According to PwC’s 2020 Crypto Hedge Fund Report (1) the total assets under management (AUM) for crypto hedge funds increased from an average of USD 21.9 million by 2018 year-end to USD 44.4 million last year.
Likewise, PwC estimates that the total AUM of all hedge funds more than doubled between this same period, climbing from ~ USD 1 billion in 2018 up to over USD 2 billion in 2020.
Overall, cryptocurrency exchanges are responsible for the safekeeping of a significant chunk of circulating cryptocurrencies, but consumer trust in these platforms continues to deteriorate due to the perceived risk of loss as a result of the numerous exchange hacks and thefts (2) that have occurred in recent years.
To ameliorate this, provide a better standard of service to their users, and restore their client’s trust in the platform, exchanges and other firms with a significant custodial role have begun to employ secure third-party custody solutions to separate asset custody from their general business services.
Nonetheless, many cryptocurrency exchanges and hedge funds still continue to self-custody user funds — largely due to the misconception that third-party custody solutions are slow, incapable of scaling, and prohibitively expensive.
As such, custody providers are now doing what they can to meet the needs of their rapidly scaling crypto business customers, by providing them with flexibility and secure control over their digital assets with Ledger Vault.
Ledger Vault Capabilities
Briefly, Ledger Vault is a secure digital asset management solution that allows firms that regularly store and manage digital assets to do so with an unprecedented level of security and control. Through the use of hardware security modules (HSMs) and personal security devices (PSDs), Vault users are able to set up robust operational controls that determine how funds can be spent or managed on the Vault.
This process is controlled by two main user types:
- Administrators are responsible for creating the governance rules and assigning Operators to accounts.
- Operators are responsible for creating and approving transactions that adhere to the conditions set out by the Administrators.
Each account has its own set of governance rules set by Administrators and funds can only be accessed by the Operators directly assigned to it. The rules can include restricting transfers to only whitelisted addresses, setting a minimum or maximum transfer limit, and enforcing additional controls for high-value transactions.
The flexibility of this system allows Vault users to create highly secure, scalable transaction flows that can be adapted to practically any business process. Moreover, although many custodians maintain full control and ownership of their custody solution, custodians using Ledger Vault can securely provide their customers with access to the Vault through the use of its unique PSD-based authentication system.
This system allows both the custodian and their customers to interact with the Vault using their PSD. The PSD offers the strongest authentication mechanism on the market and allows operators to initiate transactions, which are validated using the device’s trusted display (3).
Unlike other custody solutions, Ledger Vault offers end-to-end protection of communications. This ensures that any information transmitted between the user and the Vault cannot be tampered with—effectively eliminating the risk of a man-in-the-middle attack (4).
Security and Flexibility for Custodians and Asset Managers
Although the security and flexibility of Ledger Vault lends it to a wide variety of use cases, the institutions most likely to benefit from its features are those that need to securely store, but regularly access or manage a significant portfolio of digital assets.
Custodians that provide their Asset Manager customers with direct access to Ledger vault by providing them with operator PSDs essentially enable firms of all types and sizes to benefit from arguably the most feature-complete digital asset custody solution on the market.
This system allows custodians to provide an additional layer of security to Asset Managers, by allowing them to directly access their assets on the Vault solution. By bridging the custody gap with the Asset Managers, custodians can help their customers secure and streamline their operations.
Asset Managers avoid the operational and regulatory challenges that come with self-custody, making their offerings more attractive to institutional investors and helping to ease any security qualms. This has the knock-on effect of also making Custodian services more attractive to crypto businesses.
This ensures Asset Managers can focus more on their day-to-day operations and other business practices while providing their investors and users with the peace of mind that can only be granted by an independent custody solution. This setup also enables Asset Managers to improve their audit process, since this task can be easily offloaded to the Custodian, improving transparency and providing a simple means for customers to prove they are both legitimate and have speedy, secure access to funds.
Custodians can offer a direct access setup to practically any organization that stands to benefit from highly-scalable custody services, including but not limited to:
- Cryptocurrency exchanges and brokers: Many cryptocurrency exchanges are faced with overcoming a significant trust divide with users. By working with their custody provider, these platforms can offer the security and speed their customers expect, while eliminating the costs involved in developing or maintaining their own bespoke custody solution.
