To custodian means to carefully and vigilantly safeguard something. In the traditional economic world, financial institutions play the role of custodian; the bank is responsible for safeguarding clients' assets, such as their money, stocks, or bonds. This is the original purpose of banks. However, the emergence of a new business model, such as asset tokenization through blockchain, has revolutionized the financial and investment sector as we knew it.
Asset tokenization involves the digital representation of a right or value of a real asset, meaning that both tangible objects like artwork and intangible items like company shares can be tokenized. Beyond the art industry and financial sector, other markets have embraced operating with tokens, such as real estate, video games, intellectual property, and startups.
What opportunities does a tokenized economy offer? Blockchain technology is a network that provides tremendous security and transparency to transactions, values that convey reliability to participants. Additionally, these operations are accessible to a larger number of people worldwide and, due to their characteristics, allow tokens to be bought, sold, or exchanged in real-time at any moment. This makes asset tokenization more agile and provides liquidity more quickly than other types of financial operations. The elimination of intermediaries also results in cost savings.
The custodian in the MiCA Law
The European Regulation on Markets in Crypto-Assets, better known as MiCA (Markets in Crypto Assets), defines "custody and administration of crypto-assets on behalf of clients" as "the safekeeping or control, on behalf of clients, of crypto-assets or the means of access to those crypto-assets, if applicable in the form of private cryptographic keys."
Crypto-asset custody services allow a third party to manage private keys. They do not store the tokens themselves, as these are within the blockchain; rather, they safeguard the keys that grant rights to the assets. The keys are like the secret private name of a location on the blockchain where tokens are registered.
The law requires custodians to be liable in case of asset loss unless they can prove that the loss occurred due to an external event beyond their control. It also advises against concentrations of custodians. Additionally, the regulation specifies that the custodian must be a legal entity distinct from the issuer, possessing the technical expertise and market reputation to perform this function.
Custodians must be registered in a special registry; in our country, this responsibility falls to the Bank of Spain.
Benefits of custodians
The security of assets is the primary requirement that users seek in a custodian. Having an authorized or regulated custodian is a guarantee for the investor, and therefore reduces the risk of operations. Additionally, this service allows for simple transactions.
The alternative is to store crypto-assets on exchanges, which are asset exchange platforms that can be easy targets for hackers, go bankrupt, or be shut down by authorities. Another option is to use a blockchain wallet, a digital wallet for storing and managing crypto-assets; however, if the private key is lost, access to the wallet and all its contents is also lost. This is why the custodian solution gains strength, as it keeps the keys offline in devices specifically designed for this purpose.
Ledger
An example of this type of physical device is Ledger, a French company specialized in manufacturing hardware cryptocurrency wallets used to securely store and manage cryptocurrencies offline. This device helps keep private keys on storage devices like USBs, making them impossible to hack.
The custodian at balize
The tokenization of real estate projects managed by balize is done through financial instruments or security tokens, which means there will always be a centralized custodian, similar to a traditional financial instrument. This custodian ensures that the transfer of the security token is made to another equally reliable person.
If you want to learn more about the custodian, we recommend this episode of balize talks.
