Custody in the Age of Web3: Thomas Brunner, Sygnum Bank

Transcript

all right so I have the pleasure of welcoming our next speaker Thomas Brunner head of custody staking and defy at Signum bank that is a tall order Thomas congratulations for this beautiful title he will be addressing a very timely topic today about custody and I'm not going to take much of your time Thomas the floor is yours thank you [Applause] custody is widely viewed as a commoditized service with limited scope for Innovation so this is a quote I took from a report by HSBC called custody in

2025. and of course this report was mainly referring to custody in traditional Finance for traditional Securities and I think if we talk about cryptocosity nothing could be further from the truth than what this statement says and just in case you are not convinced of this then let me yeah highlight some recent events and headlines that show that there is a lot of movement and Innovation going on in cryptocosity the first one erc4337 which is about account abstraction um so this is something where vitalik

buterin said that this is something he wanted to do for a long time this would really be a big game changer in how we use crypto wallets so I will talk about this um in a few minutes um so um hold on a moment for account abstraction then the second let's say headline the acquisition of mitoko by Ripple of course I Ripple The Entity behind the Ripple cryptocurrency and mitoko the well-known Swiss provider of Crypt of custody software Solutions and I think just one thing that this very clearly shows is that the cost city is seen as a

strategic capability otherwise I'm sure Ripple wouldn't have paid 250 million US dollars for metaco and the third one uh sort of the let's say the lecture recover controversy so I don't want to comment too much on whether this was justified or not but I think it very clearly shows two things the first one that people have very strong opinions about custody about wallets about trust and the second one concerning Trust I think this very clearly showed that even if you do self-cosity if you use

open source you always need some level of trust even if you do self-cosity um yeah so but we are not here to talk about what's happening now I would like to talk about what I think will shape um custody in the future and I picked three topics and the first one is the decoupling from private keys what does that mean so in the early days wallets were quite simple you just had a private key you took some Randomness you generate the private key IUD arrive an address from it and then if you want to do a transaction you just

take the transaction you sign it with your private key and and that's it um like these days if you want to operate sort of let's say an Institutional grade custody solution things get a little bit more complicated and these are just some of the things that you have to consider when you think about institutional great custody you might for example use MPC or threshold cryptography where you have not a single private key but multiple key shares you might also use key encryption keys so this is basically keys that you use to encrypt the

critical key material you might use a key share so maybe use something like show me your secret sharing to split up a secret into multiple pieces of course you need to deal with backups and you might use a key derivation where you have a monster seat and from that you create many addresses instead of just one but from a blockchain point of view it's still basically the same as before you have an on-site transaction you sign it with your private key or maybe with your MPC key shares and then you have a science transaction that you can submit

to the blockchain um now if you talk about account abstraction and here in this example according to this ethereum proposal erc4337 this basically adds a whole new layer on top of the existing blockchain or on top of the execution layer in the case of ethereum so erc4337 introduces a concept they call user operations and this is basically an operation that you typically do in a wallet in the most simple case it could be just a send out that you want to do then you put this user operation in a

man pool and here it's important to to consider that this is not the usual blockchain transaction mempool but it's actually another man pool that is uh in a let's say in a higher level or in a more abstracted level on top of the blockchain man pool then you have so-called bundlers they basically take those user operations and send it to the so-called entry point smart contract and this is a so-called Singleton smart contract a bit like the staking smart contract on ethereum and then sends your user operation to your smart contract wallet now maybe you ask yourself why we do all

these complicated things and what's the benefit and and I think uh the things that this enables are really quite powerful because now you have the full power of um of small contracts um for your wallet um just some examples that this would enable for example account recovery social recovery pre-authorized transactions for example maybe if you use crypto in a game you can authorize your wallet to spend transactions for the entire gaming session we can have a sponsored transactions where basically the gas fees are paid by um by paymasters on separate party we can also have cases

where we can pay transactions not only with ease but also for example within erc20 obviously as I'm sure some of you are aware with erc20s that is often a bit cumbersome it off it would enable subscription models where you could instruct your wallet to pay your monthly Netflix subscription you can have spending restriction and last but not least you could also Imagine a wallet that sort of automatically puts a portion of your tokens into a landing pool for example so I think obviously a very powerful concept if it gains traction and it

would certainly enable a lot more things that we can't even imagine today the second topic I would like to mention is the separation of exchanges and custodians this gentleman here is Bernie Madoff so some 15 20 years ago he was a well respected and well-known investment manager on on Wall Street the problem was that he was basically a fraud so what he did he took new investor money and used this to um yeah to honor withdrawal requests

from previous investors so essentially he just operated in the end quite a simple pyramid scheme and he sort of created fake traits and fake statements and what I think is quite striking or of course the similarities to SPF and when you look what the SEC did after this Madoff Scandal you see that they amended what is called the SEC custody rule and they changed it in a way that to enforce a much stricter separation between the custodian and and for example the investment manager you had to do a lot more reporting and internal

control Audits and things like that and now in 2023 of course after the the FTX scandal the FDX SCC is again amending the SEC custody rule they will now call it the safeguarding rule and in their proposal so for now it's just a proposal they yeah proposed further sort of separation of custodians and and other entities and also and I think that would have a big impact on crypto it would extend the scope of the rule to include crypto as well what this would mean

for a U.S registered investment advisors that they would not be able to use self-cosity they would not be able to use a centralized exchanges anymore and they would be basically forced to use qualified custodians so for now this is just a proposal nevertheless the change that this would bring I think is that we would move from the model that we see on the left to what we see on the right like on the left you see how centralized exchanges look like today like FDX was was like that basically they are fully vertically integrated you have the custodian exchange the broker it's all together

Under One Roof and of course such a setup is what make made the fraud possible in the case of FDX but also some 15 20 years earlier in the case of Bernie Madoff and I think what we will see is for sure a cleaner separation of uh between the exchange and the custodian that would essentially mean that exchanges would become non-custodial like we already have them in the decentralized world where all the exchanges are already non-custodial but in the centralized world it's still

um yeah very much custodial then the last Trend or topic I want to mention is embedded crypto Finance obviously we have more and more use cases where we use a crypto wallet where we have crypto I think in the future we will have crypto always almost everywhere and embedded finance and I borrowed a definition from McKinsey here basically means that you have Finance embedded in a sort of a non-financial customer experience in a non-financial customer Journey or yeah in a non-financial platform and obviously

embedded crypto Finance means that basically we have crypto everywhere in non-financial applications platforms for example games in the metaverse and so on yes so those are the three trends that I wanted to mention firstly the decoupling of private keys from from addresses with account abstraction secondly I think the further separation of exchange and custodians even inter-centralized world and then thirdly embedded crypto Finance which essentially means that we will have crypto almost everywhere thank you [Applause]

thank you so much Thomas