Building a Walled Garden
Copper is a London-based technology platform that is set to revolutionise crypto investing. By building state-of-the-art trade infrastructure, the Copper Platform not only allows funds to easily, and securely deploy capital across multiple exchanges, it also provides institutional-quality independent custody.
Currently, crypto managers are required to hold assets physically on each exchange they trade on because the exchanges only provide liquidity within their own trading ecosystem. Unlike traditional assets, there is no centralised limit order book (CLOB). Whereas a hedge fund manager doesn’t need to have an NYSE account, this is not yet the case in the crypto space.
This means additional security layers are needed to safeguard digital assets, as they move from one exchange to another. With Copper’s pioneering trade infrastructure, the issues of counterparty risk and having to deal with security risks related to hacking, unsolicited withdrawals and private key mismanagement have been removed.
As Boris Bohrer-Bilowitzki, a Partner and Head of Business Development at Copper, explains, what Copper has built is a ‘Walled Garden’ solution for funds and their LPs, in respect to secure trade execution and custody.
“When we went live in 2018, we were approached by several fund-of-fund investors who shared the following problem: ‘Our biggest concern is counterparty risk,’ they said. ‘If we allocate to a fund, there is nothing prohibiting the manager from misappropriating that capital from the exchange’,” says Bohrer-Bilowitzki.
“On the one hand, our Walled Garden infrastructure provides full protection of LPs assets; they cannot be misappropriated from exchanges. While at the same time, streamlining the treasury management function for the Fund Manager into one central place, allowing them to be much more reactive in the marketplace.”
Based on a multi-signature mechanism, a private key is split into thirds across the Fund Manager, Copper, and a trusted third party (i.e. trustee, lawyer, or fund administrator). This, combined with whitelisting technology ensures that digital assets can be moved securely across multiple exchanges and Copper’s award winning offline custody, without ever leaving the Walled Garden infrastructure. This mitigates counterparty risk.
“Having a set-up such as ours, where no single CP at any point in time can access the fund’s assets, is key for the overall compliance program and general peace of mind,” says Bohrer-Bilowitzki.
He explains that there are four points that have to be addressed in order for an exchange to be eligible. These included:
• Two-factor authentication log-in;
• Permission-based APIs;
• Whitelist capabilities where one can pre-define a certain set of wallet addresses at the exchange level;
• IP whitelisting, where one can only initiate withdrawals or movements of assets from a pre-defined set of IP addresses. This element is optional.
“Once whitelisting on the exchange is locked down, it provides Fund Managers with a higher degree of on-exchange custody – after which, to change an address it becomes a manual process involving Copper, the Fund Manager and the Exchange. If a request is sent to move assets, it can only go to a pre-defined set of wallets,” comments Bohrer-Bilowitzki. For example, if the Manager is trading bitcoin – or any digital asset – on Binance, and wants to move them to Kraken or Coinbase, execution can only happen if all three exchanges’ wallet addresses are whitelisted.
“Our custody application is an essential part of the ‘Walled Garden’,” continues Bohrer-Bilowitzki. “The client having their bitcoin custody address with Copper whitelisted on various exchanges means if they want to move assets away from one of the exchanges, and into custody, all they do is click a button.”
This is helping to make digital asset management safer and easier. The custody solution Bohrer-Bilowitzki refers to is the Copper Unlimited custody application: an offline server-less, optically air-gapped application. The user installs the Copper Unlimited solution onto a machine that is not connected to the internet; nor ever will be.
The next step is to create a digital wallet, known as a Copper Vault. As part of this process, a private key is sharded into three distributed keys, held by the client, a Copper representative, and a trusted third party. None of the fund’s assets can be withdrawn or moved without two of three keys coming together to sign the transaction in an offline environment.
“The private key is split into three parts and encrypted, where each party creates their own password, confirms it, and the application saves this as a double-layer encryption file. We also eradicate any single point of failure by using the BIP39 seed extension. This is simply a password that extends the seed mnemonic, which is made up of 15 or 18 random words, and held by separate parties.”
Copper transaction files are encrypted and transmitted optically between the client’s Copper Unlimited storage application and the online trading environment. It is the only custody solution currently on the market that provides this level of security.
“All of this happens completely offline. If we suddenly disappeared and our offline machine holding the private key is lost, it doesn’t matter because you only need two of three key holders for authorisation,” says Bohrer-Bilowitzki.
In a worst case scenario, where two of the three parts of the key are lost, one could use the seed mnemonic held by the administrator, for example, to re-establish the wallet.
Part of the appeal of Copper’s infrastructure solution is not only the high level of flexibility and security when executing one’s trading strategy, it is the fact that the Copper Unlimited custody solution solves a problem that traditional custody solutions have historically faced.
Say you have USD10 million of gold bars stored at home. It’s nice to look at, but you don’t want the custody burden so you give the gold bars to a bank. You’ve solved one problem but created another one: somebody else now has USD10 million of your gold. It might be protected in a vault with security cameras but theoretically someone within the bank can take your gold, and everyone else’s gold in the vault.
“With our custody solution we’ve solved the first problem whilst also avoiding the second problem,” comments Bohrer-Bilowitzki. “What I mean here is, we as the custodian do not have sole access to a client’s digital assets. And indeed, neither does the client without using the multi-signature authorisation. This means we are just as secure with one client as we are with 50,000 clients. There is no central point where all keys are being put together; everything is multi-signature protected and each transaction is individually completed offline.”
This is taking digital asset investing into a new, institutional realm. The ability to mitigate counterparty risk on exchanges, and even within the fund itself, while ensuring that no single person or entity can access the Fund’s assets, is likely to give family offices, fund-of-funds and other LPs, greater confidence in allocating to the asset class.
“Before this infrastructure was in place, allocations were modest, USD100-500K, but now we see allocations of USD5-10 million, which is a major step up, and likely to continue rising,” concludes Bohrer-Bilowitzki.
Boris Bohrer-Bilowitzki has over ten years of sales and relationship management experience within asset management and fintech industries, across Europe. In his previous role as Senior Relationship Manager at Newscape Captial Group he specialised in bespoke high net-worth strategic and structural planning and execution, focusing on clients from Central and Eastern Europe. He holds an MBA and LLM.