Research Summary
This report revisits the omnibus model for digital asset custody, highlighting its benefits and relevance in the rapidly evolving digital asset market. The report discusses the operational, risk management, and security advantages of the omnibus model over the segregated model. It also introduces the multiparty computation (MPC) model and discusses the SEC’s proposals for Registered Investment Advisers (RIA) custody.
Key Takeaways
Omnibus Model for Digital Asset Custody
- Definition and Function: The omnibus model combines clients’ assets across multiple digital asset private and public key pair groups, segregating funds at the books and records level. This model allows custodians to track assets held by each client.
- Security and Control: The omnibus model provides greater control over risk management by offering custodians the flexibility to manage key generation, replacement, and distribution of assets across different storage methods.
- Common Misconception: Contrary to the belief that the omnibus model results in a “honeypot” of assets, in practice, omnibus custodians may have more groups of master key pairs than clients on the platform, enhancing overall security.
Comparison: Omnibus vs. Segregated Model
- Impact on Liquidity: The omnibus model allows custodians to maintain a liquid position to meet trading or withdrawal needs in a timely manner, unlike the segregated model which may require complex processes to move funds from offline to online storage.
- Transaction Fee Efficiencies: Omnibus wallets give custodians more flexibility in managing fees using tools such as aggregation and batching. They also cover on-chain transaction fees.
- Privacy: The omnibus model enhances client privacy as funds are not transferred to absolutely segregated addresses, preventing addresses from being linked to individual clients.
Multiparty Computation (MPC) Model
- Definition and Function: MPC is a recently developed model that distributes private keys across multiple entities involved in a transaction or asset management. It ensures that no single party has complete access to multiple private keys or can manipulate the computation to learn new information.
- Advantages and Challenges: While MPC offers advantages such as privacy, security, and verifiability, it also presents challenges such as complexity and trusted setup, making it less accessible to non-cryptography experts.
SEC Proposals for RIA Custody
- Enhanced Safeguarding Rule: The SEC proposed an “Enhanced Safeguarding Rule for Registered Investment Advisers” in February 2023, which included additional guidance for digital assets. This proposal may help RIAs understand what regulators are seeking when defining a qualified custodian.
Actionable Insights
- Due Diligence: Clients should perform due diligence when choosing a custodian to understand exactly what segregated custody entails and the extent to which a custody solution is “omnibus” or “segregated”.
- Regulatory Compliance: Digital asset custodians, exchanges, and service providers should prepare for potential changes in federal custody requirements by the SEC, which may require further regulatory approval.
- Understanding MPC: Custodians and investors should familiarize themselves with the MPC model, its advantages, and challenges, to evaluate its suitability for their needs.
