Cobo had the pleasure of participating in the Belt & Road Summit 2023. Our Head of Risk and Compliance, Eugene Wong, engaged in a thematic breakout session alongside other esteemed panelists. The Belt and Road Summit is a premier international platform for promoting business collaboration along the Belt and Road. The Summit gathers senior government officials and business leaders from countries and regions along and beyond the Belt and Road to exchange insights on multilateral co-operation and explore concrete business opportunities.
Theme: Digital Technology in GBA (Greater Bay Area) and Belt & Road Development
- Eugene Wong, Head of Risk and Compliance, Cobo
- Dominic Maffei, Digital Asset and FinTech Strategy Lead, SCB
- Yishi Wang, CEO, OneKey
- Rachel Lee, Senior Manager, Hong Kong Cyberport Management Company Limited (Host)
As one of the panelists representing Web3 advancements, Eugene showcased our product and engaged in a panel, discussing topics about blockchain, regulations, adoption, and digital asset custody. The event itself was a success and led to valuable connections with institutions such as Standard Chartered and OneKey, as well as fruitful discussions with fintech firms.
Web3 is a broad term that describes infrastructure, platforms and applications that are driven by distributed ledger technology (DLT) or blockchain. How does Web3 impact us on our day-to-day lives?
Eugene: On an industrial level, DLT is used for information verification and identity authentication. For example, Tencent has been using DLT to perform electronic invoicing and supply chain tracking in China. Many large tech companies are advancing in this direction.
The integration of blockchain technology with digital currencies and assets has also led to major advancements in the finance space. Barriers to accessing financial services are lowered for many people. For example, stablecoins built on blockchain can facilitate cross-border payments at much lower costs than traditional systems like SWIFT. This is especially impactful for users in developing countries who frequently need to make international money transfers. Overall, the synergies between blockchain, digital currencies, and assets are driving major advancements and increasing accessibility across the global financial system.
Are digital wallets the key to mass adoption in Web3?
Eugene: Web3 wallets are a vital gateway to accessing different layers of the Web3 ecosystem. Whether for individual users or institutional custody, wallets provide the essential functions of safeguarding digital assets and managing accounts. Their integration with Web3 apps allows participation in a secure manner, while abstracting away technical complexities.
There are 2 main challenges to address in order for Web3 to gain mass adoption:
- Processing capacity: Currently, the volume and speed of data processing (TPS) with blockchains is not on par with centralized processing systems.
- This Security & UI: Many users still struggle with exploits, technical complications, and unintuitive designs when attempting to interact with Web3 applications.
For example, Web2 platform Alipay has achieved mass adoption due to the combination of ease-of-use and brand trust in the Alibaba group. As Web3 expands, the evolution of intuitive, yet robust wallets will remain crucial for mass adoption by ensuring funds are kept safe and interactions are seamless.
What type of asset custody method do institutions prefer?
Eugene: Institutional custody of digital assets involves more than just security. Considerations like collaboration, compliance, and risk management are also critical. To address these needs, custodial platforms like Cobo have a myriad of tailor-made solutions. For example, Cobo implements multi-party computation (MPC) where private key-shares are spreaded across multiple parties, preventing single points of failure.
Meanwhile, regulators are also gaining greater comprehension of Web3 custody requirements. As their understanding improves, regulatory policies are adapted to better accommodate the nuances of crypto custody. The advancements in custodial technology coupled with maturing regulations provide institutions with more custody options and increased accessibility. Overall, the improvements on both the technology and policy fronts are converging to make digital asset custody easier for institutional participants.
For institutional adoption, would the use of third party custodian be more favorable than self custody?
Eugene: Cobo has been dealing with various institutional users and offers a comprehensive suite of custody technologies from full custody, to MPC co-managed custody, and fully decentralized smart contract-based self-custody.
We can observe institutions adopt the full custody solutions because of a few reasons. 1st - is their own regulatory requirements. Eg. It’s more preferable to make use of 3rd party custodians for hk type 9 licensed virtual asset fund managers to avoid conflict of interest. 2nd reason - doing co-managed/self custody requires the institution to have certain technical capability to safekeep their own private key. Some institutions would prefer to get rid of the technical development and focuses only on their strength eg. trading, doing investment research.
