In 2023, crypto hacking was reported to have reached an all-time high, with over $1.7 billion stolen in 2023 alone, largely from DeFi (Decentralized Finance) protocols. These breaches highlight the increasing sophistication of cybercriminals targeting institutional assets through vulnerabilities in online wallets and exchanges.
Hot wallets, which are connected to the internet, were found to be especially vulnerable to attacks. On the other hand, cold wallets offer a significant advantage by being offline, thus insulating institutional assets from internet-based threats.
Cold wallet custody is an essential defense mechanism that no institution can afford to overlook. This storage method reduces the risk of cyberattacks by over 95%, making them a critical security tool for institutions managing significant sums of cryptocurrency.
Here’s why your business should prioritize cold wallet custody to mitigate security risks and protect your investments.
1. Cold Wallet Custody Complies with Crypto Management Regulations
Regulatory bodies worldwide are increasing oversight of crypto asset management, emphasizing the need for robust security protocols, particularly for institutions managing client funds.
In the U.S., FinCEN’s June 2023 report highlighted the importance of cold storage solutions to prevent theft and fraud. The European Union’s upcoming Markets in Crypto-Assets (MiCA) regulation, effective in 2024, similarly mandates secure storage for client assets.
In Asia, regulators like Singapore’s Monetary Authority (MAS) and Japan’s Financial Services Agency (FSA) have introduced strict licensing requirements and guidelines, encouraging cold wallets to safeguard crypto assets from cyber threats. South Korea’s Financial Services Commission (FSC) has enforced similar regulations to protect investors.
Across these regions, cold wallet custody is emerging as a key solution for institutions to comply with increasingly stringent regulations and maintain operational integrity.
2. Cold Wallet Custody Reduces Insider Threats
While external threats like hacking dominate headlines, insider threats also pose significant risks. A 2023 survey conducted by cybersecurity firm Proofpoint revealed that nearly 35% of organizations experienced security incidents involving insider actors, including in the crypto space. Insider theft is a real concern, especially for institutions with access to large volumes of crypto assets.
Cold wallet custody mitigates insider threats by keeping institutional crypto assets completely offline and inaccessible to unauthorized personnel. Unlike hot wallets, which are always connected to the internet and more vulnerable to insider manipulation, cold wallets store assets in an air-gapped environment, making it far more difficult for any single employee or insider to access or move funds unilaterally.
As institutions expand their crypto operations, the offline nature of cold wallet custody provides an essential safeguard against internal threats, ensuring that asset transfers require physical access and follow strict security protocols.
3. Cold Wallet Custody Offers Long-Term Asset Security
Recent market reports have shown that institutional investors are increasingly treating crypto as a long-term investment. However, these assets must be securely stored over time with market volatility and evolving threats. Many institutional investors prioritize security as the top concern when holding digital assets long-term.
Cold wallet custody offers unparalleled protection for institutions looking to hold onto crypto assets for years. The offline nature of cold wallets eliminates the constant exposure to hacking attempts that hot wallets face. This ensures institutional investments remain secure and protected, even as cybersecurity threats evolve.
4. Cold Wallet Custody Reduces Human Error and Operational Risks
Cold wallet custody significantly reduces the risks associated with human error while managing institutional crypto assets. By keeping funds offline, cold wallets eliminate the possibility of accidental transfers, incorrect address inputs, or unauthorized access resulting from staff mishandling or oversight.
For businesses managing high-value crypto portfolios, cold wallets offer a secure solution that mitigates operational risks, ensuring that asset handling is carefully controlled and deliberate, free from the risks of everyday online interactions.
5. Cold Wallet Custody Minimizes Downtime in Case of a Security Breach
When a hot wallet or exchange is compromised, institutions may experience significant operational downtime while investigating and recovering lost assets. Cold wallets, being offline, dramatically reduce the chances of a breach in the first place.
Even in a security incident, the assets stored in cold wallets remain untouched, allowing businesses to maintain continuity without significant interruptions. This level of protection minimizes the operational and financial impact of potential breaches, ensuring that businesses can focus on growth rather than damage control.
Cold Wallet Custody as a Strategic Necessity
For businesses in the cryptocurrency space, protecting institutional assets is more critical than ever. With cyberattacks rising, regulatory demands tightening, and external and internal threats growing more sophisticated, cold wallet custody offers a critical layer of protection. Cold wallet custody provides a non-negotiable solution for safeguarding digital assets against these risks.
At ChainUp, we help institutions build secure, scalable cryptocurrency platforms with cold wallet custody as a cornerstone of asset protection. Contact us today to learn how our blockchain solutions can ensure your platform’s security while keeping you compliant with the latest industry regulations.
