The Crypto Explorer

The Crypto Explorer podcast: Revisiting crypto custody

Welcome our latest episode for The Crypto Explorer, a podcast by Sygnum, which takes you into the exciting world of crypto assets and Future Finance with conversations with leading figures in blockchain and finance.

In this episode, host Aliya Das Gupta and guests Christoph Simmchen, Co-Founder of Safe ecosystem, as well as Matin Burgherr, Chief Client Officer at Sygnum, discuss how to assess and use different custody solutions.

Listen to the full podcast episode here.

Aliya Das Gupta: With all the things that have happened, how has your view of custody solutions in the market changed over the last week?

Christoph Simmchen: It’s not a big surprise but my views haven’t changed at all. For me, the benefits of self-custody have always been clear. However, that being said, I can also see the case for third-party custodians. This might be due to legal requirements or because self-custody is still scary nowadays as it requires a specific level of technical knowledge and operational security. While bearing this in mind, we are big believers in an approach we call hybrid custody. We think there should be a setup where some components are self-custodial, and some components are exercised by a third-party custodian, like a regulated bank. From our perspective, this is the future to unlock digital ownership.

Martin Burgherr: What we’ve seen so far is that there are very clear losers. I would say the clear losers are exchanges. We can see this with the data and record outflows in the billions, basically across the board. From the large exchanges Binance, OKX, FTX, etc., all these exchanges saw record outflows.

We also have clear winners. For example, Ledger is a clear winner, I saw they recorded record sales for people who transitioned to self-custody. I believe Safe would also be a winner because it’s a very clear case for self-custody. Safe actually meets the need for people who say a ledger is not enough, as you need to have a multisig setup, which is more institutional grade. A Safe value proposition is more attractive now.

We can also say that Sygnum Bank is clearly a winner. For example, the regulation, reliability of a bank, the certainty that your assets are kept off balance sheet and cannot be subject to a bank run, this is a value proposition that is very strong. We also see it in the data, month to date, we have already recorded CHF 350 million in inflows. This is a very sizable amount for a bank like us.

To summarise, the clear winners would be Ledger, Safe and fully regulated players in tier 1 jurisdictions like Sygnum.

Aliya Das Gupta: Regulation is a tricky topic when it comes to the decentralised space. Where do you think the regulators are going to go out of this?

Christoph Simmchen: It’s the same topic that we have been dealing with now for ages, that we are trying to make sure that we are really living up to these values and saying: same assets, same risks, same regulation. But this really needs to be like an in-depth analysis, going deep on the asset level. Are NFT’s really the same, are ERC20 and other tokens really securities? What is the difference on the asset level? On the risk level, I see there is a huge need to spend more money with regulators and educate them, especially when it comes to counterparty risk or operational risk. Because what we are now seeing is that DeFi applications are now running according to plan. They are still operational and they are working well. This is something that I am happy about because regulators are recognising this.

Another thing when it comes to regulation that is really concerning, it’s that we had this opportunity for harmonisation, but at least what I see right now when it comes to FATF travel rule, or in Europe with MiCA, there’s still a lot of room for individual jurisdictions to define by themselves what a virtual asset service provider is. By taking the perspective from a project, it’s really hard to deal with all the different kinds of definitions and do a proper analysis and structuring on all of the activities.

Martin Burgherr: To add on what Christoph said, I’m a bit worried that the regulators will draw the right conclusions. It’s always a risk that they basically overreact and think crypto is the issue, but we also need to say very clearly, crypto is not the issue. Crypto worked like a charm and DeFi, which is built on crypto, worked like a charm. So, it really showed that the most vulnerable point are probably these exchanges that were growing to a market share that was unhealthy and were growing at a pace which was not sustainable.

For me the global regulation is very important, like the same rules for everyone. Crypto is global and you can transfer them anywhere. Hence, it is very important that you have at least a global minimum bar, which everyone needs to fulfil, because otherwise it leads to exactly the kind of situation where some jurisdictions basically arbitrate other jurisdictions. If we manage to find common grounds with minimum standards, which are valid for all the players around the globe, then this would be a big achievement. Then we need to make sure that we set these regulations to somewhat a reasonable standard so that we don’t prevent innovation from happening, but that we actually protect, especially retail investors, from losing their funds.

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Because Sygnum is a bank and some of the information in the podcast relates to financial and investment topics, we want you to understand that we do not create a bank client relationship with you when you listen to the podcast. By listening to the podcast, you agree that the information on this podcast does not constitute professional advice and no bank-client or other relationship is created between you and Sygnum. Do not consider the podcast to be a substitute for obtaining advice from a qualified investment advisor. The information in the podcast may be changed without notice and is not guaranteed to be complete, correct or up-to-date. All information you hear is never considered to be a solicitation for any purpose, in any form or content.

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