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What do you need to consider when you are choosing your bitcoin custodian?

Bitcoin is increasing in value as quickly as it is growing in popularity.  At first its popularity was a combination of novelty, a lack of regulation and the fact it came into being with a truly global reach.  However while it may once have been seen as a slightly dark and mysterious art, banks (most notably Barclays and UBS) and governments are now speaking very positively about bitcoin and the blockchain that supports it.

However, as ever, where there is opportunity there is risk and if you are serious about entering the bitcoin market, you need to take every possible step to protect yourself.

To many the code – or smart contract -that sits behind a bitcoin transfer is its key selling point as it can be used to make sure any payments involved cannot be finalised without all parties agreeing.  The only problem is that if anything offsets this virtual world, any assets lost through fair means or foul will be almost impossible to recover.

Successful bitcoin trading (or ICO) relies upon making sure you are fully protected at every turn and while securing your private keys and passwords is a must, whoever has access to that information could access the associated bitcoins.  This is where a trusted (not to mention audited, recognised and accredited) third party could provide the final layer of security. 

This third party - or ‘custodian’ – plays a very similar role to a traditional banker.  They ultimately hold the key to the vault containing the cash, gold or any other assets the client wants to protect. The only difference is with a bitcoin custodian rather than opening the safety deposit box in the client’s presence and at the client’s request, they provide a totally secure digital environment with all of the required encryption, controls and processes.

The primary factor to consider when choosing a bitcoin custodian is whether they have a proven reputation.  On the surface this means they should be able to point you towards their other clients so you can make sure they are both reputable and have a demonstrable, proven and public track record in providing a custodian service to traders.  It also means that they should be regulated and accredited by their professional body, for example if you were considering a UK lawyer they must be accredited by the Solicitors Regulation Authority.

They should also have comprehensive insurance against potential loss as it is currently estimated that 5% of all bitcoins have been either lost or stolen at some point even though every bitcoin transaction is a matter of public record thanks to the blockchain.  

Another issue you need to consider is how to make sure your bitcoin sits easily alongside your other financial assets.  This could involve implementing a number of quite sophisticated changes to any account or asset management systems you currently use.  Again an experienced custodian should be able to talk you through the easiest way to make any required changes.

The final attribute we would suggest you look for is your potential custodian’s ability to show they are in step with the latest technologies.

At the launch of bitcoin there weren’t many options when it came to storing coins and investors had to download the Bitcoin-QT client onto their desktop.  Now there are an increasing number of online options and many of these are managed by a third party but not all are as reputable as they may seem because the level of security will depend on the host (and the motives) of the host.

Confidence in hosted wallets has been damaged further recently by cases like Mt. Gox whose commercial decline made it impossible for users to withdraw their bitcoins and the attack on Inputs.io which led to hackers stealing an incredible $1.2m from their wallet.

As the security liability for the contents of your wallet will immediately become the responsibility of the custodian, you should make sure any potential custodian you approach is able to talk you through the available options and demonstrate an understanding of the likely future development of bitcoin wallet technologies as their creators push their capabilities to the next level.

Your custodian should also be able to match the right wallet to your objectives; are you looking to trade regularly (in which case a ‘hot wallet’ would be probably be best) or make a more long-term investment (in which case a ‘cold’ or ‘offline wallet may be more appropriate)?

This may look like a lot of information to assimilate but the security of your investment and your own piece of mind is reliant on having the right custodian in place.  

As both a law firm that is involved in settling disputes involving bitcoin and a range of other cryptocurrency fraud on a daily basis and as accredited custodian we are here to help.  If you would like to discuss how to ensure you place your bitcoin in the most secure environment, call us today on 020 7792 5649 or email us at info@selachii.co.uk.

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