Five key digital asset stakeout principles that institutions can't ignore

Digital Assets Staking Has a Problem

The majority of today’s stake providers don’t meet enterprise and regulatory standards. The status quo is infrastructure pieced together by small, sometimes inexperienced teams on centralized Big Tech clouds that are not tuned for digital assets – nor engineered to meet the regulatory compliance standards that major players like BlackRock demand. In the traditional financial sector, there are longstanding standards of robust risk management that is crucial for fulfilling institutional requirements. Service providers within the decentralized world need to meet these expectations.

But this is not the end. Every institution needs to consider a few essentials when assessing stake options. This guide will cover the five most important, such as:

Multi-Stake: diversification of providers, hardware & approach
Security of people, processes & technology
Service & reporting
Integrating the Custodial Integration & relationships
Regulation compliance, especially with audited practices like SOC 2 or ISO27001 – and CCSS

First, we’ll explore how diversification forms the basis of an effective staking plan and the other pillars that build upon it.

Diversification: The Cornerstone Of Institutional Staking & Your Reassurance

After the dramatic collapse of FTX both sophisticated investors and institutions took a step forward to review their custody practices. Diversification of custodians was a major consideration. Boston Consulting Group has highlighted that diversification reduces the risk of one single point of failure in terms of market, counterparty and regulatory risks, as well as security.

The institutional stake industry has evolved a theme of diversification, with a focus on risk reduction.

It extends beyond service providers – a diversity of core infrastructure, hardware, networks, ownership, and staking approaches is also essential. In the same way as telecom networks and data networks of early 2000, dependence on “diverse” Providers that use the same layer of physical support undermine true diversity.

Reliance on “diverse” The same providers on different layers of the physical structure undermine true diversity.

Examples of operators that are heavily dependent on “big tech” hyperscaler cloud infrastructure (AWS, Google Cloud, Azure, etc.) GlobalStake, a specialist in bare-metal stake operations, is the only one that avoids centralization, third-party risks, and concerns about cost management. IBM highlights the security benefits of bare metal solutions in critical applications.2 Bespoke bare metal staking providers run their own infrastructure and control their own networks – purchasing and owning equipment outright, fully controlling and tuning hardware, software, and network routing, and operating through distributed global data centers rather than renting from big tech and third-party suppliers. Pro tip: Ask your service provider for details if they claim to use bare steel. Are they the owners? Does it belong to them? What networks or geographies do they service with bare steel?

Institutional Diversification: Benefits for Institutions

The Returns on Investment

Diversification allows you to leverage the strengths and expertise of various partners. This can reduce risk, but also lead to higher returns. CoinDesk’s annual report highlights how provider performance can differ significantly.

Improved Regulatory Compliance

Regulations landscapes are always changing. KPMG’s blockchain report highlights how diversification is a way to navigate any potential changes in regulations that might impact your assets. You can be assured that you are complying with all the local laws and regulations.

Multi-Stake : A New Standard of Institutional Resilience in Staking

Hedging funds, which are part of the traditional financial industry, have embraced a “multi-prime” approach—engaging multiple prime brokers—to mitigate counterparty risk, enhance access to diverse services, and optimize operational efficiency.5 The practice became critically necessary after the 2008 financial crisis.

The cryptocurrency market is maturing and institutional investors will be able to participate. You must have a “multi-stake” strategy—diversifying their staking activities across multiple providers—to ensure resilience and optimize their participation in the evolving digital asset ecosystem. It is important to take this approach for multiple reasons.

Risk MitigationThe impact of a potential failure or poor performance associated with one provider is significantly reduced by distributing staked assets across multiple providers.
Service OptimizationDifferent providers of staking offer different benefits. These include varying fees, improved security, and superior customer service. By partnering with multiple providers, institutions can take advantage of the strengths and weaknesses of each.
Operational ResilienceThe multi-stake method ensures a continuity in stake operations because it does not rely on one entity. This is crucial for ensuring that rewards are consistent and to meet the requirements of network participation.
Improved regulatory compliance: Regulations landscapes are always changing. KPMG’s blockchain report highlights how diversification is a way to navigate any potential changes in regulations that might impact your assets. You can be assured that you are complying with all the local laws and regulations.

Adopting the Multi-Stake Model, institutional cryptoholders align themselves with financial practices that are well established, creating a staking ecosystem which is more efficient, secure and scalable as the market progresses.

Selecting the Right stake partners: beyond diversification

Once diversification—the most critical foundational staking pillar—becomes a priority for an institution, the other essentials become clear, helping to refine the list of options and choosing the right partners to work with.

How to determine the key elements that will impact your overall strategy for staking:

Security of People, Processes, & Technology:

Make sure your provider uses industry-best practices throughout its entire enterprise. This includes background checks for all employees, creating defined and repeatable processes to eliminate risks at each step, and making sure the technology is up-to-date. It is important to know how much your service provider depends on outside contractors as opposed to full-time employees.

Service, Reporting, Insurance, & Flexibility:

There are far too many stake providers who hide behind automated help desks and web applications (if there is any). The ability to communicate with an experienced account manager is a key attribute. This is especially true when institutions have to regularly report to their managers, investors, regulators and accountants.

Providers of staking services should have the ability to deliver detailed and tailored reports on stake activity. Ideal would be an offer that offers real-time dashboards and customized reports as well as actionable insights on staking performances, helping institution decision makers evaluate and refine their strategies.

The best providers offer insurance at a reduced rate from top-rated insurers. The ability to deploy in a flexible way and support custom client applications is a major value-add.

Custodial Integrations, Self-Custodial Technology Solutions & Relationships:

Secure institutional staking is built on the basis of qualified, credible custodians. Partnering with trusted custodians or leveraging self-custodial technology solutions, such as BitGo—which offers both options—ensures a seamless and secure staking experience. The partnerships allow for the adoption of best practices, and they foster trust in all aspects of the staking procedure. Ledger enterprise, a custodial platform that is advanced, helps many global custodians to enhance the quality and effectiveness of their institutional staking services. Forbes points out that the participation of trusted custodians are essential to meeting security standards, and aligning expectations with institutions.6

Integration with custodial platforms of institutional grade is equally important. To streamline onboarding, to minimize friction in the operational process and to improve overall experience, providers should prioritise compatibility. In order to meet the demands of sophisticated investors, and strengthen their status as partners, providers should ensure a seamless and secure link between custodial and staking platforms.

New, Old, & Niche Asset Support

Citations

Boston Consulting Group, “Managing Risk for the Next Wave of Digital Currencies.” https://www.bcg.com/publications/2023/managing-risk-for-next-wave-of-digital-currencies
IBM, “Bare Metal Servers vs Virtual Servers.” https://www.ibm.com/think/topics/bare-metal-servers-vs-virtual-servers
CoinDesk, “Consensus Annual Report 2023.”
KPMG, “Crypto and Digital Assets: Regulatory Challenges.” https://kpmg.com/us/en/articles/2022/ten-key-regulatory-challenges-2022-crypto-digital-assets.html
Merrill Lynch “The Multi-Prime Broker Environment: Overcoming the Challenges and Reaping the Benefits https://www.opalesque.com/files/MultiPrimeBrokerEnvironment.pdf
Forbes, “Guide for Institutional Security of Digital Assets” https://www.forbes.com/sites/digital-assets/2023/10/30/the-institutional-guide-for-securing-digital-assets/
Gallagher, “SOC Type 2 Certification and What it means.” https://security.gallagher.com/en/Blog/SOC-2-Type-2-certification-what-it-is-and-why-it-matters