Crypto custody is now table stakes: here’s why

The 3 pillars of crypto custody

If you look at any digital asset solution on the market today, you’ll find three core components, essential for securely managing digital assets like stablecoins:

1. Key management (the vault)
2. Digital asset management (wallets)
3. Compliance engine (screening & authorization)

Let’s dig a bit deeper.

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Key management (the vault)

Blockchain key management refers to how we securely create, store, and use the cryptographic keys that allow us to access and manage digital assets like stablecoins.

Think of it like managing the keys to a safe that holds your money, but instead of physical keys, we use digital ones.

In order to hold stablecoin funds, you need:

• A public key: Like your bank account number. Share it with others so they can send you cryptocurrency.
• A private key: Your PIN or password. It's a secret that should never be shared. Allows you to access your funds and authorize transactions.

Key management systems help ensure that your private key is stored securely, using advanced technologies like hardware security modules (HSMs) or multi party computation (MPC)  setups, where multiple key shards are needed to sign a transaction. Layer1 for example uses a modular, standards-based key management system which is hosted within your infrastructure.

In short, blockchain key management is all about keeping your digital keys safe so that only you (or authorized people) can access and manage your digital assets.

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Digital asset management (wallets)

As soon as a new public key (aka blockchain address) is created on a blockchain, it can instantly receive and send stablecoins.

But blockchains aren’t designed for payments out of the box.

There are many different blockchains out there (eg Bitcoin, Ethereum, Tron): each using different logic, data structures, on-chain accounting methods and ways to manage authorizations. Also, a blockchain won’t send you a push notification or webhook when a transaction has been settled. It simply updates the ledger to reflect new transactions and balances.

Today’s wallet solutions include digital asset management features that solve these challenges.They manage the ‘read’ access to a blockchain by:

• Taking the list of addresses created with the key management system, connecting to the relevant blockchain nodes and monitoring the connected networks for ledger updates (i.e. transactions hitting one of the addresses).
• Translating ledger updates into a human readable event and transaction object that can inform further processing.
• Harmonizing the data structure of different blockchain networks into a coherent accounting structure, where each transaction has common fields like currency, source, destination and amount, regardless of which network it was settled on.

Wallet solutions today also manage the ‘write’ access to the blockchains for outgoing payments:

• Technically embedding rules to follow to successfully submit a transaction (data structure, real time transaction fees, etc).
• Preparing a transaction with all of the required parameters (using real time blockchain data) that can be signed by the key management system.
• Taking the signed blockchain transaction and sending it to the blockchain queue via the connected nodes.

Now you have a wallet solution that gives you an API and frontend to receive and send crypto assets. If you’re using the solution for yourself (eg to manage your own treasury), you’re good to go.

But, if you’re a payment provider who wants to enable stablecoin custody for your customers, it doesn’t stop here. You also need to map blockchain addresses to customer accounts, which creates challenges like:

• How do you know which user should be credited for a given deposit?
• How can you logically combine addresses into groups of users or internal accounts?

This is where off-chain accounting logic comes in. Wallet and custody solutions today typically provide account objects (similar to payment objects) that can carry additional (off-chain) reference data used to solve those problems.

In my next blog, I’ll examine this logic in more detail and share how BVNK’s Layer1 providers prebuilt logic for payments use cases.

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Compliance engine (screening & authorization)

If you’re enabling stablecoin payments for customers, you’ll need to comply with various regulatory requirements to prevent financial crime (eg global anti-money-laundering rules, counter terrorist financing rules, OFAC and sanctions requirements, the Travel Rule).

So, the final table stakes component of any custodial digital asset solution is a compliance engine. This allows you to control and avoid processing funds that are associated with illegal activity, which is a key requirement of a regulated custodian.

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To achieve this, the wallet solution:

• allows you to integrate your third party compliance tools (eg Chainalysis, Elliptic), so you can effectively screen your transactions against sanction lists, fraudulent activity and other risk factors.
• Embeds the risk data into automated processing decisions to control the movement of funds on the platform.

As the user, you define your own risk appetite and configure the solution to automatically or manually approve or reject transactions. We’ve built Layer1 to seamlessly automate these screening and authorisation flows.

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Layer1 is more than just custody

Crypto custody services are required for stablecoin payments, but they have become table stakes – foundational technical and compliance features.

At BVNK, we’ve built Layer1 to enable payment companies and enterprises to make stablecoins work harder, driving new value for customers, as well as revenue and profit.

This typically means two things: moving stablecoins and converting stablecoins into fiat and vice versa.

In my next blog, I’ll outline the unique features of Layer1, optimized for accepting, sending and converting stablecoin payments.

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