Angie Lau: You can be a student or an institutional investor, but anyone can lose their keys to their crypto. Today, we dive into the sensitive nature of custody solutions for enterprise, for individuals. Are we there yet? Is trust still an issue? And what happens when you lose access to your crypto? Whose responsibility is it? These are all questions more and more institutions and investors are searching answers to, in Asia and beyond.
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.
Just like a safe has a combination lock, crypto is secured with keys of its own. And just like a safe, you can sometimes lose or forget your password, and therein lies the issue.
Today, we are joined by Israeli-based institutional custodian Fireblocks, who works with more than 100 financial institutions and, according to the firm, secures more than US$150 billion in digital assets every month.
Now, Fireblocks was recently sued by one of its clients — staking platform StakeHound — who claims that it lost access to more than 38,000 Ether and that Fireblocks bears responsibility.
The bigger picture here is what does this say about the wider industry? It’s a growing industry, custody solutions. It’s also one where chain of custody can be murky. And then who’s held responsible?
Well, joining me today is the CEO of Fireblocks himself, Michael Shaulov. Michael, welcome to the show.
This is a growing industry. This is a growing part of the industry. In this case, it got a little bit messy. Thank you so much for joining us from your headquarters in New York.
Micahel Shaulov: Thanks for having me.
Lau: All right, let’s dive right into it. We caught wind of this lawsuit from one of your clients that said that Fireblocks was in part responsible for it losing access to 38,000 ETH. That’s a lot of money. It’s now suing Fireblocks in a Tel Aviv court. Can you get us up to speed here? What happened?
Shaulov: There are a couple of things that were caught up in the media, which are a bit incorrect, and also there are several reasons why they were basically brought up like this in the lawsuit. But one of the things that are actually very important to make clear is that neither that client nor any other of our clients actually ever lost keys to their wallets. Even that client, all of their keys to their wallets are basically backed up. The way that our system works is that all those keys are being backed up every 10 minutes across multiple cloud providers, across multiple availability zones. And there are additional procedures in which it’s also backed up by third parties. Honestly, it’s also the case with this particular client. The situation is that with all their production environments, they’re still using us and they’re still using the platform.
So there was a bit of a confusion there in terms of how it was presented through the lawsuit and in terms of how it was interpreted by the media, which I think it’s important for me not only to stress it on behalf of Fireblocks, but also, generally speaking, on behalf of the entire industry, that in terms of where we are today from basically providing the base infrastructure for custody technology and the ability to safe keep keys. The industry is at a very immature stage. I don’t think that any one of the big providers or anyone else has had any incident in terms of taking out the custody itself.
Now, specifically, as it relates to that incident, part of what Fireblocks is really famous for is enabling the cutting edge or the bleeding edge of this industry. So there are the basic things that most people are interested in in terms of storing their Bitcoin, trading Bitcoin and things like that. But one of the things that Fireblocks really enables is some of the cutting-edge use cases, such as staking, such as DeFi, interaction with smart contracts. And honestly, in the case of this particular client, where they were essentially stretching it into is something that is called liquid stacking, which is a combination of staking and DeFi together. Specifically, they were basically engaging in something that is in the preparation of the Ethereum 2 network that is not even live yet.
So just to explain to the audience, this particular case is sort of abnormal because what that specific client was operating is basically on the far edge of what currently this industry is doing. And clearly, when you look historically into almost every innovation in this space or in any other space, autonomous driving or anything else, clearly there are risks. Usually, when people operate in this far edge of the innovation, it’s part of their responsibility to understand really well what they are doing, how they are engaging, and how they are building their products because they are operating in a sort of borderline area where it requires a lot of responsibility not to make mistakes because some of the things that are being done there are being done the first time.
This is the first thing that I want to make clear because of the ways that that was interpreted by people was that this is common and this is something that is just generally risky if a super reputable provider like Fireblocks that currently powers about 400 institutions, and we’ve secured today almost US$1 trillion of transactions, that can happen to us, then what does it mean to the rest of the industry? Nothing can be farther from the truth because essentially everything was functioning properly in terms of the core offering services and so on. This is something that is very important to put out there.
Lau: But let me just pause right there, because a lot of the audience aren’t so deep into crypto and blockchain to understand the nuance. We want to keep catching them up because you’re totally right. The headline is really scary. You’ve got 38,000 ETH. It’s today worth US$90 million, one company says, `Hey, I lost my keys and I’m going to sue Fireblocks, who I’ve been working with, because they were supposed to help me with our keys.’ That’s really just what the top headline is.
The nuance is so much more important. You’re totally right. It’s not, `Here’s a 38,000 ETH. I’m going to stick it somewhere.’ For most people, they have it in a hard wallet, cold wallet, or if it’s a hot wallet, if you’re holding it with a custody provider, a custody solution, and or you have your own wallet that’s a USB, and you stick it in your pocket with some passwords. We’re not talking about that here. In this case, what you’re saying is that this is cutting-edge stuff. There was staking involved.
This is a staking firm. They are looking to leverage. They are looking to play within the margins of 38,000 ETH. Whose ETH is it? Are you leveraging your clients, et cetera, et cetera. This is part of their business innovation that they were working with you on. So to be enormously clear, we’re talking about the gray space right now.
Shaulov: Yeah, we’re talking about something that was in the space — this is probably the sub-zero-one percent of the activity that is being done that is so far out from [waht] most institutions, most people are actually engaged in. It’s not that it’s not important that we are not talking here about real crypto real money. But it’s important to stress to people that the infrastructure and the ability of providers like ourselves to really secure a large amount of funds, with insurance and all the procedures in place, is actually a pretty safe capability today.
Now, specifically, how innovation needs to proceed in this space — the space is continuously disrupting itself. So this sort of 0.1% of the experiments that are being done are important. Historically, of course, we’ve seen quite a few incidents. Then during those experiments, things were lost or stolen. But again, it’s not like the common situation for most investors that are operating in the space.
Lau: Got it, but let’s dive into that a little bit deeper. If the keys were not lost. Where is this access to 38,000 ETH? Is that lost forever?
Shaulov: That’s a good question as well. Maybe I’ll explain the overall procedure in terms of what’s going on with Ethereum 2. Specifically with Ethereum 2 staking…
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