- Hedge funds: Cryptocurrency hedge funds are faced with the challenges of attracting investment, while managing potentially significant sums that need to be accessed regularly by their fund managers. These represent ideal customers for Vault custodians, since Vault offers the flexibility and robust security hedge funds need to attract sizable investors.
- Foundations: Many cryptocurrency companies operate as a foundation, which generally entails a non-profit, ethical business model. Cryptocurrency foundations are usually tasked with developing a blockchain ecosystem and ensuring favorable growth for its users. Foundations set up on the vault with operator accounts can easily demonstrate how they’ve managed their finances, and better focus on growing their community.
Custodians Can Onboard Asset Managers Easily
As we previously touched on, Ledger Vault allows custodians to securely provide their customers with direct access to the custody solution, without risking the co-mingling of funds or increasing the risk of a breach. This is achieved thanks to the unique properties of the Ledger PSD, which allows Vault users to securely authenticate themselves.
The process custodians use to onboard their customers to the Vault is identical to that used for setting up a standard operator—but in this case, the operator PSD is distributed to the customer, rather than a member of the custodian team. Extending the PSD to the custodian customer provides them with a variety of benefits, including:
- Authentication: Users do not need to manually verify their identity with the custodian each time they interact with the Vault. This is automatically achieved prior to each action thanks to the unique identity generated by and stored in the PSD. This eliminates the need for the custodian to manually verify the identity of each Vault user for each operation. In less advanced solutions, the authentication process would often require a video link or a call — a process rendered completely obsolete by the Vault authentication system.
- Confidentiality & Integrity: The secure agreement protocol employed by the secure channel encrypts sensitive data, preventing leakage even when used to communicate information over a relatively insecure medium like the internet. The information transmitted over the secure channel cannot be tampered with.
- Non-repudiation: Because each PSD has a unique identifier, requests made by each operator can be linked to its owner thanks to the request signature process. This attribute makes it impossible for Operators to deny that a request came from their PSD—simultaneously ensuring authenticity and traceability. This property is essential for crypto firms with significant assets under management.
- Auditability: Each PSD is unique and linked to a single user, whereas each action that is signed by each user using their PSD is meticulously logged within the Vault. Thanks to this granular process, administrators can be certain of the origin of each action, ensuring everything can be audited quickly and easily
Onboarding a customer as an operator on the Vault is a one-time process that can easily be carried out remotely.
- The custodian sends PSDs for each operator.
- The PSDs are distributed to the individuals in the customer firm responsible for managing interactions with the Vault. These Operators initialize their devices and each creates a unique seed on their device. This seed is rendered into a unique ID shown on the trusted display (5) of each device.
- Operators securely communicate their ID to the custodian through a video or voice call—or any other method that allows the custodian to securely verify the identity of the device owner. This is the only time the identity of the PSD holder needs to be manually confirmed over an insecure channel.
- Using these IDs, an Administrator within the custodian institution generates an invitation URL for each operator
- Operators register
- The newly registered operators then need to be approved by a quorum of other custodian administrators based on the admin rule (6).
All-in-all, once the PSD has been delivered to the designated customer, getting them started on the Vault should take just minutes. And with the potential to support potentially tens of thousands of operators and accounts, this setup can support business operations of practically any size.
Once the operators are registered, specific rules can be implemented to minimize the risk of errors and increase security. Two example workflows might look something like this:
Workflow 1: Customer operator initiates a low-value transaction to a trusted address from the whitelist: only one custodian operator is required to review and approve it.
Workflow 2: Customer operator initiates a high-value transaction to a new address: Approval is required from two custodian operators.
See the Create an account (7) section of the Ledger Vault Help Center for a more complete overview of the range of parameters that are defined in the transaction rules.
With Ledger Vault, focus on what’s essential
Ledger Vault is designed to act as a secure hub for digital asset management, and as a bridge that custodians can use to forge a more trusting relationship with their customers by providing a direct-access custody solution.
«We at Ledger believe that Vault represents a simple path towards uncompromising security for both custodians and their customers.»— Ledger CEO, Pascal Gauthier.
If you would like to see how Ledger Vault can be applied to your use case, schedule a 1:1 demo here.