Be your own bank! With this motto, cryptocurrencies are repeatedly advertised. This is not least because the underlying distributed ledger technology blockchain in conjunction with public key cryptography enables self-custody.
By Michael Baumgartner, Head Sales Transaction Banking & Crypto / Token Services, InCore Bank
Digital values can be kept independently with the help of appropriate software and hardware solutions. In the Bitcoin community, which is now spread around the world, this self-custody – true to the original Bitcoin philosophy – is very important.
What sounds fascinating in theory is not child’s play in practice. Self-custody requires a lot of knowledge. Hardware wallet, private key or seed phrase – these are all terms that you have to understand for the independent custody of cryptocurrencies. Ultimately, the following applies: Freedom and independence in the custody of your own money need to be practiced!
Two sides of the same coin
As nice as the option of self-custody is, it has its price: The independence and self-sovereignty that you achieve by independently custody of your own digital assets go hand in hand with a high level of personal responsibility. Anyone who holds their digital assets independently is their own bank – and consequently they have to implement and adhere to all those preventive and security measures that the bank takes in a normal setup.
Don’t be fooled: Even with Bitcoin and other digital assets, someone has to take responsibility. In the case of self-custody, you are yourself. This responsibility is not an easy burden and, especially with larger sums, can quickly rob you of calm.
Pitfalls and pitfalls
If the custody is dependent on you, even the smallest mistakes are unforgivable. For example, if you make the mistake of sending your Bitcoin to the wrong recipient address or losing your access key, there is no hotline or contact point that can help you find and retrieve it.
The risks of self-preservation can of course be reduced through knowledge acquisition and experience. From the point of view of an end consumer and Bitcoin user, however, it is not very desirable to first try hard to learn in order to recognize, learn and ultimately avoid possible pitfalls and pitfalls in self-custody.
At the same time, it takes a lot of time to get a waterproof setup for self-custody. Only a few people have the time, the incentive and the will to persevere to actually go this grueling path in full. Nevertheless, this requires professional self-custody.
As the reality shows today, many people are primarily interested in Bitcoin’s non-correlation and asymmetrical earnings potential. Cryptocurrencies are held primarily for the purpose of portfolio diversification. The ethos of self-sovereignty says little to these investors, which is why they have no need for self-custody. As the traditional world teaches us, the banks are there for these purposes – and they do their job excellently.
Core business safekeeping
The safekeeping of assets is part of the core business of every bank. This has also grown historically1. Wells Fargo provides a famous illustration. Still one of the largest American banks today, Messrs. Wells and Fargo started a small transport company in New York in the 19th century.
When the gold rush broke out on the American Gold Coast, Wells Fargo transported many gold seekers and prospectors from western America to California.
Wells Fargo, for example
At Wells Fargo, you quickly realized that you could not only safely transport and store people, but also their gold finds. In just a few short years, Wells Fargo has built an excellent reputation as a safe carrier and custodian of gold and other valuable items.
When the North American railway network was put into operation across the board, the transport service was superfluous and the safe custody and the banking system based on it remained.
Wells Fargo is certainly not at the origin of the banks. But the example illustrates the centuries-old tradition of banks in the custody business. Safekeeping is one of the core fields of a bank. This vote of confidence, which has been proven over decades, should also be exploited in the area of digital assets.
InCore Bank offers a turnkey solution for other banks. This enables other banks to expand their core competence to include the safekeeping of digital assets.
Banks are also under regulatory supervision and have to follow clear and proven regulations. For this reason, it goes without saying that the custody solutions from banks are also based on a secure and resilient infrastructure in the area of digital assets. A regulated bank from Switzerland is likely to be used to much higher standards than various third-party custodians in the crypto sector.
Specialists in this field
In terms of a profitable division of labor, it therefore makes sense to have your own crypto currencies and other digital assets managed by a bank. Their employees are specialists in this field. Once they have dealt with the matter and built up a functioning crypto custody business, they have the necessary knowledge and the necessary infrastructure that is required for secure storage.
Those who keep their digital assets at the bank theoretically always have the option of self-custody. The blockchain allows you to take digital assets into your own custody at any time. Just knowing about this possibility should be enough for some investors to self-control.
Additional benefits for the bank and its customers
It does not have to stop with the mere custody service provided by a bank. Anyone who keeps their digital assets at the bank has access to them around the clock via the usual e-banking. The bank also fully integrates the digital assets in the corresponding asset statements provided by the bank. This service creates convenience and helps the investor to keep a complete overview of his digital assets at all times.
In addition, the bank is able to support the investor with the proper taxation of his digital assets. In the same way, income that an investor earns with the possession of a cash flow token, for example, can be mapped by the bank in the customer’s portfolio.
In connection with custody, banks can also offer conventional banking services such as payment transactions with Bitcoin, crypto credit cards, borrowing against collateral with digital assets or comprehensive investment advice on crypto assets.
Interest income thanks to digital assets
Another important reason for keeping your own digital assets at the bank could also be that you can receive interest for them at the bank. For example, some blockchains offer the option of staking, depending on the consensus mechanism. With so-called proof-of-stake (PoS) blockchains, holders can entrust their coins to the blockchain themselves.
In doing so, they donate security to the blockchain and are rewarded with new coins. Since these processes require technical know-how, banks can excel here with innovative solutions.
As a bank with expertise in the blockchain area, you could also give your customers who keep their digital assets with them curated and filtered access to the new world of decentralized finance. Various profitable DeFi projects and products could be offered to the customer directly by the bank.
Due to their experience, banks are predestined to offer the safekeeping of digital assets for the benefit of third parties. Above all in Switzerland there are the best conditions for this: A high level of legal security, low political risks and a lively banking system, but also advanced DLT regulation and a flourishing blockchain scene make the Swiss Alpine republic an excellent repository for digital assets.
- Self-custody requires a high level of personal responsibility
- Few people actually want to be their own bank – banks can help here
- Safekeeping is one of the core fields of a bank. This historically based vote of confidence should also be played out in the field of cryptoassets.
- Banks can provide a secure and legally clear custody solution for digital assets.
- The convenience for the customer can be increased by the fact that the bank can support him at any time in matters of crypto with consolidated statements of assets or advice.
- Banks can offer additional services based on their custody service, such as mapping income from cash flow tokens. Interest income from staking is also possible.
- Due to the advanced DLT regulation and a stable political climate, Switzerland offers optimal conditions for innovative custody solutions in the field of digital assets.
1Wells Fargo History Museum: A Piece of American History.
Michael Baumgartner has been responsible at InCore Bank since the beginning of February 2020 for global customer service, the development of new business and the expansion of existing relationships in the “Transaction Banking” segment, which connects the traditional and digital world of finance. He has more than 30 years of professional experience in investment banking and wealth management. During his professional career to date, he has worked for many financial institutions such as BNP Paribas (Suisse), Deutsche Bank (Switzerland), UBS and Nomura Bank (Switzerland) in Switzerland and abroad.