BitcoinIRA’s Chief Operations Officer, Rick Synrod, offers his executive insights on today’s hot topics in cryptocurrency, from recent market turmoil to crypto custody and security. Synrod recaps what our industry can learn from last year’s events, and what investors should consider when deciding if and how to participate in the digital asset ecosystem going forward.
Why have crypto security and custody been in the spotlight recently?
2022 was a tumultuous year for financial markets with growth-oriented sectors like tech, emerging markets, and especially digital assets getting hit the hardest. Domestic and global macro environments faced significant challenges including record high inflation, rising interest rates, ongoing supply chain constraints left over from COVID-19 shutdowns, international political tensions, and global energy supply shortages resulting from the Ukraine-Russian war to name a few. While these headwinds had impacts across most asset classes, the digital asset ecosystem experienced several upheaval events of its own, including the major collapses of Terra (LUNA), Three Arrows Capital, Voyager, Celsius, and the once second-largest global exchange, FTX. However, these events, like the others before them, allow our industry to learn, grow, and adapt – spotlighting the importance of security, transparency, and the need for smart regulation.
How would you summarize 2022 for digital assets?
With the benefit of hindsight, it is easy to look back and proclaim that 2022 was both expected and necessary. Let me explain. If you would have told me at the beginning of last year that we would experience the collapse of a top 10 digital asset (LUNA), the downfall of such significant industry players as Three Arrows Capital, Voyager, BlockFi, and others, and the catastrophic collapse of one of the largest exchanges in the world, I would have told you that we should pack it all up and head home! However, looking back at what did unfold, we can begin to piece together what led to each of these events individually, as well as collectively. Setting aside fraud, as there appears to have been some elements of that intertwined, it is my belief that a lot of what happened last year was driven by a combination of lack of transparency, poor risk management, over-leverage, and general industry growing pains. Without diving deep into each of these, the summary takeaway is that 2022 taught us, and more importantly taught new entrants to our space, the right questions to ask, what answers to accept, and what our industry needs to address to truly achieve mass adoption. Also, the fact that the industry has survived the combination of these events in a single year tells me that the resilience of good actors, quality businesses, solid projects, and a belief in the future of finance far outweigh the impact of the inverse. As they say, “what doesn’t kill you, makes you stronger” – I do not think that could be any more applicable to our space.
What were some of the lessons learned for crypto investing last year?
For one, most people do not go through their daily lives thinking about “counterparty risk” – which is a term we use in finance to describe the risks inherent in working with, storing, accessing, executing, or otherwise being exposed in some way to another party in a financial transaction. In the realm of digital assets, counterparty risk is extremely important to understand, as was made exceedingly clear in many of the events that unfolded in 2022. The learnings that came out of the past 12 months are that ordinary investors are now increasingly starting to ask deeper questions about how assets are stored, if and how assets are lent, asset reserves, and look-throughs into contractual terms to better understand their counterparty risk.
Using FTX as an example, a lot of investors unknowingly exposed themselves to increased risk, simply by keeping their assets on the exchange. What investors learned in the wake of FTX’s collapse was how to better understand who controls their assets, how they are held, if they are backed one-to-one, and the important differences between holding assets on an exchange vs. a true custodial solution. For many people that have been in the industry for several years, conducting one’s own research becomes second nature. However, for some newcomers, these concepts are sometimes lessons learned. We have more work to do to help educate our industry, and 2022 will be a great teacher.
Is self-custody the only option for digital assets?
While this industry was born from the ideas of self-sovereignty, direct ownership, and individual financial control, concepts referred to collectively as “self-custody,” the reality is that it may not always be feasible or practical for every person or entity to self-custody their digital assets. For instance, there are specific laws and regulations that dictate what various account types, institutions, and corporations can and can’t hold, and how and where they must hold certain types of assets. For others, the ease and practicality of storing their assets with a transparent, regulated, qualified custodian that they can trust gives them much more comfort. Regardless of the reason, self-custody is not a one-size-fits-all solution, and it might not be a viable solution at all in certain situations.
The adage “not your keys, not your coins” is often thrown around after events like those we experienced in 2022 to reinforce the ideology of self-custody. Unfortunately, it falls short in helping to better educate would-be investors that there are custodial solutions that meet a wide range of unique needs and use cases. While it is a great tag line, we would do better in helping to further advance the adoption of our industry by explaining the various types of custodial solutions and how to choose the best type of custody for an individual’s specific application.
