The Last Trade E062: The Evolution of Bitcoin Custody with Brian Cubellis & Bradley Chambers

The Last Trade: a weekly, bitcoin native, interactive podcast covering where Bitcoin and traditional finance meet on a macro scale. Hosted by Jackson Mikalic, Jesse Myers (Croesus), Michael Tanguma, and a special weekly guest host.

Join us as we dive into what Bitcoin means for how individuals & institutions save, invest, and propagate their purchasing power through time. It’s not just another asset – in the digital age, it’s the Last Trade that investors will ever need to make.

0:00 – Intro to Bradley Chambers & Brian Cubellis
2:00 – A message from Onramp
2:45 – Origins of custody & bitcoin’s unique properties
8:20 – The incentives of Multi-Institution Custody
13:40 – Mitigating risk & scaling bitcoin to the masses
21:30 – Living in a world where we trust institutions
23:54 – Bitcoin is a protocol for money
29:00 – Analogues in technological adoption
33:50 – Different forms of bitcoin custody & tradeoffs
37:55 – Establishing a new custodial standard
45:25 – Advancing security & peace of mind
52:34 – Onramp Multi-Institution Custody
54:04 – Realities of custodial scalability
57:38 – Solving inheritance for bitcoin
1:04:48 – Handicapping risks of bitcoin ownership
1:15:26 – The convergence of digital & physical risks
1:19:14 – The importance of trusted turnkey solutions
1:24:44 – Enabling innovative financial solutions
1:28:57 – Final thoughts & wrapping up
1:32:22 – Outro

The Last Trade Recap: The Evolution of Bitcoin Custody

This episode highlighted our recently published report, “The Evolution of Bitcoin Custody,” and how multi-institution custody is poised to secure the future of this revolutionary asset. Each section detailed below links to the area of the conversation where the given topic was discussed.

Origins of custody & bitcoin’s unique properties

The Onramp team kicked off the discussion by exploring the origins of asset custody, tracing it back hundreds or even thousands of years. We highlight how traditional custody has evolved but remains largely centralized. Bitcoin, however, presents unique considerations as a digital bearer instrument. Unlike stocks or bonds, if something goes wrong with bitcoin custody, there are no fallbacks or ways to recreate the asset. This fundamental difference underscores why custody is paramount for long-term bitcoin ownership and investment.

The incentives of Multi-Institution Custody

Multi-institution custody is a game-changer for bitcoin, fundamentally shifting the incentives and game theory that underpin asset security. Unlike single-entity custody, where one party has unilateral control and can act without accountability, multi-institution custody introduces multiple participants, creating a system of checks and balances.

At Onramp, we utilize a 2-of-3 multi-signature key quorum, leveraging institutional partners like BitGo, Coincover, and Tetra Trust. This structure means that no single entity has unilateral control over the assets. The beauty of this system lies in its inherent incentives for good behavior:

• • Participants are naturally motivated to act in good faith, as they’re being monitored by other parties.
  • For any malicious action to occur, it would require collusion between at least two separate entities – a significantly higher bar than a single entity deciding to act in bad faith.
  • This increased difficulty in compromising the system provides greater assurance and security for bitcoin holders.

Mitigating risk & scaling bitcoin to the masses

As bitcoin continues its journey towards mainstream adoption and potentially higher valuations, the importance of robust custody solutions becomes paramount. Multi-institution custody is a natural evolution in this landscape, offering a more secure and scalable approach to holding significant amounts of bitcoin.

Consider this: as bitcoin potentially moves past $100,000 per coin, the gravity of securing it becomes even more apparent. Multi-institution custody provides:

• • Redundancy and fault tolerance, crucial for high-value assets
  • A bridge between the decentralized nature of bitcoin and the need for institutional-grade security
  • A pathway for larger pools of capital to get comfortable allocating to bitcoin

This evolution in custody is not just about security – it’s about enabling bitcoin to fulfill its potential as a preferred store of value. By reducing custodial risk, multi-institution custody makes bitcoin more attractive to pools of capital seeking both performance and risk mitigation.

