custody Explore Tripartite Digital Asset Custody Arrangements

An ongoing FinTech experiment is attempting to set up a new form of shared custody between three entities, leveraging Web3.0 technology. I have deliberately read and written extensively in order to refine my language preference; however, the original narrative for this summary is somewhat odd. I think the rephrased version more accurately conveys my understanding of the experiment's purpose. This experiment seeks to examine whether a three-way shared custody setup between investors, investment managers, and decentralized exchanges (“DEx”) can be created to facilitate post-trade operations, while guaranteeing that investors still keep possession of the digital asset. The traditional finance ("TradFi") ecosystem necessitates breaking down the problem of purchasing a financial asset into smaller, addressable chunks. This is done through a series of front, middle, and back office processes handled by various financial intermediaries who each provide a slice of service. These include providing financial advice on matching assets and liabilities, selecting the best suitable financial asset for an envisaged need, managing the portfolio of financial assets to monitor returns, handling the post-trade and asset serving operational process, and making sure records of financial asset ownership are synchronized from a depository to a custodian to investors. While this is an inefficient process, it is still a product of necessity. A key concept in the DeFi ecosystem is that investors always maintain control of their digital assets. Based on this, it can be concluded that the CeFi's responsibility of keeping the definitive account of financial asset ownership, historically placed in the hands of depositories and custodians, must be decentralized through the use of cutting-edge technology. Upon further examination, they identified a new protocol to solve this challenge. Previously, the FinTech had explored the feasibility of employing Multi-Signature SmartContracts to allow investors to maintain control over their digital assets, entrust basic operation decisions to the investment manager, and still retain power over critical operations. Though the use of Multi-Signature SmartContracts demonstrated success, it exposed an issue with the investment management model. Specifically, the fund manager must use centralized exchanges or DEx, necessitating both the investor and investment manager to transfer the digital asset to the intermediary. After further research, they uncovered a protocol to address this dilemma. Maintaining its belief in investors having control over digital assets, the FinTech developed a novel Web3.0 technology to facilitate an arrangement for shared custody among the investor, investment manager, and exchanges. The FinTech proposed to investigate Multi-Signature SmartContract as the fundamental element in order to evaluate this new approach. Moreover, to arrive at a tripartite shared custody, two variants of the Multi-Signature SmartContract would be tried. For the initial model, it is projected that two Multi-Signature SmartContracts will be put into effect; one to build the link between the investor and the investment manager, and the other to construct the connection between the investment manager and the exchange. This pair of Multi-Signature SmartContracts will be connected by software codes to enable them to exchange data via API, an essential aspect of synchronizing the current workflow situation between the pair. In addition to enabling digital communication, this linkage also allows for settlement safeguards. These safeguards guarantee that the designated digital assets to be sold will be irrevocably transferred to the exchange if the sale is completed. Similarly, the safeguards will work in reverse, making sure the digital assets that were bought will be irrevocably sent to the investor and investment managers if the purchase is finalized. Investors will maintain a high degree of control, as they will typically keep ownership of their digital asset the majority of the time, aside from when it is marked for sale. Security of transactions is ensured through the settlement safeguards, giving both investors and exchanges the assurance that trades that are completed are settled without issue. A Multi-Signature SmartContract will be created in the second implementation, with sub-keys issued to the investor, investment manager, and exchange. This would mean that basic operations can be performed with a quorum of sub-keys, and the full set of sub-keys would be required for critical operations. In order to ensure settlement security, a number of these sub-keys will be afforded the special privilege of setting aside a digital asset for future settlement. The envisioned process will be started by the investment manager, with authorization from the exchange. Therefore, these privileged sub-keys should be exclusively held by the investment manager and exchange. The FinTech are hoping that the dual Multi-Signature SmartContract will be more likely to be accepted, this partitions the business relationship into two sections, one between investor and the investment manager, the other between the investment manager and the exchange. Though, the application of API can be a root of worry over earmarking, exposed to the possibility of a cybersecurity threat that could lead to disregard of the API call. The Multi-Signature SmartContract implementation will incorporate communication into itself, possibly decreasing the cybersecurity risk. This adds complexity as provisioned sub-keys must be generated to guarantee settlement protection. In order to truly comprehend the intricacies and limits of Web3.0 technology regarding tripartite shared custody for digital asset, it is essential to code up implementations of Multi-Signature SmartContracts. The successful experiment could create a new way to custody digital asset in a decentralized fashion. This different approach would enable investors to maintain possession of their digital asset, while facilitating the necessary post-trade operations for the intermediaries. This would change the existing model where investors must hand over control of their digital asset to intermediaries to be part of the DeFi network.

Source: https://medium.com/@notherArmchairEconomist/experiment-with-tripartite-shared-custody-for-digital-asset-f0f17267522d?source=rss------fintech-5