Following the recent updates on the surge in cryptocurrency ETFs, we recently caught up with Manthan Dave, Co-founder of Palisade, a digital assets custodian backed by enterprise blockchain firm Ripple.
Manthan Dave from Palisade shared key insights on the potential for more crypto ETFs beyond just Bitcoin (BTC) and Ethereum (ETH) to be launched this year.
Dave touched on the current demand for single coin / token ETFs.
Our conversation with Manthan Dave is shared below.
Crowdfund Insider: While ETFs simplify access to crypto, how do they complement direct asset ownership in a diversified investment strategy?
Manthan Dave: A good way to think about ETFs is that they are a liquid investment held in long term cold storage. Drawing parallels here with gold, if you held a gold ETF, from your perspective as an investor, the only difference between that and physically holding gold in a locked away vault is that you can sell the ETF at a click of a button. Because of this, it does not discount the fact that there are benefits to holding the real asset.
When you think about the wider DeFi ecosystem, particularly the opportunity to generate additional yield on your asset through activities such as staking or liquidity mining, it does make sense to have some exposure to the real underlying asset.
While it does increase the risk, the yield can help not only counter the ETF premium, but also expand the portfolio into assets that are not yet available as an ETF but are on the blockchain. Assets such as Ethereum, Solana are particularly good candidates for this diversification of holdings as they have a thriving on-chain ecosystem.
Crowdfund Insider: Why is secure custody critical for retail investors who want to go beyond ETFs and hold crypto directly?
Manthan Dave: Retail investors who are going beyond ETFs and are holding crypto directly are rarely doing it because they just want to hold the token. They are usually doing it to access tokens that are not currently available as ETFs and to access the wider Defi ecosystem. This exposes them to unique risks, including the ones that are beyond their control.
For example, just the activity of generating a private key alone can set up the holder for failure. If the private key was not derived randomly, or if the seed was influenced by an external factor (due to a fault in the app or even in the device itself), then the attacker can recreate the private key completely in isolation to the holder, jeopardizing their security.
Additionally, specifically in DeFi, the smart contract risks can put users in a position where their funds can disappear from their wallets without their knowledge or approval. While DeFii promises great yields, it requires users to not only better understand the underlying technology but also stay vigilant of developments in the ecosystem that may negatively impact their position.
A good secure custody platform mitigates against these risks. It provides research and a deep understanding of not only the blockchains but also the ecosystems surrounding it. It ensures that this understanding is deeply embedded in their DNA, from the way they design the user experience all the way to how they stay on top of developments in the space and actively thwart on and off chain attacks even before the user is aware of it.
Crowdfund Insider: As the digital asset ecosystem grows, how important are advancements in technologies like Multi-Party Computation (MPC) for securing both ETFs and direct holdings?
Manthan Dave: Believe it or not – we are still early with regards to custody and wallet technology. We have solutions ranging from hardware wallets using HSMs, software wallets, as well as distributed wallet technologies such as multisig and MPC.
From the risk perspective, we have solutions ranging from protecting one super risky thing like a single private key really well using ultra secure HSMs – to spreading the risk by splitting and distributing the private key using multisig and MPC technologies.
While things are getting easier to use day by day, the ultimate question is – how much does this matter to an average person. It matters little to someone who simply wants exposure to the asset in their portfolio because they can do so using instruments such as ETFs.
A financial institution is less worried about the risks mitigated by decentralization but more about managing the exposure to different assets. If crypto is akin to cash, a financial institution would much rather have it held by someone else for a fee than holding cash themselves directly.
Having said that, the underlying wallet technology matters more when we talk about the on-chain ecosystem for blockchains such as Ethereum. An investor will be able to do much more and generate more yield by holding such an asset directly.
For such an entity, ensuring the security of assets while mitigating risks of key loss is important. We are innovating here on two fronts: MPC makes it easy to have a recovery flow setup where a user can recover their assets in case of loss of the primary shard, and on-chain technologies such as account abstraction (webauthn) that makes it easy to access wallets.
While these technologies have made huge strides in getting closer to the balance of ease of use and security of assets, there is still more to go. Most MPC solutions still have some dependency on the solution provider. At the same time, webauthn based solutions are often not cross chain and can very easily lead to loss of funds if used incorrectly.
Crowdfund Insider: With regulators paying closer attention to crypto ETFs and custody solutions, what challenges and opportunities do you see for institutional investors in the coming years?
Manthan Dave: I think the challenge in the next 20 years will be to shift the current “walled garden” mindset to a more open mindset that favors interoperability. Generally, the crypto ETFs today are replicating the current financial scene on crypto, which, while it is bridging the gap between the two worlds, is undermining the actual capabilities and the goal of crypto.
For example, institutions have been constantly pushing for efficiency of the market. While segregated exchanges provide a better albeit walled garden experience for everyone involved it can lead to fragmented liquidity and an overall inefficient market.
The crypto approach to this is to favor composability and interoperable protocols that lead to better, more liquid markets. I think regulators need to change their approach here.
Instead of thinking in terms of walled garden and keeping specific actors and their identities out by inconveniencing everyone, they need to think about more transparent but effective approaches where the rules are enforced by protocols on funds itself