A brief discussion on third-party custody of Bitcoin trading platforms

The purpose of third-party custody of trading platform funds is to avoid the risk of trading users losing their principal due to misappropriation of user funds by trading platforms due to poor management or other reasons. Bitcoin trading platforms need to be custodial or prove that they have 100% reserves, which are of two types: the first is legal currency, and the second is digital currency.

Old Bitcoin investors should remember clearly that before and after the collapse of MTGOX in 2014, the entire Bitcoin investment community was worried that their commonly used trading platforms would suddenly announce that platform funds (fiat currency or Bitcoin) were stolen like MTGOX, resulting in the loss of all their principal. For this reason, many Bitcoin investors at home and abroad strongly demanded that trading platforms publish Bitcoin cold wallet addresses to prove that they did not misappropriate Bitcoin or other digital currencies stored by users on trading platforms. What is more worth mentioning is that the industry has also designed a "100% reserve verification plan" based on the Bitcoin blockchain specifically for this matter. In order to respond to the voices of investors, major trading platforms at home and abroad have also had to introduce different versions of the "100% reserve verification plan" to prove their innocence. However, due to the lack of strong government intervention and relying solely on industry self-discipline, the matter was later left unresolved. Until today, digital currency investors still need to worry every day whether trading platforms will suddenly close their websites and run away with their money.

The rumor that "the Chinese government will conduct third-party custody of trading assets on domestic digital currency trading platforms" is indeed a major positive from a policy perspective, which invisibly gives digital currency trading platforms a legal cover. Before the assets are deposited by a third party, various digital asset trading platform access systems should be established to regulate the entire digital currency investment market. The current situation is that China's digital currency trading platforms have no access system and the market is relatively chaotic. As long as you can do website development, or even spend a few thousand or tens of thousands of RMB, you can build a digital currency trading platform. However, such a platform has no guarantee. The investment risk of trading on these platforms is extremely high, and ordinary investors are unable to distinguish which platform has the lowest probability of running away with the money.

Implementing third-party custody of trading platform assets completely separates the assets to be traded from the trading process. The trading platform is only responsible for matching users' transactions, while the trading assets are stored in other institutions. This has at least two major advantages: first, investors can rest assured to invest and trade on the platform where the assets are managed, because even if the trading platform loses money and closes, the investor's legal currency or digital currency can be preserved; second, for the trading platform, it greatly reduces the system risk. Everyone knows that Bitcoin is an asset stored on the Internet. As long as the network where Bitcoin is located can be invaded, the corresponding Bitcoin may be stolen. If the storage of Bitcoin is separated from the trading platform, the probability of the trading platform being stolen due to hacker attacks will be greatly reduced.

If the Bitcoin trading platform has a legal cover, it will not only reduce the systemic risk of the trading platform, but also reduce the investment risk of Bitcoin investors. Isn’t this a good thing?

"100% Reserve Verification Scheme for Bitcoin Exchanges" Original link: https://iwilcox.me.uk/2014/proving-bitcoin-reserves
Translation of "Bitcoin Exchange 100% Reserve Verification Scheme": http://vdisk.weibo.com/s/uCK9m7Df9B0xo?from=page_100505_profile&wvr=6

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