Crypto for Advisors: Digital Asset Custody’s Future

Whether it is the technology itself, the abundance of new tokenized investment products, or the risks of leaving real or perceived assets to service providers such as centralized exchanges, the custody of digital assets is evolving.

Colton Dillion, CEO of Hedgehog Technologies, breaks down developments in digital asset custody, focusing on the shift of wealth towards personal custody and how advisors should support this shift.

In Ask the Expert, Sound Advisory’s Jessy Gilger answers questions about direct ownership of bitcoin in an IRA account.

–SM

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Not Your Customer’s Keys, Not Their Money: The Future of Digital Asset Custody

Web3 rails will eventually swallow traditional finance, and there is no doubt about it.

Weighing in at an impressive $2.3 trillion market cap, the digital asset industry still has some growing to do before surpassing the $110 trillion stock market; but if you haven’t been paying attention, real world assets (RWAs) and Stablecoins have seen big bets recently from big 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 is only a matter of time before regulators catch up with the market to allow the exchange of traditional securities. Ditto with Fortune 500 stocks or exchange-traded funds (ETFs). Eventually any traditional asset will also become an on-chain asset. All we need is time.

So what does this mean for depositors?

Chainalytics reported last June that personal wallets were increasing exponentially even as assets returned to exchanges decreased from quarter to quarter. Both retail and institutional clients are choosing to keep their assets on-chain rather than entrusting them to custodians who may turn out to be just another FTX or risking their funds in highly interconnected remortgage networks. If only you could prevent your money from getting locked up in Silvergate’s bankruptcy, wouldn’t you?

While Coinbase, Kraken, and Gemini all support at least one of the spot Bitcoin ETFs as primary custodians, and institutional use cases are slower to transition, there is a clear trend for Web3 asset holders to begin moving their wealth into their own custody. reaches a certain level of development. Once insurance methods catch up with wallet compromise, we expect that most individuals and institutions will choose to directly address the separation of their accounts and demand control of their own private keys.

The story continues

As advisors and fiduciaries, we need to be prepared for the day when our clients come to us and want to support their personal custody solutions. There are many options for brave self-custodians, from multi-signature accounts to account abstraction (AA) smart contract wallets, from enterprise hardware to multi-party computing (MPC) wallets, but each requires its own security and usability tradeoffs. as well as cost considerations.

multi signature

Gnosis Safe is the original multi-signature solution for Ethereum-based networks and comes with some useful tools for managing your stash in a wallet that requires multiple people to agree before a transaction can occur. You’ll need to find other solutions, such as a dedicated wallet software that supports Shamir’s Secret Share on other chains. For under $500, a wallet can be created with m number of signatures (e.g. 2 out of 3 or 8 out of 9 must sign for a valid transaction), but the permissions on these accounts are more limited if the new account abstraction is not included. It is less robust. offers, most importantly ERC-4337. If you have one of the signatures, you can help remove the signature from all privileges in the Secure account.

Account Abstraction

This is another EVM-only solution for now, but in principle any chain that supports smart contracts can support the standard. Account abstraction allows an experienced developer to add additional permissions and capabilities on top of a standard account so that certain signers can only log in to certain types of transactions. Many providers also leverage these capabilities to add transaction aggregation, de-native gas tokens, transaction donation, and more. These players include groups such as Gnosis Safe and ZeroDev, Biconomy and Fun.

Corporate Cold Storage

Many custodians offer a cold storage solution that leverages hardware security modules and robust physical security to keep your assets as safe as the gold nuggets under Fort Knox. Using special chips that are extremely expensive to crack, they can generate private keys on your behalf and securely sign transactions without the flexibility and speed of a hot wallet. Depending on the provider, these solutions are often combined with a multi-signature, AA or MPC solution, but the cost often reaches double-digit bases with high minimum balances and account maintenance fees.

Multiparty Calculation

One of the most flexible options on the market, MPC is not limited to a specific network by a smart contract, but does require trust in potentially opaque partners. MPC is closer to private key entropy, the underlying layer of crypto, and all participants in an MPC wallet participate together to regenerate the private key, rather than having multiple private keys send their own valid signatures. For the more technically savvy there are the Qredo and Lit protocols, which are fully decentralized solutions, but for advisors who want a little more white glove treatment and are willing to work with trusted third parties, Anchorage has launched its enterprise solution Porto, and my own company, Hedgehog, offers funds management, alt launched an MPC account management product focused on consulting and turnkey asset management programs.

Frankly, we agree with Anchorage CEO Nathan McCauley outlining their reasoning for choosing MPC as their solution:

“A lot of people right now are looking at self-custody solutions that allow them to do a more flexible set of activities on the blockchain. We think of that as really expanding and additive.”

Whatever you choose as an advisor, it’s important to keep the Custody rule in mind and make sure you don’t have arbitrary withdrawal privileges on your clients’ accounts. There is not much guidance for some of these account structures and there is still some clarity as to the degree to which any multi-signature, AA or MPC protocol qualifies as significant control over customer funds. Still, we must carve a path forward, or be left behind in our customers’ dust.

– Colton Dillion, CEO, Hedgehog Technologies

Ask an Expert

Q. Can you keep 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 to use one of the spot Bitcoin ETFs traded at major brokerages. However, this path only provides exposure to the US dollar to Bitcoin price movements, not direct ownership of the actual coins.

The preferred option for many bitcoin investors is to open an IRA through a private provider that allows bitcoin to be owned directly and stored in the account. Key control is key here – being able to maintain private keys means you have full ownership and control of the bitcoin in your IRA without entrusting it to a third-party custodian. This eliminates the centralization and counterparty risks of other options.

Q. What is the benefit of keeping 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 fits well with the long-term horizon of retirement accounts.

Specific benefits include tax-deferred or tax-free growth (traditional or Roth), which allows your bitcoin holdings to accumulate more efficiently over decades. Bitcoin has historically gained in value on consistent 4-year cycles, so earning these gains tax-free can significantly accelerate your retirement timeline.

Holding bitcoin in an IRA also allows distributions to be received in bitcoin rather than selling for dollars and receiving a taxable gain. For clients who want complete sovereignty, key control over their IRA’s bitcoins is crucial to avoiding 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 sound money, the IRA’s tax advantages may outweigh this.

– Jessy Gilger, CCO and Senior Advisor, Audio Consulting

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