Next-Generation Custody-Based Approach for Securing the Future of NFTs

Blockchain, News, Opinion | April 12, 2022 By:

Hacks – bad faith actors are not only impacting decentralized exchanges but targeting lucrative NFT holders as well. Until industry leaders can come up with a solution to protect these valuable assets, particularly for institutional holders with high stakes, NFT technology may never meet its full potential. Hackers have already succeeded in stealing coveted Bored Ape Yacht Club NFTs; if users can’t even trust the security of their digital art, then there’s no chance of bringing NFTs and smart contract technology to crucial documents like digital identification or mortgages. But custody-based solutions can create the foundation of trust for NFTs to be true game changers.

Chartered digital custodians combine the regulatory scrutiny of a traditional bank with the cutting-edge decentralized technology provided by blockchain. And security experts can provide the authenticity of a Sotheby’s or Christie’s by reviewing smart contracts for vulnerabilities and vetting sellers based on reputation. Custodians provide the security of a cold wallet and efficiency of a hot wallet – an active vault, if you will – without the risks and expenses of moving an asset between the two. 

NFTs can be secured by harnessing the power of hardware security modules (HSMs), which are hardware computing devices that safeguard and manage digital keys. Since NFT ownership is managed via private keys, anyone who gains access to the private key also gains access to the digital asset and can permanently move it to another wallet. Because each NFT is linked to a unique key, any theft or compromise makes it nearly impossible for the rightful owner to recover their NFT. An HSM approach solves this issue, complying with international standards for creating and storing private keys and utilizing third-party verification for a solution that’s better than cold storage.

For the most part, NFT marketplaces hold the private keys for digital assets on their platforms. If these platforms are compromised, hackers can steal large numbers of NFTs, and even if the platform boasts strong security measures, users can leave themselves vulnerable by choosing weak passwords or foregoing layers of security like two-factor authentication. Custodians can take the guesswork out of these transactions and can offer one of the most tried and tested forms of security: insurance. Standard Custody & Trust Co. plans to custody NFTs by Summer 2022.

Blockchain transactions are still mystifying and intimidating for much of the population, and expecting new users to thoroughly research NFT security risks is unrealistic. Banks gave people a safer way to store their fiat than under the mattress. It’s time for digital asset custodians to do the same with NFTs.