Henrik Gebbing is the Co-founder and Director of Finoa, a German-based digital asset banking provider, offering state-of-the-art custody and brokerage services.
Finoa is destined to launch the world’s first fully digital warm-storage custody solution for Digital Assets, providing institutional investors with a banking-grade custody solution with the highest security standards known to the market.
This week, I had to pleasure to interview Henrik to learn more about Finoa, custody and the future.
What are the problems with custody today that needs to be solved?
Custody is one of the missing pieces of infrastructure holding back further institutional money inflow in the Digital Asset ecosystem. Due to the digital nature of this new asset class, it requires different technological capabilities and handling in contrast to traditional assets — due to the asymmetric encryption mechanism, the Private Key must not be exposed and needs to be protected at all times — only an institutional custodian infrastructure is able to fully protect the numerous risks that Digital Assets incur.
Current market landscape — lacking of sophisticated solutions and of a regulatory framework (such as in the traditional financial system), still allows institutional investors to opt for alternative forms, which include sub-optimal solutions such as Hot Storage (e.g. keeping Private Keys on exchanges), or going for self custody (paper wallet in a safe).
On the other hand, cold storage, despite its perceived high security, remains a sub-optimal solution as it not only limits investors from taking advantage of market fluctuations and from participating in advanced Blockchain-protocol functionalities (such as staking or harnessing the value of tokenized-securities) but also transfers the risk from high-security technological infrastructures to a human-managed process. “Cold-storage custody providers are killing the Digital in Digital Assets — it is anything but disruptive”
Other problem: missing fully regulated players, so-called qualified custodians (we are in the process of applying for a German-based license)
The history of hacks and thefts are well documented. What can we learn from these past losses to ensure assets are safe for the future?
First of all, we have to take a historical look at this new asset class: on the contrary to the majority of traditional asset classes, Digital Assets started adoption from the retail investor side. This led to the creation of mass-market solutions and delayed the development of the necessary infrastructure to serve institutional investors.
If we see the distribution of assets in the traditional asset world, we see that around 85% are owned by institutional investors — the Digital Asset space is currently vice versa — Bitcoin etc. is mainly held by private individuals — as this is expected to change.
Other lesson learned:
The Private Key is the single-point-of-failure for Digital Assets: institutional investors’ job is to pursue an investment strategy, not to handle private keys
Leaving assets “on-exchanges” is still a sub-optimal solution: we need to separate the execution part of the transaction from the custody of the asset itself (when is not used for trading) — analogous to the traditional financial system.
Institutional adoption is a hot topic. What is your opinion of custody being the barrier for institutions to participate in digital assets?
As already mentioned, Custody is the single biggest piece of infrastructure holding back the growth of institutional investors in the Digital Assets space. The real problem is the lack of sophisticated solutions. Custodians need to implement the necessary institutional/banking-grade technology and infrastructure to secure tokenized assets which means protecting the private keys and developing secure mechanisms to support transactions in and out of custody.
What type of clients and digital assets will Finoa service?
Finoa positions itself with a product for institutional, B2B clients: we have two major types of clients we are planning to serve:
- 1st group of crypto-investment funds who have a problem to manage Digital Assets as of today
- 2nd Group of Financial Institutions, Traditional Asset Managers and Corporations that will develop/create assets stored on the blockchain
Can you explain the infrastructure behind Finoa and how it provides maximum security and compliance?
First of all, we build our solutions specifically tailored to institutional investors’ needs, operating a secure and cost-effective infrastructure to service professional investors directly or as sub-custodian on behalf of financial institutions.
Our warm-custody solution (online-storage with deep-cold-storage security characteristics) is based on state-of-the-art banking standards, is compliant with European Union’s PSD2 banking regulation and is built on EBICS (Electronic Banking Internet Communication Standard) standards. We leverage the “gold-standard” in hardware security through a partnership with German-based Hardware-Security-Module (HSM) provider Utimaco GmbH, also renowned for supplying hardware to the Federal Intelligence Services.
We use the most-secure available Smartphone Hardware of Google Pixel 3, the worldwide only Smartphone with tamper-resistant hardware security module supporting StrongBox Keymaster for a fully digital experience.
We integrate one of the world’s first Blockchain-adapted Core Banking System for secure accounting and reconciliation, developed in-house over the course of the last year.
We operate a cryptographic-Pairing of Smartphones/Fingerprints (latest smartphone generation with mobile, programmable HSMs) with an eBanking interface and HSM infrastructure.
We established a redundant infrastructure plus backup-mechanism in a banking-scale high-security data center for maximum security.
Are there any future plans or goals you would like to share?
The initial product of Digital Assets custody will serve as the base to grow the product portfolio in the future with more Digital Assets financial services such as Prime Brokerage, Tokenization Services, and/or Investment Services/Wealth Management.
In the short term, we are planning to launch the trading Interface (In-Custody Trading) + increase the Token spectrum late summer 2019 alongside with integration of FIAT (leveraging a partnership with an established financial institution).