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Initially, the transparency of governments and states about their custody strategies is low.
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The need for states could bring new bitcoin custody technologies.
The first government in the world to adopt strategic reserves was El Salvador, a country that has more than 5,800 bitcoins stored. Now, it seems that the world is heading towards a new stage of bitcoin (BTC) adoption, and questions are arising about the praxis of these strategies.
It is known, for example, that the United States already has reserves of the currency, yet Donald Trump promises to strengthen this government strategy even more during the period of his mandate. It is also known that Ukraine, the United Kingdom, Georgia and Bhutan have them, and that there are proposals that want to do the same in Suriname, China and even Venezuela.
Faced with this international scenario, the question arises: how will countries safeguard their strategic bitcoin reserves?
Initially, the transparency of governments and States about their custody strategies is low, at least today. Even these custody practices may be, in some cases, unsophisticated, considering that many of the bitcoins held by these entities come from digital asset confiscations.
For their part, nations that intend to enter the market by purchasing bitcoin directly will scale up their custody methods, since active and planned safekeeping of the currency requires more sophisticated habits.
How does the first country with bitcoin reserves guard its coins?
As NoticiasVE reported, it is more than a rumor that the bitcoins in El Salvador’s possession are guarded by a third party: BitGo, a North American digital asset security and trust company based in Palo Alto, California.
This entity offers “regulated and qualified” custody, storing its clients’ private keys offline, also called cold storage status, in third-degree bank vaults. The custody of this company is carried out in a multi-party manner with three private keys, all in the possession of BitGo. One of those keys is reserved for emergency recoveries. Together with the client’s private key, both give access to the last key.
According to the standard operation of the BitGo custody process, every time the person in charge of the Bitcoin reserve in El Salvador wants to make a transaction of his coins “he must initiate a transaction [usando la “llave del cliente”] with the BitGo team and pass a series of security checks.”
According to the company, its clients can request withdrawals 24 hours a day, 7 days a week.
Ukraine: a case of Bitcoin self-management in a war situation
Since the start of the Russian invasion in 2022, Ukraine has used bitcoin and cryptocurrencies, mainly ether, as means to receive donations.
Ukraine’s official profile on the X network has unveiled its official public addresses for bitcoin (BTC), polkadot (DOT), and ERC-20 tokens on Ethereum to receive contributions.
Today, you can see at these addresses, through a block explorer, how much bitcoin and cryptocurrencies Ukraine owns, in addition to the equivalent of its dollar holdings. It is necessary to clarify that this information does not allow us to know anything about the forms of cryptocurrency custody that the country has used.
Nevertheless, The contextual conditions of a war make plain and direct methods of self-custody conducive to hardware y hot wallets. A changing war environment, which impacts services such as electricity and the internet, makes self-custody the most suitable means of storing cryptocurrency reserves.
A transferred custody would depend excessively on communications and their stability, which is why it is implausible that Ukraine would transfer custody of its bitcoins, like El Salvador, to a foreign company.
Other reports indicate that there were a series of directorates associated with volunteer initiatives and other non-governmental organizations to finance the war in Ukraine. Associations like Come Back Alive They work directly with the Ukrainian army.
This suggests that the custody of funds could be distributed among several entities or digital wallets, and that the financing of the war of these groups could be coordinated, and its funds disseminated and placed at the service of the central government and its strategies.
United Kingdom: a regulatory framework for institutional custody
Although there is no clear information on how the UK government guards bitcoins, it can be deduced that the security practices used by it would follow, both with the confiscated bitcoins and with those hypothetically destined for a strategic reserve, the avant-garde standards of the sector. These include services from institutional custodians that respect regulatory compliance.
In this sense, it is likely that the United Kingdom in the future will use a third-party safeguard model similar to that of El Salvador, although prioritizing companies on British soil.
The above follows from the fact that the United Kingdom has been working on establishing a regulatory framework for cryptocurrencies, including custody and exchange. This legal framework contemplates the trading of cryptoassets as a regulated financial activity, which implies that the sector would favor custody by third parties, from organizations and entities that have licenses and are supervised by the State.
Of course, not all companies offering escrow services will follow the three-key model that BitGo employs. The form and style of bitcoin custody will depend on each product and technological solution.
The case of the state of Bhutan, a bitcoin purchasing and accumulating country, It is one of the most transparent today in terms of strategic reserves. Even the entity in charge of the coins is known: it is called Druk Holding & Investments (DHI).
The purpose of this entity, which is connected to the royal government of Bhutan (which functions as a constitutional monarchy) is to “safeguard and enhance national wealth for all generations of Bhutanese through prudent investments.” DHI has been identified as an entity that has practiced bitcoin mining and cryptocurrency investing.
DHI is thus Bhutan’s “sovereign investment” arm, and is understood to hold the private keys to the country’s Bitcoin funds. This follows from the bankruptcy proceedings of BlockFi and Celsius, which revealed that DHI had accounts directly with these service providers.
The nature of the transactions in which they were involved (deposits, withdrawals, and loans) indicate that DHI was not only a passive client, but directly managed its digital assets from other wallets external to the platforms. According to Forbes, DHI has been mining bitcoin since 2019, when the currency was trading around $5,000.
Bitcoin mining requires a high level of technical expertise; which means that Bhutan is a clear prospect to exercise self-custody without intermediaries of bitcoin.
United States: bitcoin, better in the hands of “professionals”
Currently, the management of confiscated bitcoin in the United States falls to several official entities. In principle, the country has the participation of the Department of Justice (DOJ), specifically with the MIMF division, in charge of prosecuting cases of fraud and market manipulation related to cryptocurrencies. If the United States decided to buy bitcoin for a strategic reserve, as Donald Trump promised, the Treasury would likely be the supervisory entity.
However, the daily management and custody of said assets would probably be outsourced to professional custodians, following a line of action similar to that of El Salvador and similar to what it is estimated that the United Kingdom will follow.
Coinbase Custody is the leading company in the United States for these services. It operates as a fiduciary entity under New York State banking law and has SOC 1 Type II and SOC 2 Type II audits.
Currently, Coinbase is the custodian of the bitcoins they support 9 of the 12 BTC ETFs of the financial market in the United States.
For Bitcoin ETFs, Coinbase uses segregated accounts. This means that the ETFs’ backed bitcoin is not mixed with other assets of users of the platform. This contrasts with custody for retail users, which employs “omnibus accounts” where all funds are combined.
Among other security features, Coinbase uses multi-party keys for its wallets, in addition to safeguarding funds using cold storage (offline).
BitGo, the company that custody of El Salvador’s funds, or Anchorage Digital, a platform that offers financial services with cryptocurrencies, are also competing to be guardians of a possible strategic reserve of bitcoin in the United States.