Living in a world where we trust institutions

While bitcoin’s ethos is rooted in decentralization, the reality is that we still live in a world where trust in institutions plays a crucial role. Multi-institution custody offers a middle ground – it honors bitcoin’s decentralized nature while providing a framework that can integrate with existing financial structures.

Imagine a future where you can choose your key holders, perhaps including a trusted local bank, with transactions initiated only in person. This vision combines the security of bitcoin’s technology with the familiarity and trust of traditional financial services.

It’s important to remember that even in a bitcoin-centric world, some level of trust will always be necessary. The goal isn’t to eliminate trust entirely but to create systems that minimize risk and maximize security while still allowing for the convenience and services that most people expect from their financial interactions.

By embracing multi-institution custody, we’re not just securing bitcoin – we’re paving the way for its integration into the broader financial landscape, making it more accessible and appealing to a wider audience. This approach could be key to bitcoin’s long-term success and adoption as a global store of value.

Bitcoin is a protocol for money

Understanding bitcoin as a protocol for money is critical. Just as we’ve built our digital lives on protocols like SMTP for email and HTTP for web browsing, bitcoin provides a foundational protocol for financial transactions. This perspective opens up a world of possibilities:

• • Different ways to use bitcoin
  • Various custody solutions
  • Multiple adoption pathways

The beauty of this approach is that there’s no single “right” way to interact with bitcoin. Just as we choose our preferred email client, we’ll see a variety of bitcoin solutions emerge, catering to different needs and preferences. This flexibility is key to bitcoin’s long-term growth and adoption.

Analogues in technological adoption

When we look at bitcoin’s current state, it’s crucial to draw parallels with past technological revolutions. We’re essentially in the “early ’90s of the internet” for bitcoin. Consider these points:

• • The first iPhone couldn’t even send picture messages – now it’s a core feature
  • Loading a 3MB audio file on AOL once took hours – now it’s instant
  • Early websites were rudimentary compared to today’s standards

These examples remind us not to underestimate bitcoin’s potential for rapid evolution. While we might overestimate short-term changes, we often vastly underestimate what can be achieved in a decade or more. The key is to maintain a long-term perspective and embrace the journey of technological progress.

Different forms of bitcoin custody & tradeoffs

As bitcoin matures, we’re seeing a diverse ecosystem of custody solutions emerge, each with its own set of tradeoffs:

• • Exchange custody: Convenient for trading, but comes with counterparty risk
  • Mobile wallet apps: Easy for small amounts, but potentially vulnerable to device security issues
  • Hardware wallets: Great for tech-savvy users, but require careful management of backup phrases
  • Multi-institutional custody: Balances security and usability, ideal for larger holdings and long-term storage

The key is to understand that there’s no one-size-fits-all solution. Different custody methods serve different purposes, and it’s perfectly valid to use a combination of approaches. As the bitcoin ecosystem evolves, we’ll likely see even more innovative custody solutions emerge, further expanding our options for securely holding and using this revolutionary digital asset.

Establishing a new custodial standard

As bitcoin continues to evolve, multi-institution custody is emerging as the new standard for securing the asset. This innovative approach addresses many of the shortcomings of traditional custody methods while maintaining the core principles of bitcoin’s decentralized nature.

Key benefits of multi-institution custody include:

• • Enhanced security through distributed key management
  • Reduced risk of single points of failure
  • Improved peace of mind for bitcoin holders
  • Easier integration with existing financial structures and services

By leveraging the strengths of multiple trusted institutions, this new custodial standard provides a robust framework that can scale with bitcoin’s growing adoption and increasing value.

Advancing security & peace of mind

Multi-institution custody represents a significant leap forward in bitcoin security, offering users unprecedented peace of mind. This approach addresses several key concerns:

• • Reduced personal attack surface: By distributing keys across multiple institutions, the risk of physical threats or “$5 wrench attacks” is greatly diminished.
  • Minimized technical burden: Users no longer need to worry about the complexities of managing their own keys or backup phrases.
  • Elimination of single points of failure: With multiple institutions involved, the risk of losing access to funds due to a single entity’s failure is significantly reduced.

This enhanced security model allows bitcoin holders to sleep better at night, knowing their assets are protected by a robust, fault-tolerant system that doesn’t compromise on the core principles of bitcoin ownership.

