
of
time
before
regulators
catch
up
with
the
market
to
allow
the
exchange
of
traditional
securities,
such
as
Fortune
500
stocks
or
exchange-traded
funds
(ETFs),
in
the
same
exact
manner.
Eventually
every
type
of
traditional
asset
will
also
be
an
on-chain
asset.
All
we
need
is
time.

So,
what
does
that
mean
for
custodians?

Chainalysis
reported
last
June
that
personal
wallets
were
increasing
exponentially
even
while
assets
being
sent
back
to
exchanges
were
decreasing
quarter
over
quarter.
Both
retail
and
institutional
clients
are
choosing
to
keep
their
assets
on-chain
rather
than
trust
them
with
custodians
who
may
turn
out
to
be

another
FTX
or
otherwise
risk
their
funds
in

highly
interconnected
networks
of
rehypothecation.
If
you
could
avoid
having
your
funds
locked
up
in

Silvergate’s
bankruptcy
proceedings,
wouldn’t
you?

While
Coinbase,
Kraken
and
Gemini
all
support
at
least
one
of
the
spot
bitcoin
ETFs
as
a
primary
custodian,
and
institutional
use-cases
are
migrating
more
slowly,
there’s
a
clear
trend
for
Web3
asset
holders
to
start
transitioning
their
wealth
to
self-custody
once
they
reach
a
certain
level
of
sophistication.
Once
insurance
methods
catch
up
with
wallet
compromise,
we
expect
that
most
individuals
and
institutions
will
choose
to
handle
the
segregation
of
their
accounts
directly
and
demand
control
of
their
own
private
keys.

As
advisors
and
fiduciaries,
it
behooves
us
to
be
prepared
for
the
day
that
clients
come
to
us
asking
to
support
self-custody
solutions.
There
are
many
options
out
there
for
intrepid
self-custodians,
from
multi-sig
accounts
to
account
abstraction
(AA)
smart
contract
wallets,
from
institutional
hardware
to
multi-party
computation
(MPC)
wallets,
but
each
entails
their
own
security
and
usability
tradeoffs,
as
well
as
cost
considerations.

The

Gnosis
Safe
is
the
original
multi-signature
solution
for
Ethereum-based
networks
and
comes
with
some
handy
tools
for
managing
your
treasury
in
a
wallet
where
multiple
people
have
to
agree
before
a
transaction
can
happen.
On
other
chains,
you
have
to
find
other
solutions,
like
a
dedicated
wallet
software
that
supports
Shamir’s
Secret
Sharing.
For
under
$500,
one
can
set
up
a
wallet
with
m
of
n
signatures
(eg
2
out
of
3
or
8
out
of
9
have
to
sign
for
a
valid
transaction),
but
the
permissioning
on
these
accounts
is
less
robust
without
including
the
new
account
abstraction
proposals,
most
notably
ERC-4337.
If
you
have
one
of
the
signatures,
you
can
help
sign
away
any
privileges
on
the
Safe
account.

Account
Abstraction

This
is
another
EVM-only
solution
for
the
time
being,
but
in
principle,
any
chain
that
supports
smart
contracts
can
support
the
standard.
Account
abstraction
allows
a
savvy
developer
to
layer
additional
permissions
and
capabilities
on
top
of
a
standard
account
so
that
certain
signers
can
only
sign
on
certain
types
of
transactions.
Many
providers
also
leverage
these
capabilities
to
add
transaction
batching,
non-native
gas
tokens,
transaction
forgiveness,
and
more.
These
players
include
Gnosis
Safe
and
groups
like

ZeroDev,

Biconomy
and

Fun.

Institutional
Cold
Storage

Many
custodians
out
there
offer
a
cold
storage
solution
that
leverages
hardware
security
modules
and
robust
physical
security
to
keep
your
assets
as
safe
as
the
gold
bars
under
Fort
Knox.
By
using
specialized
chips
that
are
extremely
expensive
to
crack,
they
can
generate
private
keys
and
sign
transactions
securely
on
your
behalf
without
the
flexibility
and
speed
of
a
hot
wallet.
Depending
on
the
provider,
these
solutions
are
often
combined
together
with
a
multisig,
AA,
or
MPC
solution,
but
the
cost
usually
runs
into
double-digit
basis
points
with
hefty
minimum
balances
and
account
maintenance
fees.

