Future of Finance


The Fireblocks platform is one big reason why institutional interest in crypto-currency is catching fire

The Fireblocks platform is one big reason why institutional interest in crypto-currency is catching fire

One reason institutional money is now being invested in crypto-currencies is that it is safe to do so. Fireblocks, the provider of an institutional-grade safe custody and settlement platform for digital assets, can take a good measure of the credit for what is happening. Dominic Hobson spoke to Michael Shaulov, CEO and co-founder of the firm, as it completed a US$133 million Series C fund-raising that also saw giant global custodian BNY Mellon take a strategic stake in Fireblocks.

Questions that are being asked

1. You saw the institutional grade cyber-security opportunity in crypto-currencies four years ago. Back then, crypto was a retail investing activity. Four years on, what assurance can you offer institutional investors in the area of cyber-security?

2. Digital asset safekeeping is a technical subject, but methods of securing digital assets from being stolen by hackers have evolved considerably. Can you run us through the story from the first generation of solutions (e. g. cold storage, multi-sig, HSM) to the current generation, explaining the drivers of change?

3. Your own solution is Multi-party computation (MPC) and chip isolation technology to secure private keys, API credentials and eliminate the need for deposit addresses. Can you explain why you believe your solution is superior?

4. Digital assets in safekeeping have to be moved to a new address when a transaction take place, which is a point of vulnerability in the same way as a conventional payment or securities transaction. What can be done?

5. Digital assets serviced as well as custodied (e. g. transaction fees paid, income collected etc.). What vulnerabilities does this create and how can they be solved?

6. Identities (is this person who they say they are?) is another point of vulnerability familiar from conventional payments and securities market. Are the solutions – two factor authentication, biometrics – the same? And are digital identities any part of the solution?

7 The crypto-currency exchange hacks may be now largely a thing of the past but the CypherTrace report says that DeFi has become a major target of financial criminals in the last year, because of weaknesses in smart contract coding, and that DeFi is now the major vulnerability in crypto-currencies. What do institutional investors need to do to mitigate that risk?

8. In conventional financial markets, a major source of vulnerabilities is the human factor (such as the rogue employee, employee collusion,  the fat finger, the USB stick, the email attachment, or the inadequate internal process). How do digital assets change the nature of the human factor?

9. Are the networks connected to crypto-currency exchanges, market makers and custody providers a point of vulnerability?

10. Lack of scalability is another longstanding concern of institutional investors. Has that challenge been overcome – and, if so, how? 

11. We are seeing institutional money (private banks, wealth managers, asset managers, corporate treasurers) investing in a narrow range of crypto-currencies. What contribution has increased cyber-security made to that development?

12. Cyber-security in digital asset markets feels like a Red Queen race, in which both hackers and investors constantly adapt and evolve. What is the secret to keeping ahead of the hackers?

The BNY Mellon investment reflects how seriously the global custodian is now taking the possibilities of tokenisation. “Developing products to bridge digital and traditional assets is foundational to the future of custody,” says Roman Regelman, chief executive officer of Asset Servicing and head of digital at BNY Mellon. “Following significant due diligence and market research, we recognise Fireblocks as a market leader in providing secure technology to support digital asset services.”

The engagement of BNY Mellon is certainly a striking endorsement of the Fireblocks model. And the overall fund-raising takes the total amount raised by Fireblocks since it foundation in 2017 to US$179 million, making it easily the best-funded infrastructure provider in the digital assets industry. In fact, the Series C round marks not only the advent of institutional interest in digital assets, but the emergence of a market leader in digital asset issuance, settlement, custody, cyber-security, suspicious transaction monitoring and operational risk management.

According to Coinmarketcap, the market capitalisation of the global crypto-currency market is now more than US$1.8 trillion – more than half it attributable to Bitcoin alone. Which means wealth managers, asset managers, insurers, custodian banks, private banks, hedge funds and FX brokers are now joining crypto-currency exchanges, market-makers and prop traders as active investors in the asset classs. At the same time, the DeFi market – which arguably pre-figures the tokenisation of securities – now has US$44.6 billion in total value locked (TVL), according to DeFi Pulse.

The new institutional entrants to these asset classes have struggled to persuade end-investors that they will not lose either their reputation (to bad actors) or their assets (to exchange insiders or external hackers). So the fact that they are now investing is proof positive that pioneering investors at least are convinced that asset safety is no longer an issue, whatever the implications of the price volatility of crypto-currency and DeFi investing.

Fireblocks has played a large part in changing attitudes. Its multi-party computation (MPC) and chip isolation methodology has advanced safekeeping of digital assets beyond the clumsy multi-signature authorisation (multi-sig) and hardware security modules (HSM) that still characterise the offerings of competitors. But if MPC is convenient as well as secure, Fireblocks never misses an opportunity to emphasise the need to build multiple layers of security.

Indeed, securing digital assets, like securing any asset, is a task without end. Fireblocks prides itself on its ability to inhabit the minds of financial criminals, and with backing now from investment houses such as Paradigm, Galaxy Digital, Swisscom Ventures, Tenaya Capital, Cyberstarts Ventures and others, the company has the resources to continue to invest in the talent it needs to maintain market leadership, and enlarge its franchise.

The investors in Fireblocks are certainly convinced Fireblocks has made possible a much wider transformation of the way money is invested, lent, managed and transferred. “We are standing at the cusp of the biggest transformation that the world’s financial system has ever seen,” says one of them, Micky Malka, managing director of Ribbit Capital, the investment firm behind success stories such as Coinbase, Revolut and Robinhood. “Fireblocks is standing right at the forefront of this revolution, and we believe that their technology will play a critical role in driving tremendous innovation in the financial sector for decades to come. We are excited to join their team and help fuel their exciting journey ahead.”

Written by Dominic Hobson, Co-Founder Future of Finance, March 2021