Realities of custodial scalability

As we look at the trajectory of bitcoin adoption, it’s crucial to address the realities of custodial scalability. The current landscape presents some significant challenges:

• • Self-custody is not feasible for institutions from a fiduciary perspective
  • Third-party custody centralizes the asset, which goes against bitcoin’s core principles
  • Exchange custody, while convenient, comes with significant counterparty risk

These issues highlight a fundamental problem: how can bitcoin truly scale to become a global asset worth tens of trillions of dollars with the current custody options? The answer lies in innovative solutions like multi-institution custody, which addresses many of these concerns by distributing risk and control.

Solving inheritance for bitcoin

One of the most overlooked aspects of bitcoin custody is inheritance planning. This is a critical issue for several reasons:

• • Many bitcoin holders view it as a multi-generational asset
  • Traditional self-custody methods often lack clear inheritance pathways
  • Failure to plan for inheritance could result in the loss of significant wealth

Multi-institution custody offers a solution to this problem by providing a structured approach to inheritance. It allows for seamless wealth transfer without compromising on security or control. This is particularly important as bitcoin matures and becomes a more significant part of people’s overall financial planning.

Handicapping risks of bitcoin ownership

When considering the risks associated with bitcoin ownership, it’s important to focus on real, present dangers rather than hypothetical future scenarios. Some key risks to consider include:

• • Personal security risks, such as the “wrench attack” scenario
  • Social engineering attacks targeting individuals’ login credentials
  • The risk of missing out on larger allocations due to custody concerns

Multi-institution custody helps mitigate many of these risks by distributing control and reducing single points of failure. It provides a balance between security and accessibility, allowing individuals and institutions to confidently increase their bitcoin allocations without compromising on safety.

As we move forward, it’s crucial to continue evolving custody solutions that address these real-world risks while enabling bitcoin to fulfill its potential as a global store of value. By focusing on practical, scalable solutions like multi-institution custody, we can help ensure that bitcoin remains secure, accessible, and poised for widespread adoption.

The convergence of digital & physical risks

As bitcoin’s value continues to rise, we’re witnessing a concerning convergence of digital and physical risks that many in the community haven’t fully grasped yet. Here’s what you need to consider:

• • Digital threats are evolving: Sophisticated online attacks targeting bitcoin holders are becoming more prevalent.
  • Physical security is increasingly important: As bitcoin’s price appreciates, the risk of physical attacks or “wrench attacks” grows exponentially.
  • Data leaks create vulnerabilities: With numerous exchange hacks and data breaches, it’s becoming easier for malicious actors to identify high-value targets.

Imagine a scenario where bitcoin hits $350k or even $1 million. Suddenly, a modest allocation becomes a multi-million dollar target. Are you prepared to protect not just your digital assets, but your physical safety and that of your family?

The importance of trusted turnkey solutions

As the bitcoin ecosystem matures, we need to shift our focus towards developing trusted, turnkey solutions that cater to a broader audience. Here’s why this is crucial:

• • Mass adoption requires simplicity: Most people don’t want to deal with the technical complexities of self-custody.
  • Security and convenience must coexist: Solutions need to balance robust security measures with user-friendly interfaces.
  • Professionalization of custody: As bitcoin grows, we need more sophisticated, institutional-grade custody options.

Multi-institution custody represents a significant step forward in this direction, offering a blend of security, ease of use, and professional management that can appeal to both individual investors and institutions alike.

As we continue to build on this foundation, we’re creating an entirely new financial ecosystem that combines the best of traditional finance with the revolutionary potential of bitcoin. The future of bitcoin custody is here, and it’s more secure, accessible, and innovative than ever before.

Final thoughts

As we conclude our discussion on the evolution of bitcoin custody, it’s clear that multi-institution custody represents a significant leap forward in securing and scaling bitcoin. This approach addresses key challenges in personal security, technical complexity, and inheritance planning, while maintaining the core principles of bitcoin ownership. As bitcoin continues to grow in value and adoption, solutions like Onramp’s multi-institution custody will play a crucial role in making this revolutionary asset more accessible and secure for a wider audience.