The problem is that global custodians keep a record of assets not owned by them, the information about these assets is often owned by a third party asset manager. They work in cooperation with other custodians to track and monitor all changes in ownership and execution of entitlements. Usually, that is quite long chain of middlemans: investors, brokers, trading exchange and possibly even sub-custodians. Participation of this additional market players creates additional costs. Another weak point is that the information is generally held in unreliable and insecure databases. Although, many people believe what custody is essential for regulatory and reporting reasons, while at the same time its curent standarts must be changed. The Blockchain technology provides a revolutionary way of tracking and securely storing assets in a decentralized database, which means lower risks and the possibility of self-custody of digital assets.
Blockchain Technology can allow everyone who has some valuable assets to trade — assets could be purchased over the counter (OTC) or via emerging virtual trading exchanges. Nowadays assets are regularly recorded in the name of the custodian (who acts as trustee), rather than the real beneficial owner. The real owner of the asset is hidden, but this move creates additional costs, which owner has to cover.
In Blockchain central clearing houses will be avoided, as independant computers will verify, record and synchronize ownership of digital assets. Verification process will need to satisfy all regulators in order to get their approval. Custody Services powered by Blockchain Technology will make things simpler — each transaction will be recorded on the Blockchain for all participants to see. Trustees, beneficial owners, regulator — everyone who has the permission can access the data. Investors could self-custody themselves using software wallets, hosted exchange accounts or store their assets in so called cold storage (offline).
The first step for compliant security standards is a custom multi-signature wallet which minimazes the risk of loss or theft of a single key is significantly reduced where multiple parties are needed to confirm any value transfer.
Custody process can be secure only when assets can be accessed by cryptographic keys being signed, or unlocked, by multiple parties, such as one from the investor and the other from their third-party financial institution. Setting general technical standards of the use of signatures and permissions-based controls for whole industry of custody, could eliminate major risks in Blockchain investing.
Blockchain Technology is a great opportunity for custody industry to improve and expand their services. The use of Blockchain will enable asset managers to validate and get clarity of ownership of all assets. The central banks, regulators and government are starting to realise the potential of Blockchain. Blockchain Technology is able to deliver much-needed transparency and security to banking and capital markets and remove gaps in the current system, which now is fragmented and that is easy to manipulate to.
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Ingus Staltmanis, CEO
Andars Igancs, CTO