Bakkt Unveils Bitcoin Custody Plan
At last, the crypto space has been blessed with another update from Bakkt, the Bitcoin (BTC) initiative from the Intercontinental Exchange. On Monday morning, Adam White, the COO of Bakkt who hails from a Coinbase executive position, released an extensive Medium post about how his firm intends to store the BTC backing its proposed futures contract. Following a brief monologue about the importance of custody, which included terms like “the future of digital asset infrastructure,” “ironclad infrastructure and a security-first mindset,” and others that accentuated the importance of security, White explained the details.
First, he confirmed the news that Bakkt had filed an application to the New York Department of Financial Services, the state’s primary financial markets regulator that has historically been stringent yet somewhat amicable towards Bitcoin and other digital assets.
Next, he unveiled the custody solution, which has purportedly been in the works for two years and builds off the “institutional-grade hardware, operational controls, and cybersecurity systems” enlisted by the Intercontinental Exchange and its components, like the New York Stock Exchange. The following is a brief, aggregated description of Bakkt’s proposed custody system:
- Wallet Architecture: Bakkt will be using a warm (online) and cold (offline) wallet system. As with other exchanges that deal with physical Bitcoin and other digital assets, most of the holdings will be held in cold storage, backed by a $100 million insurance policy (exact partner wasn’t announced, but BitGo might be a good guess). The wallets will be secured by multi-sig, multi-factor authentication, role-based permissions, among other security facets that protect consumers.
- Key Security: To protect the warm private keys that give access to Bitcoin, Bakkt will be using “FIPS 140–2 level 3 or higher hardware security modules.” To protect the cold private keys, encryption, sharding, and distribution will be used.
- Physical Protections: All cryptographic systems managing the aforementioned key architecture will be secured in “bank-grade vaults and datacenters.” To ensure there are no ‘inside jobs’, Bakkt will be restricting employee access. Bakkt is partnering with BNY Mellon to make this work.
- Cybersecurity: Bakkt will be using the New York Stock System’s security systems, which identify threats, contact local authorities, and prevent attacks.
- Operational Controls: “Bakkt implements strict operating procedures to direct the safekeeping and storage of customer funds. All withdrawal requests are received, verified, and processed by dedicated staff located in multiple geographies.”
To further bolster its custody solution, Bakkt has acquired Digital Asset Custody Company (DACC), and brings on its “native support of 13 blockchains and 100+ assets.” The DACC team joins Bakkt.
White’s latest update comes just a week after Bloomberg reported that the startup has been coming under legal pressure from the CFTC. The sources told the business outlet that the financial regulator is currently taking issue with Bakkt’s custody solution (or then lack thereof), as the futures vehicle will be physically backed by custodied Bitcoin, meaning the CFTC wants to mitigate “possible theft and manipulation.” It was added that instead of securing a green light from CFTC, Bakkt may attempt to secure a stamp of approval from New York’s financial regulators, which we now know as true.W
Photo by Brad Knight on Unsplash