How does BitcoinIRA think about custody and who you use as service providers?
Providing access to digital assets within our clients’ self-directed IRAs means that we must take the safety and security* of client assets seriously. Therefore, it goes without saying that this is by far our top priority.
Internally, we have robust operational controls, alongside a stringent risk-management framework that guides our business and decision making. BitcoinIRA’s dynamic team combines digital asset expertise, forward-thing technology and application development, IRA domain knowledge, and legal and regulatory compliance, all working in tandem to provide industry-leading service while ensuring the protection of our clients and their assets every day. Fortunately, our team and processes are structured such that they kept us unexposed to the parties involved in the meltdowns we saw in 2022.
Separately, we are proud that BitGo serves as our primary digital asset custodian – offering safe and secure multi-signature wallet management within a fully regulated, qualified institutional cold storage custody solution. BitGo is the leader in digital asset security and custody, providing the operational backbone for more than 1,500 institutional clients in over 50 countries. BitGo also processes approximately 20% of all global Bitcoin transactions by value. We have a tremendous partnership with the BitGo team, and they continue to set the standard for institutional grade, qualified custody.
What do you think will change going forward for crypto regulation?
As I mentioned before, a lot can be, and already has been, learned from the past 12 months. I think I can say with a high degree of confidence that we are collectively smarter as an industry having gone through this past year. I do, however, think much will continue to evolve.
For one, the collective industry should expect some form of regulatory clarity given to the space. For a while, the industry has sought, even begged, for a regulatory framework for which to operate successfully; the lack of which has led to many projects and providers going overseas, out of the purview of domestic regulation. Given what happened with FTX, we expect there will be increased pressure for regulators to implement appropriate rules and guidelines to enable industry providers and participants to operate successfully and without fear of being offsides.
In addition to regulation, I believe the industry will expect more transparency from centralized providers. Already we have seen the adoption of improved “proof-of-reserves” reporting, independent auditing, and a retraction of improper lending practices. These alone do not solve or prevent issues of the past, but they are a meaningful start to a more transparent ecosystem.
Lastly, as aforementioned, I think we will begin to see better due diligence and harder questions asked of our industry. With learning comes understanding, and with better understanding comes better questions. Investors will begin to seek more clarity on where and to whom leverage is given and where there is the greatest risk of exposure. Looking back at some of the events of last year, even as early as the summer, on places like Twitter, people were asking questions about some of the moves happening between the companies that ended up having issues. They just did not know what they were seeing or the right questions to ask. I think that changes going forward. The industry will demand more transparency of significant players, or they will not be significant for long.
What are you looking forward to most in 2023 for digital assets?
Despite price depression, which holds true across asset classes, I am deeply encouraged by the amount of continued development across the entire digital asset ecosystem. From the growth and adoption of Bitcoin’s Lightning Network, to Ethereum’s anticipated upgrades and Shanghai implementation, other layer 1’s like Cardano making significant protocol improvements and building more smart contract capabilities, to the Decentralized Finance (DeFi) space continuing to gain market share of the overall trading volume from centralized exchanges… to me, all of these are signs that the industry isn’t going anywhere. Over the past three years, there have been significant investments in infrastructure making it exponentially easier for new project developers to enter the space. This will give rise to new applications aiming to solve every-day financial friction. I believe we will continue to see incremental movement towards wide-scale adoption of digital finance.
On a macro level, it appears we are starting to see some signs of easing pressure within our economy. The rampant inflation from the past 24 months seems to be subsiding which could lead to, at a minimum, a slowing of rising interest rates. If this proves true, we could see a boon to risk-on assets again, including Bitcoin and other digital assets. We will monitor how the data plays out over the first few months of the year which should be telling for how 2023 will shape up.
Separately, we are hopeful the worst of the contagion impacts within the digital asset ecosystem from 2022 are behind us. Moreover, we are encouraged by the strength and resilience of those still standing. There is a thriving crypto infrastructure ready to take on tomorrow’s challenges, leaving yesterday in the past. We are also a year away from the next Bitcoin halving – that always gives us something to look forward to, while we HODL!
*Cryptocurrencies are very speculative and involve a high degree of risk. See risk disclosures at bitcoinira.com/disclosures.