Building a Secure Crypto Infrastructure for Institutional Investors

Institutional investments in digital assets continue to surge, reflecting the confidence that the largest investors have in the strength and security of the crypto market infrastructure today.

This growing institutional base requires continued investment in security infrastructure to protect the large amount of capital deployed in the crypto markets. Moreover, whereas most players in the traditional banking sector can sign up to secure and centralized transaction systems such as SWIFT, there are no equivalent systems for cryptocurrencies. This means the security features of each individual firm holding an investor’s digital assets is the main line of security, leaving a thinner margin for error.

As the largest publicly traded cryptocurrency exchange in the U.S., Coinbase often serves as a bridge for institutional investors between traditional finance and the world of digital assets. And with the launch of its prime brokerage, Coinbase now has an integrated product that provides institutional investors with a suite of services including trading, analytics and secure custody.

Using the same regulatory, compliance, insurance, and security practices and standards that leading banks follow as its starting point, Coinbase then invests heavily in adapting and strengthening them so they’re tailored to the unique aspects of digital assets. For example, to deal with digital assets’ heightened handling risk, the settlement process is divided among many different hands, with rigorous auditing controls built into it. And to compensate for a lack of centralized authorities, it invests heavily in the design and execution of security protocols and systems to make sure that unauthorized transactions do not occur.

Coinbase works closely with regulators and the traditional finance sector to design and apply best practices in insurance, custodianship and asset management. Coinbase recognized the need for insurance early on in 2013 and has one of the most comprehensive policies for any major digital asset company.

This insurance coverage extends across fiat deposits, online and offline cryptocurrency holdings as well as separate coverages for cold- and hot-wallet storage. It also conducts annual evaluations of its insurance protection to ensure that the best coverage is offered to clients.

To that end, Coinbase Custody Trust Company LLC was formed in 2018 as a separate entity from Coinbase Inc. as a qualified custodian, creating the equivalent of the rigorous banking standards set for other major financial institutions regarding capitalization, anti-money laundering procedures, confidentiality, security and storage. Coinbase now has $130 billion in assets under custody (AUC).

Digital assets are not secured by written rules and automated processes alone. Keeping this asset class safe depends on large and dynamic teams of software engineers and cybersecurity experts who provide constant vigilance through constant innovation. Coinbase has a team of engineers assigned to cybersecurity who are able to work with both their counterparts at other digital assets institutions and other actors in finance, from traditional banks to software providers and cybersecurity consultancies.

Coinbase also carefully vets third parties before allowing them to join its network of regulatory, trading and monitoring partners. Such partner networks are essential when it comes to keeping digital assets secure today and advancing collective best practices. Information about issues like potential vulnerabilities are able to come to light as quickly as possible, and they enhance each partner’s monitoring capabilities to create a security net that is stronger than the sum of its parts.

As adoption of digital assets gathers momentum and larger players start actively participating in the market, the industry will continue to expand and mature. But one thing will stay the same: Security best practices will continue to be a top priority for institutional investors. And they’ll be keeping an eye on the custodians that are most willing to innovate in order to keep their clients’ crypto investments safe.

To learn more about Coinbase Institutional, please email us at: institutional@coinbase.com.

Disclosure: The views expressed in this article are not necessarily those of Coinbase. This material is not investment, tax, or legal advice. It is for informational purposes only, and is only intended for sophisticated investors. For more information about Coinbase, please visit www.coinbase.com/prime.