Secure Cryptoasset Management: eToro’s Custody as a Service

The unique characteristics of crypto assets—including private keys and permanent transactions—have made custody a challenge, preventing traditional financial institutions from storing cryptocurrency in the same way as commodities, equities, or fiat currency.

As cryptocurrency custody methods have evolved, the industry has suffered enormous losses.
Exchange hacks, phishing scams, and other vulnerabilities have plagued custodians, making the asset class too dangerous for cautious institutions to consider investing.

eToroX’s Custody as a Service (CaaS) is the next stage in the evolution of crypto custody—a compliant, certified and fully-managed platform that brings the secure institutional model of custody to cryptocurrency.

Complete compliance

Bitcoin was forged in the fiery aftermath of the financial crisis to offer an alternative to traditional banking. At the same time, regulatory reforms were devised to improve the financial system by changing the laws governing the custody of assets.

The Dodd-Frank reform of 2011 amended the Advisers Act of 1940 to mean that large institutional investors could no longer take custody of client funds themselves, and were legally obliged to use a third-party custodian. This reform was largely successful and remains in place today, meaning institutions now adopting cryptocurrency are required to find a regulated custodian that is capable of servicing crypto assets.

Unfortunately, such custodians are a rare breed: Traditional banks are not technically equipped to take care of cryptographic keys, and the new breed of emerging cryptocurrency custodians are typically unregulated and unable to satisfy reporting and auditing requirements.

“Custodians are necessary as the next step towards crypto-assets being seen as a safe and attractive financial asset option for large FIs and perhaps for market confidence in general… Major institutional custodians providing a secure place to store large amounts of crypto-assets could provide the protection necessary to reduce the risk of hacks and increase the trust of the investing public in crypto-assets.” — Attorneys at Perkins Coie

eToro’s CaaS is a licensed DLT provider regulated by Gibraltar’s Financial Services Commission.

As one of several cryptocurrency custodians on the Rock governed by Gibraltar’s pioneering legal framework, the platform is held to the same high standards as traditional financial institutions, and well-positioned to respond to the ongoing rollout of new guidance concerning the management of crypto assets

Third parties: Auditors and insurers

One of the key selling points of cryptocurrency is improving security by removing third parties from transactions. But this is impossible for large institutions that are legally obligated to use a third party custodian.

Instead of removing third parties, institutional cryptocurrency trading platforms can enhance security by adding more third parties in the form of auditors, certifiers, and independent reviewers.

eToroX is certified by international standards including ISO 27001 and ISO 27032, and subject to regular third party audits from the Gibraltar Financial Services Commission (GFSC) that are equal to those carried out on traditional financial institutions.

All customer assets held on eToro’s CaaS are insured by Aon against internal and external theft, loss, damage, or the destruction of assets. This ensures traders have recourse in the unlikely event that assets are compromised.

Cryptographic security

The choice between hot and cold wallets forces cryptocurrency custodians to make a dangerous trade-off between security and accessibility—either squirreling coins away in cold storage like pirates burying treasure where it is difficult to access, or storing coins online where they are easy to access but vulnerable to attack.

To avoid the vulnerability of hot wallets, most cryptocurrency custodians keep the majority of funds in cold storage. But withdrawing from conventional cold storage means transacting on the underlying chain. This can be costly and slow, leading to missed opportunities in the volatile and fast-moving cryptocurrency market.

eToro’s CaaS will incorporate a unique custody mechanism that allows institutions to trade directly from cold storage with real-time settlement, optimizing for both accessibility and security.

This comes as part of a fully-managed and regulatory compliant custody package, based on the latest cybersecurity used to protect the strategic assets of various countries. The security of the system has been battle-tested by a $250,000 bounty program.

Cryptocurrency Custody as a Service

As a secure and fully regulatory-compliant custodian, eToro’s CaaS brings the familiar model of institutional custody to cryptocurrency. This gives institutions the opportunity to securely hold cryptocurrency through a traditional structure that reflects the tried-and-tested relationship between custodians and exchanges.