Balancing security and efficiency
Adoption and usage of digital assets is growing, however the market is still not fully saturated. This means some managers may look to trade on multiple exchanges to seize on opportunities resulting from slight price discrepancies between exchanges. Accessing all exchanges through a single platform can make these managers more operationally efficient while also safeguarding the assets to ensure high levels of security.
Alex Maslin (pictured), Business Development Director, Custody and Prime Brokerage for Digital Assets at Copper outlines: “Managers have long complained about the difficulty of having to manage a variety of exchanges at the same time. Operating multiple exchange accounts can also be enormously capital intensive as managers are required to park assets on each platform so that there is capital to trade when an opportunity presents itself.
“A core component of Copper’s infrastructure is Copper’s ClearLoop, a sophisticated inter-exchange trading and settlement network we rolled out last summer which is being described as a game-changer. As opposed to holding assets across various locations independently, ClearLoop enables clients to trade on multiple exchanges via a single platform, utilising one pot of assets held in a custodial trading account with Copper.”
In addition to enhanced capital efficiency, the platform streamlines and secures the settlement process, allowing traders to maintain full control of their funds. “This is because their assets don’t leave their custodial trading account at Copper, effectively eliminating counterparty risk,” Maslin notes.
Price discovery is the primary reason investors choose to trade on multiple exchanges. Some do this simply to access the best price when an asset needs to be traded, others build a strategy around finding and capitalising on these small differences in price.
High level of security
When trading digital assets, security is paramount. Maslin comments: “A key challenge that many managers face is the balance between ensuring the security of assets while maintaining the speed and efficiency of their operations.
“The transfer of assets between the custodian and exchange has historically been highly disjointed and cumbersome. This occurs because very few custodians offer connectivity to exchanges in a secure and convenient fashion. The challenge for managers has been to confidently assure investors that their assets are secure at all times during these movements across the blockchain.”
Copper’s solutions can help managers mitigate these risks. The aforementioned ClearLoop is one which allows managers to trade across multiple venues while ensuring assets remain under Copper custody. The firm also provides a Walled Garden solution. “This enables clients to move assets interexchange, or directly from the client’s cold custody account into their exchange accounts, with all other withdrawal routes lockdown. So, assets can only go back and forth between predefined and approved destinations, effectively eradicating the risk of misappropriation of assets,” Maslin explains.
This balance between security and operational convenience is one of the most significant challenges managers trading digital assets must overcome. Maslin remarks: “We can all agree that digital assets are fast-moving assets, so minutes matter, and hours cripple a trading strategy. Historically, moving assets from cold storage to a trading environment would take up to a staggering 12 hours, due to the security measures in place. This is because it takes time for the private key (required to sign a transaction) to be accessed. Typically, custodians store private keys in a centralised location which needs to be secured.”
To support managers in their quest for more efficient trading, Copper designed its architecture to eradicate the central point of failure. Maslin elaborates: “Instead of a centralised private key creation, we employ a cryptographic approach called multi-party computation (MPC) – a decentralised architecture leveraging secure algorithms. Unique private key segments, called Shards, are formed simultaneously and in isolation, before being distributed across 3 separate locations.
No one location has ever held the full private key. We are able to perform this task by utilising a sophisticated cryptographic protocol called Zero-knowledge proof.
For this reason, we have the ability in conjunction with the client, to move client’s assets from cold storage into a trading environment in less than 10 minutes. The application of MPC technology represents a significant milestone in improving security against both external and internal attack vectors, which has enormous implications for the future of cryptocurrency.”
Full prime brokerage offering
Evolving client needs continue to shape solutions and product offerings in the digital assets space. To gain advantage in a hyper-competitive sector, custodians have had to expand operations beyond maintaining the secure infrastructure for the safeguarding of assets.
Over the past three years, Copper has gradually built a full prime brokerage offering to better meet the needs of its clients.
Maslin says: “One product we recently rolled out to satisfy client requirements is our CopperConnect solution. CopperConnect enables clients to interact with the highly popular decentralised finance (DeFi) space, without compromising on security.
“Typically, trading with a DeFi exchange means holding one’s assets in a hot wallet. This means the private key lives on a server, which isn’t very secure. CopperConnect is a bridge between the DeFi exchanges and Copper’s cold custody solution, ensuring clients can trade on these new venues, while all the time holding their assets in Copper’s award-winning cold custody solution.”
He notes that this is one example of many, as the firm is continually listening to clients’ needs and meeting them with innovative products. “This remains a critical success factor today,” Maslin stresses.
Bright regulatory future
In terms of regulation of digital assets, Maslin is optimistic in his outlook: “I think the stage is set for a bright future. Broadly speaking, the trend we are seeing is that most regulators and leading central banks are exhibiting an interest in understanding digital assets.
“A growing number of countries are beginning to realise that at a time of disruptive technological change, a properly-implemented regulatory framework is vital for investor protection and the industry’s continued growth. Of course, overzealous regulation that risks stifling innovation is always a concern. However I’m sure in time the appropriate balance will be met.”
Business Development Director, Copper
Alex Maslin joined Copper in 2020 as Business Development Director. He has over 11 years experience providing institutional sales and prime brokerage services in the FX and multi-asset spheres.
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