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No human oversight - Shanghai blockchain start-up bets on new crypto custody approach despite mainland ban

South China Morning Post logo South China Morning Post 11/9/2018 Georgina Lee
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Kenneth Xu, founder and chief executive of Shanghai-based blockchain start-up InVault, believes the only way holders of cryptocurrencies can be certain about the security of their assets is the removal of any human oversight, a model of safekeeping common among many cryptocurrency exchanges today.

Putting the private keys to your cryptocurrency assets in the hands of senior management is akin to putting all your money in their control

Kenneth Xu, founder and chief executive, InVault

“Today, the vast majority of cryptocurrency exchanges globally still involve their senior management in managing the transfer of digital tokens ordered by clients. Putting the private keys to your cryptocurrency assets in the hands of senior management is akin to putting all your money in their control,” said Xu.

Xu said he was optimistic cryptocurrency custody services will be sought after by exchanges in China keen to avoid the moral hazard of holding clients’ assets, as their primary role should be to focus on matching buyers and sellers of cryptocurrencies.

“In conventional stock trading, securities are all held at a central depository and not by exchanges. The same should apply in the digital token arena too,” he said.

InVault joins the emerging ranks of service platform operators providing cryptocurrency custody services to corporate and asset managers that deal in digital tokens.

Its launch follows repeated warnings against cryptocurrency transactions and token sales – the latter viewed as illegal fundraising – by various regulators and the People’s Bank of China, the country’s central bank.

But the company, which is being backed by venture capital fund Matrix Partners China to the tune of US$5.85 million in seed funding, is to begin offering its services this week. Xu said it had already received an order from a cryptocurrency exchange for the safekeeping of one million ethereum tokens.

a man wearing a suit and tie © Handout

Cryptocurrency trading remains active in China despite a ban on domestic exchanges, thanks to the popularity of many offshore operators, according to industry observers. Xu said, that with a market capitalisation of all cryptocurrencies at US$205 billion, he expected the cryptocurrency custody business catering to the corporate sector to remain lucrative, because most service providers today still cater mainly to retail cryptocurrency traders.

InVault charges service fees based on assets under management. It will offer a decentralised corporate cryptocurrency wallet service and will put its clients’ private keys in several physical vaults. The entrances to these vaults will be controlled by a biometric recognition technology that will only allow in employees authorised to enter the facility.

The company also plans to offer its services in South Korea, Japan and Singapore next year as its business expands. Exchanges such as Coinbase in the United States and OKEx in Hong Kong also offer cryptocurrency custody services.

In the first half of this year, the reported losses from cryptocurrency scams and hacks reached US$1.73 billion, putting 2018 on track to becoming the worst year for losses through stolen assets, according to data by Crypto Aware, a cryptocurrency scam and frauds advocacy group.

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

Copyright (c) 2018. South China Morning Post Publishers Ltd. All rights reserved.

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