Swiss NGO proposes requirements and standards for crypto custody

The Capital Markets and Technology Association (CMTA) is an independent association bringing together experts from the financial, technological, audit, and legal sectors to promote the use of new technologies in capital markets.

The organization is based in Switzerland, a crypto-friendly jurisdiction and home to an area dubbed the “Crypto Valley.” As of mid-2019, the Crypto Valley had more than 800 companies with over 4000 employees.

The CMTA recently released a document that focuses on the requirements and recommendations for technology solutions enabling the custody and management of digital assets. The document was first published on the 30th of April 2020. Readers of the real-time BNC Pro Newsfeed were notified upon the release.

Fedor Poskriakov, the CMTA General Secretary and Partner at Lenz & Staehelin, states that it is the first initiative of the Swiss financial industry to agree on a common standard for custody and management of digital assets.

“The digitalization of the capital markets infrastructures is accelerating. In that context, the launch of the ‘Digital Assets Custody Standard’ represents a key milestone,” states Poskriwkov. “The benefits of the digitalization of the financial industry are such that the evolution towards decentralized infrastructures seems inevitable.”

The Digital Assets Custody Standard, or DACS, aims to contribute to a high level of assurance for digital asset owners, without hampering a custodian provider business, nor the usability of any custodial system. “There are aspects to the custody of digital assets that contrast sharply with the operational and security aspects related to the safekeeping of traditional financial assets,” states the document.

These distinctive features present a number of challenges, the most notable being how to generate, operate, and secure the private keys relating to Digital Assets throughout the lifecycle of the custody services.

The DACS attempts to establish a baseline upon which customers and auditors can rely on. The baseline is intended to allow them to assess a custody solution or provider. To that aim, the recommendations are defined and formulated to be, verifiable, auditable, while also being implementation and asset agnostic.

Banks and other financial institutions can operate self-custody solutions, the document states, whereby a technology solution is controlled and operated by the institution in order to manage a number of digital ledger accounts ("DLAs"). Said DLAs may be managed according to different models.

The first model involves pooling assets. The digital asset ownership is recorded on DLAs created and controlled by the custodian. The private keys are controlled exclusively by the custodian.

The distinctive factor between the first and second model, both of which include pooling, is the fact that in the second model the digital assets credited on each DLA are allocated to one or several determined clients by way of an internal ledger, as opposed to a global pool allocation in a model 1 pooling.

In the third model, each DLA is allocated to a single client via an internal ledger maintained by the custodian, with the private keys being either exclusively controlled by the custodian, or together with the client.

Each model is accompanied by a detailed list of requirements and recommendations, from security periodic review, to document handling and cryptographic best practices. The selection of a particular custody model may have far-reaching legal and regulatory implications, according to the document, depending on the types of digital assets and the regulatory status of the custodian. The DACS does not address those implications.

Dr. Jean-Philippe Aumasson, Tech Committee Chair at the CMTA and co-Founder of Taurus Group, states: “The DACS will contribute to a greater maturity in the technological and procedural aspects of digital assets custody. Leading auditing firms, custody solutions suppliers, and regulated financial firms have joined forces to accelerate the evolution of the financial industry towards decentralized infrastructures.”

Taurus Group is a crypto infrastructure and custody startup, with institutional clients that include the banks SEBA, Vontobel, and Arab Bank. The startup just raised over ~US$11M (€10M) in Series A funding. The funding round was led by a current client, Arab Bank Switzerland, with participation from Tezos Foundation and other new and existing investors.

The capital comes at an opportune time for Taurus Group, as many other crypto firms in the “crypto valley” are struggling to survive in the current economic climate. Swiss newspaper SonntagsZeitung reported that a finance official for “crypto valley” is in talks with the federal government about setting up a 100M Swiss franc (US$102.7M) fund.

Of the biggest 50 companies operating in the region, only half said in a survey that they will make it through the next 12 months under current conditions, as reported by the paper.