Custodianship is a topic that his heating up amongst some of the larger players both in and out of the crypto world. Handling private keys is clumsy and full of risk and as Andreas Antonopoulos has stated many times(paraphrased):
Our experience and ability in securing non digital objects is very well developed,
while the only thing we can say about the same for digital objects is - we suck at it!
I see this going 2 ways guys:
- Safeguarding of private keys. Like in a very strong safes with alarms etc... . Maybe with insurance policies as well, but that could get sticky, I'll explain why later
- Pooling funds much like a bank does with you money today.
Lets talk the first one.
Private key security
This is the way we would like it to go. This means your money is yours and nobody else can do anything with it.
Basically you do this because you are not sure of your ability to keep a piece of paper with the private key, the only private key safe, so you give this to a company that has a huge safe with all the stuff around it that makes you feel secure.
If you want your money, you have to go there and get the private key yourself.
(I was involved with a crypto fund and custodianship was deeply discussed. This simply blurb hides a myriad of different problems with such a scheme that I will not go into right here. Let me know if you want to read more about this in the comments section and I may do a piece on this)
This option preserves to a great degree the spirit of crytpos while giving some security to the subject of safekeeping.
We could consider this service to be about the same as that with gold coins.
The physical security of them is quite easy to comprehend. You need to possess them in order to use them.
The invention of crypto introduces a digital aspect to an immutable asset such as gold. It can be moved frictionlessly over the internet. This means a thief can travel down your ethernet cable to steal them!
Hence the headache of applying physical security measures to a digital object.
and now the second...
Bank style custodianship
The banks will love this one. This is almost like business as usual. They will not mind your private keys for you, you will give them your tokens and they will play with them with the promise that they will give back your tokens (not exactly the same ones but the same number of them) when you ask.
It is how retail banking works today - sort of.
The difference is that cryptos do not operate under a fractional reserve system. The bank may be able to lend out your crytpo in order to earn some interest, but they will not be able to create new crypto out of thin air using your deposited crytpo as a reserve asset.
You put your trust in a trusted institution to do something with your money to make some more of it for you - aka interest. But the same rules will apply as today at the other side. Bank goes bust, you lose some or all of your tokens. Too many want their tokens at the same time, i.e. bank run, you may have to wait a while, or worst case, see point one.
No fractional reserve banking with crypto
With this kind of custodianship, assuming we use the the range of cryptos we have at the moment, (i.e. fixed supply or openly inflationary) we would already have a far more honest banking world.
Banks would operate the way most financially illiterate people think they work today i.e. lending depositors money out and making business by taking a cut of the interest repayments on that money. Depositors are incentivised by safety and earning an interest rate on savings in the bank.
Anyone under the delusion that this is how it works are firmly in the financially illiterate group - sorry
If you don't like being in this group, then you need to learn what fractional reserve banking is! Pronto!!
watch this youtube clip
Cryptos are still very new and not well understood by most of the population. But you could say that our current monetary system is also not well understood by most of the population!
The difference is we are forced to use our current moneys.
That is where the term "fiat money" comes from. Money by decree!
We must remember that this is a new concept for humanity. It started in 1971
If you are like me, you would have already crossed the rubicon in your understanding of the corruption and unsustainability of our current financial system.
In the absence of any real reforms to address the corruption and unsustainability from within our current monetary system, we look at crypto as the best answer available to address these issues.
Yes it is clunky, and private keys are not so easy to handle safely. But the tech is solid and its here.
Things like user interfaces and key handling still need some work before the average person feels safe using it.
We have to be patient.
As always guys, leave comments, have fun and trade safe.