Digital assets: What you should know about crypto custody and wallets
Anyone who wants to invest in digital assets such as virtual currencies or tokens cannot avoid the topic of crypto custody. In October 2021, Tangany received the final permission from BaFin to conduct crypto custody business. Along with Coinbase and Kapilendo, the FinTech is one of the first and so far only three companies that have been able to obtain the coveted crypto custody licence.
In his guest article, Philipp Sandor (Manager Sales & Business Development) explains the different types of custody and how Tangany will continue to position itself strongly in this market with its Custody Suite.
Crypto custody refers to the safekeeping of digital stores of value such as virtual currencies or digital securities, so-called tokens. Basically, it is a further development of the traditional custody business, such as that offered by a bank. Figuratively speaking, a wallet can be thought of as a digital wallet, a bank account or a securities account.
With regard to cryptoassets, the custody is geared towards a fully digitalised environment. It therefore entails a number of special technical features.
In this context, you can also read about how banks deal with the trading and custody of cryptocurrencies.
Incidentally, it is not really the tokens or coins that are held in custody, but rather the cryptographic access data for them: the so-called private key. This is the individual authentication key that the custodian holds for the respective owners of the crypto assets.
The safekeeping of cryptoassets or private keys is an essential component for anyone who wants to invest in cryptoassets or use the diverse possibilities of blockchain technology. Without safekeeping, one is at great risk of theft, fraud or loss.
What types of wallets are there for crypto custody?
Generally, a distinction is made between cold and warm wallets. Another common name for a warm wallet is a hot wallet. Put simply, the values are managed online in the warm wallet and offline in a cold wallet. Compared to a licensed custody solution, other so-called “self-custody” approaches to self-custody also exist. Examples include a MetaMask wallet or a cold storage solution such as from Ledger. However, it should be noted that the user is then responsible for storing his private key and is exposed to a great risk if it is lost or made public.
In order to make it easy for customers and end users and to relieve them of the great responsibility of safekeeping, there is the Tangany Custody Suite. It offers both solutions:
The warm wallet solution with API integration is a regulated, highly secure and scalable custody solution for digital assets based on a hardware security module (HSM) technology.
In addition to Bitcoin and Ethereum, all protocols of the Ethereum ecosystem (all ERC Smart Contract-based tokens) and all EVM (Ethereum Virtual Machine) compatible blockchains such as BSC, Polygon or other Layer 2 can be held in custody. In addition, we have custody of other Utility Tokens, Security Tokens and Non-Fungible Tokens (NFT). We have also recently integrated the Tezos Blockchain into our Custody Suite. For a detailed list of supported coins and tokens, please feel free to contact Tangany.
Our warm wallet solution can be integrated into new or existing systems as a white label product, both in clients’ software, app or interface. Via the API interface, the customers – or, as in the neoFIN example, their investors – can manage the wallets themselves, execute transactions and call up the current balance.
For our B2B customers, who come from traditional finance, tokenisation and blockchain projects, this means enormous added value, flexibility and scalability, as well as an easy path into the blockchain industry. To this end, they benefit from our experience, expertise and industry knowledge gained as one of the first movers in this still young market segment.
In addition to our warm wallet solution, we also offer customers our regulated cold wallet solution for crypto custody.
It is a hardware wallet physically stored in a safe. With the cold wallet solution, we currently cover the top 50 coins and tokens. All customer wallets are separated from each other and may have different governance levels, address whitelisting and multisignature solutions. Furthermore, backup mechanisms are active in both our warm and cold wallet suites to secure access to our clients’ assets in the hypothetical event of a natural disaster or third-party intervention.
Of course, security is at the forefront of our custody suite. As a fully regulated crypto custodian by BaFin, we operate to the highest standards and can offer maximum security. Furthermore, our processes and standards are ISO 27001 certified.
How does the creation of a wallet for crypto custody work?
Let’s take the example of neoFIN again, which uses our B2B white label solution and infrastructure. After registration and subscription on the neoFIN platform, a wallet is directly created for each individual customer in the Tangany infrastructure. The customer can then communicate with their own wallet via the platform and the API interface, view the holdings and initialise transactions. Thus, each customer has their own public key address.
Depending on the customer’s wishes, there are also various additional services that are tailored to each individual B2B customer.
The investor does not need to do anything for this and is not aware of the process. On the other hand, they can act immediately and have their own public key address. The private key is kept in the HSM and never leaves the HSM.
How many wallets should I have?
Asked the other way round: How many bank accounts and securities accounts do you have? Technically, it is not necessary to have several of them. And yet there are reasons to split assets.
Different cryptoassets can be stored on Tangany Wallets. As already described, the focus here is on Bitcoin, all ERC tokens and the relevant EVM blockchains such as BSC, Polygon or other Layer 2.
The wallet remains intact as long as assets are stored on it. This is particularly important for investors who have invested in the Green Ship Token via neoFIN, for example, which has a relatively long term. The wallet is only deleted when this has expired or the customer sells the assets. Of course, this only happens if the assets were legally transferred beforehand.
If an investor wants to invest in crypto assets over a long period of time (so-called “HODLn”, i.e. hold for a long time), it would make sense to additionally store the assets on a cold wallet solution.
On the other hand, there is of course also the case that someone invests via neoFIN and already has their own wallet. If our B2B partner like neoFIN makes this possible, the customer can then of course also use it for a transaction. Tangany is completely flexible here.
What happens if I lose the access data to my wallet?
You can regularly read about this supposed horror scenario in the media. At least for Tangany customers and their end customers, we can give the all-clear:
Tangany is a B2B white-label provider. This means: The end customer receives access to the wallet via the dashboard or the frontend of our B2B partner. If he loses the login data, he reports to our B2B customer. He can restore access at any time. Private keys of the customer are always securely stored in the Tangany infrastructure.
In addition, the Tangany partner portal will soon be available for our B2B customers. There they can, for example, generate reports, determine governance levels and independently manage their API credentials.
Tangany was founded in 2018 by Martin Kreitmair, Christopher Zapf and Alexey Utin. Alexey is a computer scientist, Christopher and Martin have a background in business informatics. All three are united by their enthusiasm for decentralised networks. Their mission from the beginning was to guarantee the highest standard of reliability and security. A claim that is honoured by the experts: Tangany has already won the coveted Fintech Germany Award twice, each time in the categories “Seed Stage” (2020) and “Investment Technology” (2021). The company reached another major milestone in October 2021 when it received BaFin authorisation in accordance with Section 65 (2) of the German Banking Act (KWG) to keep registers of crypto securities.
By of February 2022, Tangany has assets under custody (AUC) of approximately €500 million. Its biggest customers include the Exporo platform, German commercial banks, a top tier crypto exchange for the Cold Wallet Suite and VC funds.
The FinTech is pursuing ambitious goals. After a successful funding round in 2022, Tangany aims to grow its team from the current 22 people to 50 by the end of the year in the next twelve months. The regulated white-label custody suite will be further developed to meet the needs of customers (partner portal, MPC technology, usability, regulatory security) in order to continue to grow strongly in Germany and Europe. In addition, further revenue streams for customers (staking, lending, DeFi applications) as well as a significant expansion of the licence offering with regard to crypto custody licences and crypto securities registry management are also in the pipeline. Tangany wants to be the largest custodian in Europe in five years.