Multi-party
Computation

One
of
the
most
flexible
options
out
there,
MPC
is
not
limited
to
a
specific
network
by
a
smart
contract,
but
it
does
require
trust
in
potentially
opaque
partners.
MPC
is
closer
to
the
base
layer
of
crypto,
the
private
key
entropy,
and
all
the
participants
in
an
MPC
wallet
participate
together
to
recreate
the
private
key,
instead
of
having
multiple
private
keys
send
their
own
valid
signatures.
There’s

Qredo
and

Lit
protocols
for
those
who
are
more
technically
savvy,
which
are
fully
decentralized
solutions,
but
for
advisors
that
want
a
little
more
white
glove
treatment
and
are
willing
to
work
with
trusted
third
parties,
Anchorage
just
released
their
enterprise
solution,

Porto,
and
my
own
company

Hedgehog
just
released
an
MPC
account
management
product
with
a
focus
on
fund
administration,
sub-advisory,
and
turnkey
asset
management
programs.

Obviously
we
agree
with
Nathan
McCauley,
the
CEO
of
Anchorage,
when
he
summarized
their
rationale
for
choosing
MPC
as
a
solution:

“Right
now,
many
people
look
to
self-custody
solutions
to
allow
them
to
do
a
more
flexible
set
of
activities
on
the
blockchain.
We
really
think
of
this
as
expansionary
and
additive.”

Whatever
you
choose
as
an
advisor,
it’s
important
to
keep
in
mind
the
Custody
rule
and
be
certain
that
you
don’t
have
arbitrary
withdrawal
privileges
on
your
clients’
accounts.
There
hasn’t
been
a
lot
of
guidance
for
some
of
these
account
structures,
and
there
still
remains
some
clarity
to
be
had
around
the
extent
to
which
any
particular
multisig,
AA,
or
MPC
protocol
qualifies
as
substantial
control
over
client
funds.
Nonetheless,
we
must
forge
a
path
forward
or
be
left
behind
in
our
clients’
dust.

–


Colton
Dillion,
CEO,
Hedgehog
Technologies

Q.
Can
you
hold
bitcoin
in
an
IRA
account?

Yes,
there
are
several
ways
to
gain
exposure
to
bitcoin
in
both
traditional
and
Roth
IRA
accounts.
The
easiest
method
is
through
one
of
the
spot
bitcoin
ETFs
traded
on
major
brokerages.
However,
this
route
only
provides
U.S.
dollar
exposure
to
bitcoin’s
price
movements,
not
direct
ownership
of
the
actual
coins.

For
many
bitcoin
investors,
the
preferred
option
is
opening
an
IRA
through
a
specialized
provider
that
allows
direct
ownership
and
storage
of
bitcoin
within
the
account.
Key
control
is
crucial
here
–
the
ability
for
you
to
maintain
the
private
keys
means
you
have
full
ownership
and
control
of
the
bitcoin
in
your
IRA,
without
entrusting
it
to
a
third-party
custodian.
This
avoids
the
centralization
and
counterparty
risks
of
other
options.

Q.
What’s
the
benefit
of
holding
bitcoin
in
an
IRA?

The
main
advantage
is
being
able
to
invest
in
bitcoin
as
a
long-term
store
of
value
while
enjoying
the
tax
benefits
of
an
IRA
account.
Since
bitcoin
is
viewed
by
many
as
a
superior
form
of
savings,
it
aligns
well
with
the
long-term
horizon
of
retirement
accounts.

Specific
benefits
include
tax-deferred
or
tax-free
growth
(traditional
or
Roth),
allowing
your
bitcoin
holdings
to
compound
more
efficiently
over
decades.
Bitcoin
has
historically
appreciated
in
consistent
4-year
cycles,
so
capturing
those
gains
tax-free
can
significantly
accelerate
your
retirement
timeline.

Holding
bitcoin
in
an
IRA
also
enables
taking
distributions
in
bitcoin
itself
rather
than
having
to
sell
for
dollars
and
realize
taxable
gains.
For
clients
wanting
full
sovereignty,
key
control
over
their
IRA’s
bitcoin
is
paramount
to
avoid
third-party
custody
risks.
The
downside
is
reduced
liquidity
and
increased
rules
and
age
restrictions
compared
to
a
standard
brokerage
account.
But
for
long-term
investors
convinced
of
bitcoin’s
role
as
hard
money,
the
tax
benefits
of
an
IRA
can
outweigh
this.

–



Jessy
Gilger,


CCO
&
Senior
Advisor,
Sound
Advisory