But we can see: more clients have shown interest in the co-managed MPC custody solution and take part in safekeeping part of the private key shard to eliminate a single point of failure, especially after the failure of multiple centralized institutions during the recent years.
What are the key regulatory challenges we see in asset custody for institutions and individuals?
Eugene: The Web3 industry is rapidly changing and at the same time the regulators all over the world are continuously learning and designing the correct regulatory approach towards the VA industry. As of now, most jurisdictions do not have a comprehensive licensing regime applicable to all VA industry players. The regulatory focus in many regions is currently centered on digital asset exchanges and trading platforms. However, there is a lack of a clear licensing framework for digital asset custody, especially full custody. This creates ambiguity and requires custodians to put in extra effort to build trust.
In contrast, individuals with self-hosted wallets face different challenges like Travel Rule compliance as self-custodian wallets inherently pose higher money laundering risks.
Therefore, custodians have work to do on both fronts - enhancing clarity from regulators on their business models while also meeting evolving compliance expectations around areas like the Travel Rule. A balanced regulatory approach that recognizes the nuances of different custody models will help drive adoption while protecting investor interests.
What are the key considerations individuals and businesses should keep in mind when choosing a wallet or custody solution for their virtual assets?
Eugene: Individuals and businesses should decide a suitable wallet or custody solution according to their own needs and technical capability.
Individuals and businesses should decide a suitable wallet or custody solution according to their own needs and technical capability.
When evaluating crypto custodians, having a strong technical foundation is important. Companies like Cobo have built proprietary solutions for full custody, MPC co-management, and smart contract custody.
Additionally, company-level factors should be assessed including licensing status, certifications obtained, past performance and breach history. A strong clientele in institutional customers can also validate a custodian's reliability and track record.
Ultimately, individuals and institutions should look for custodians with robust technical custody architectures, compliance with regulations, and a reputation for security and performance based on past client experiences. A combination of cutting-edge technology and trustworthy business practices is key.
Looking ahead, what are some of the emerging trends and opportunities that Web3 technology presents for TradFi, and how can they prepare themselves to embrace these changes?
Eugene: For Web3 mass adoption, we have to address the following 2 core challenges,
- Solving Performance Capacity - Can be done so by upgrading and improving blockchain throughput. On the other hand, the emergence of many layer 2 solutions and sidechains brings alternative solutions to address the TPS challenge.
- Improving interface usability & security - Areas such as zero-knowledge (ZK) and DeFi, there are still many innovative attempts underway, which also bring a lot of opportunities.
For TradFi institutions, it would be prudent to closely monitor the emerging technologies and regulations in the Web3 ecosystem, even amidst differing views on its prospects. Cultivating a sizable and active user base is essential for achieving mass adoption of Web3, while enabling seamless transition of assets between centralized and decentralized platforms. Much like the telecommunications and AI industry, Web3 has the potential to spur the next wave of innovation. Establishing relationships with influential Web3 companies, some of which have already been operating for 6-7 years like Cobo, can help keep your organization apprised of key developments in this burgeoning space. Our extensive experience can offer invaluable perspective and guidance as the digital asset industry continues to evolve.
Quick Overview of Cobo
Cobo is a globally trusted leader in digital asset custody solutions. As the world’s first omni-custody platform, Cobo offers the complete spectrum of solutions from custodial wallets to non-custodial wallets including MPC custody and smart contract-based custody, as well as wallet-as-a-service, a DeFi management platform (Argus), and an off-exchange settlement network (SuperLoop). Trusted by over 500 institutions with billions in assets under custody, Cobo inspires confidence in digital asset ownership by enabling safe and efficient management of digital assets and interactions with Web 3.0. Cobo is SOC2 Type 1 and Type 2-compliance-certified and licensed in 5 jurisdictions.
For more information, please visit www.cobo.com.