Introduction
In an era dominated by digitization, organizations are navigating uncharted waters with the rise of digital assets. These assets, ranging from cryptocurrencies to tokenized securities, present unique challenges for custody providers like BNY Mellon as well as for organizations that intend to self custody their assets.
To ensure the security and integrity of digital assets, organizations must choose a storage and custodial mechanism that is secure. However, just as important as the mechanism for storing their assets is the means by which they protect their activity. Meticulous rules and policies must be established within the organization in order to ensure that their assets are protected and that all transactions meet the requirements for the organization.
There are numerous recent examples where incorrect or missing policies have lead to huge financial losses from organizations.
Drawing from authoritative insights and industry best practices, this article sheds light on the key considerations for creating secure rules and policies for organizations entrusted with managing digital assets.
Understand the Digital Asset Landscape
The first consideration to keep in mind is that digital asset rules and policies are not “one size fits all”. It's crucial to understand the diverse nature of digital assets as well as how those assets will be used within the organization.
Cryptocurrencies, tokenized RWAs, non-fungible tokens (NFTs), all should be evaluated individually. Each type of asset has distinct security requirements and associated risks. This coupled with the fact that each asset type will also be used differently, implies that a comprehensive understanding of these assets and their usage must forms the bedrock for effective rule formulation.
Digital assets operate in a dynamic environment with rapidly evolving threats. Conducting a thorough risk assessment is imperative. This involves identifying potential vulnerabilities, evaluating the likelihood of occurrence, and gauging potential impact. By categorizing risks into low, medium, and high, you can tailor policies to address each category's unique challenges.
Multi-Layered Controls
Next, organizations must realize that they need to take a multi-layered approach towards securing and controlling their digital assets. A robust security framework comprises multiple layers of defense. Implement stringent authentication protocols, encryption standards, and access controls. Multi-signature wallets and hardware security modules (HSMs) provide an additional layer of protection against unauthorized access and cyberattacks.
Digital asset custody hinges on striking a balance between accessibility and security. Hot wallets offer quick access but are susceptible to hacking. On the other hand, cold storage—keeping assets offline—is highly secure but can hinder immediate withdrawals. A well-defined policy that dictates the allocation of assets between these storage types is essential.
Organizations should leverage the same multi-layered strategies for their custodianship as well as for their rule and policy controls. Having multiple systems that can perform verifications of transactions to ensure they are compliant with an organizations rules and policies is critical to the security of these transactions. It can be beneficial to have redundancy in these validations as well so you are not just relying on a single check, but in fact running multiple verifications of a transaction before accepting, sending, or storing assets across multiple systems.
The digital realm is ever-evolving, and so are cyber threats. Stay proactive by monitoring industry trends, emerging vulnerabilities, and new attack vectors. Update your policies accordingly to fortify your security posture. Continuous evaluation of security measures is paramount. Regular audits by independent third parties ensure adherence to policies and identify potential gaps. Penetration testing simulates real-world attacks, helping uncover vulnerabilities before malicious actors exploit them.
Regulatory Compliance
Protecting digital assets is not just a programmatic security consideration. The digital asset landscape is governed by a patchwork of regulations. Staying compliant with applicable laws and regulations is non-negotiable. Regulation in the space is constantly evolving and sometimes being called into question. This can cause significant challenges for organizations trying to navigate these regulations across jurisdictions. It is important to collaborate closely with legal experts to ensure your policies align with the evolving regulatory landscape.
Programmatic rules and controls can help to quickly and confidently ensure that your organization is meeting the regulatory requirements for your jurisdiction. If these controls can be developed in such a way that the organization can easily be configured, then it is also feasible that the firm can adjust to the changing regulatory landscape without undue burden on the internal teams.
Operational Procedures
Human error remains a prominent threat in all financial sectors. This is especially true in digital assets where the technology is still new and there irreversible consequences to incorrect actions being taken. Comprehensive training programs should educate employees about best practices, security protocols, and potential social engineering tactics. Regular awareness sessions foster a culture of vigilance against phishing attacks and other forms of manipulation.
Despite robust preventive measures, incidents can occur. An efficient incident response plan outlines steps to contain, mitigate, and recover from security breaches. This plan should be regularly updated and tested to ensure its efficacy in real-world scenarios.
From a client perspective, transparent communication builds trust. Clearly articulate your security policies, procedures, and the measures you undertake to safeguard clients' assets. This transparency not only reassures clients but also demonstrates your commitment to their security. In the event of an incident, there should be clear guidelines on client communication procedures. During the time of an actual incident, tensions and stress levels of employees are incredibly high. If something is communicated to clients incorrectly or rumors start to circulate, this can only exacerbate an already challenging situation. Set expectations for what information will be communicated, when, how, and by whom, so that clients and employees can can ensure that they are taking all the proper actions to respond to the given incident.
Conclusion
As organizations take on the responsibility of safeguarding digital assets, either as a service to their customers or for their own needs, their success hinges on the strength of their rules and policies. By understanding the unique nature of digital assets, implementing a multi-layered security approach, and staying agile in response to emerging threats, these custody providers can confidently navigate the complexities of the digital asset landscape while ensuring the security and peace of mind of their clients.