What it takes to keep crypto safe
Part two of a five-part series on strengthening Canada’s blockchain ecosystem
The safeguarding of private keys is a critical challenge for the crypto space, and Brane is offering a strong solution.
ISTOCKPHOTO / GETTY IMAGES
Custody solutions catalyzing broader sustainable crypto adoption
They’re here and growing fast – and blockchain and decentralized finance have the potential to “change the way the world is functioning,” believes Patrick McLaughlin, founder of Brane Capital.
The expansion of blockchain knowledge is also accelerating. With support mounting for the continuing development of a robust, secure and resilient digital currency ecosystem, “growth will outstrip what we currently envision,” he says. “The value of cryptocurrency in circulation has already surpassed US dollars, and this is just the beginning.”
While he is “optimistic about the potential of blockchain and cryptocurrencies to transform the way the world exchanges value,” Mr. McLaughlin also sees an urgent need to ensure investors are protected. That’s why he founded Brane, a Canadian blockchain innovation company offering institutional-grade custody solutions to regulated financial institutions.
“Best practices and government oversight exist for a reason, and I don’t see how the industry can grow in a sustainable manner without proper custody,” he says. “Our mission is good custody, which we see as an essential catalyst for broader, sustainable adoption of blockchain technology.”
Decentralizing risk for better protection
An integral aspect of cryptocurrencies, private keys allow investors to control their assets. While blockchain technology offers a transparent and immutable record of cryptocurrency ownership, the security of that ownership of crypto depends on the safekeeping of investors’ private keys.
One of the biggest concerns revolves around lost keys. “We have to recognize that people make mistakes, and past experience shows that even the world’s biggest companies sometimes get cybersecurity wrong,” says Mr. McLaughlin. “This inspires a certain level of pragmatic humility in designing a truly safe and reliable crypto custody solution.”
Entrusting private keys to an independent custodian – one that’s not affiliated with the exchanges where crypto assets are traded – enhances safety, and Brane set out to create a highly secure solution by eliminating single points of failure, he says. “By decentralizing risk, we can anticipate and prevent mistakes, conflicts of interest and fraud.”
“Best practices and government oversight exist for a reason, and I don’t see how the industry can grow in a sustainable manner without proper custody.”
Boxes, locks and keys
To illustrate the concept, Mr. McLaughlin suggests picturing Brane’s blockchain-based vault technology as a virtual lockbox for crypto with multiple locks and multiple keys for maximum security.
Each of those locks and keys represents potential points of weakness. Storing them all in a single location would defeat the purpose, since “this would mean centralizing risk,” says Mr. McLaughlin. “That’s why we safeguard private keys using multiple technologies – so no single individual, and no single technology, is ever fully entrusted with control of the assets.”
Another essential feature of Brane’s custody model is a recovery protocol that protects ultimate access to the crypto assets, he adds. “In a disaster scenario where people in key authority roles are compromised, our client still has a means to recover the funds. We have built a solution that protects institutions and investors from many of the risks we have seen leading to loss of crypto.”
Each Brane-powered custody account is governed by an authority matrix, a list of points of contact required for every transaction. “You might have someone initiating the transaction, like a broker or dealer, which is followed by verification from an internal audit team that would ensure everything is in order,” Mr. McLaughlin notes. “The next step is getting approval from a quorum of people who have a fiduciary duty to protect the assets held in the vault.”
Only upon completion of all the prerequisite approval steps can the transaction be pushed to the blockchain, he says. “It’s not finalized until all the conditions are met and verified by the authority matrix, which has the power and responsibility over different steps in the workflow.”
A healthy ecosystem and good governance
“The beauty of blockchain is that it’s decentralized, so all participants hold each other accountable for the accuracy of information. Coupled with the right technology solutions, this can help address the issue of trust,” says Mr. McLaughlin, who stresses that this system of verification doesn’t eliminate the need for regulatory support. “Good governance and regulatory standards are necessary elements, rather than a threat, to decentralized finance.”
Taking best practices from the traditional financial ecosystem and applying them to the crypto space can boost safety and accountability, he believes. “The financial capitals of the world have sound infrastructure and a healthy ecosystem supporting traditional markets, which gives people the confidence required to participate. Now, it’s a matter of figuring that out for the blockchain space.”
In Canada, which already has a strong global reputation for regulating traditional finance, efforts are underway to create a regulatory framework designed to protect crypto investors. Brane is taking an active role by developing and providing purpose-built custody solutions.
“As a custody service provider, we provide the infrastructure to keep assets safe and maintain an independent record of their value,” says Mr. McLaughlin. “In Canada, we only deal with institutions that are in good standing with regulators. And in the global landscape, we’ll only work in well-regulated jurisdictions.”
Brane consistently submits its information security and management practices to third-party audits, and is certified to global standards including NIST Tier 4 – the first Canadian company, in any industry, to achieve that distinction. For private key safekeeping, the organization is working with the best and most secure partners in the world, including the Thales Group, one of the largest defence and security companies.
“More and more people are seeing value in cryptocurrencies, but we have to do more to keep these assets safe for everyone, including people like my mom and dad,” says Mr. McLaughlin. “That’s why I see custody as the most important part of the market infrastructure – because it all comes down to how your assets are kept safe.”
For more stories from this feature, visit globeandmail.com
To view the full report as it appeared in The Globe's print edition: Cryptocurrency Series 2021