What Is BitGo?
BitGo is a company with one goal in mind–enabling institutional investment in cryptocurrency. But why should this be necessary? Doesn’t crypto provide a means of avoiding banks and financial institutions?
Cryptocurrencies and blockchain technologies need the trust and investment of financial institutions if they are ever to gain true mainstream adoption. After all, the big money lies with institutional investors. One New York Times columnist concurs. In June, Omid Malekan of the NYT wrote:
“Institutions control so much money that they own half a trillion dollars’ worth of Apple alone, and that’s just one stock within a single asset class. If all the hedge funds and family offices out there decided to commit a fraction of that capital to a diversified portfolio of cryptocurrencies, they may double the size of the sector.”
There are signs that the interest of banks and financial institutions is becoming more real. In May, Goldman Sachs became the first regulated institution to allow Bitcoin trading. Only last month, the Grayscale Investments biannual report stated that 56 percent of its $250m investments so far this year have come from institutional investors.
So the institutions are showing interest. But current investment levels seem to represent dabbling, rather than diving.
The fact is that given the infancy of blockchain and cryptocurrencies there is currently limited infrastructure enabling involvement from institutional investors. Banks and financial institutions are subject to local financial regulations concerning security and privacy. Public blockchains such as Bitcoin just aren’t designed to meet those requirements.
BitGo provides Security-as-a-Service to institutional investors. The company started in Palo Alto, California in 2013. It went on to raise $12m in venture capital funding in 2014, followed by a further $42.5m last year.
The BitGo business model has multiple arms, comprising the following:
- Custody services for institutional investors
- Multi-signature wallets for enterprise investments
- Customized private blockchains for the financial world
- Platform API, which enables developers to integrate BitGo solutions into their blockchain projects
Most of the cryptocurrency wallets on the market today are not fit for use by banks, companies and other institutions. In general, corporate spending requires more than one authorizing party. Most crypto wallets are designed for use by a single party.
BitGo is the pioneer of multi-signature digital wallets. These wallets require more than one party to sign off on a cryptocurrency transaction without taking custody of the digital assets themselves.
The BitGo software allows a company to create its own policies and procedures for the authorization of payments, which ensures legal compliance with any local legislation governing corporate transactions.
Crypto custody solutions are not unique, as Hong Kong crypto investment company Xapo and US-based mega-exchange Coinbase are already in a similar space. However, BitGo also offers institutional investors the custody solution they need to assure regulators that their crypto investments are held securely and in line with local legislation.
Customized Private Blockchains
Bitcoin and other public blockchains generally do not meet the legislative requirements for institutional investors. Therefore, a further service offered by BitGo is the development of customized private blockchains. Using such a customized solution, institutional investors can trade digital currencies.
One example is the RMG (Royal Mint Gold) token. The UK Royal Mint developed this token to enable the trading of gold as a blockchain-based asset. The RMG trading platform was built in collaboration with BitGo and AlphaPoint to provide a compliant solution for institutional investors.
The BitGo platform offers an API so that developers can integrate the multi-signature wallet functionality into their own Bitcoin applications. Essentially, this means that any new app or software taking Bitcoin as payment can take advantage of the BitGo wallet functionality as a payment method.
The project also offered (but no longer does) BitGo Instant, a feature that instant transactions by effectively acting as a payment guarantor. The company instantly honored any payments sent, providing the same kind of instant payment services offered by traditional financial middlemen like Visa or PayPal. Crypto exchange BitStamp was among the clients using BitGo Instant.
In the News
BitGo was unfortunately implicated by news outlets in the 2016 hack of Hong Kong exchange Bitfinex, where nearly 120k Bitcoins were stolen. The company firmly denied any knowledge or wrongdoing.
To belay any residual security doubts, a July press release described how the company has recently achieved a Service Organizational Control 2 (SOC 2) audit with Deloitte. The SOC 2 report provides assurances to clients about the effectiveness of security controls around their confidential information.
Predictive UTXO Management
BitGo has also recently implemented predictive UTXO management. UTXO stands for unspent transaction output and refers to a scenario where coin holders have multiple small fragments of Bitcoin sitting in their digital wallets.
The situation is analogous to having a lot of spare change in a real wallet, as a result of having spent all your banknotes. Therefore, UTXO is the process of converting the small change to larger denominations.
However, due to fees, this can be a costly process for high-volume transaction wallets. The “predictive” element refers to using low-fee periods to enable these conversions, hence reducing the overall fees for individual wallet holders.
Finally, BitGo has also recently established a partnership with Cinnober, which creates crypto exchange technology. The partnership enables institution-grade exchange technologies, allowing banks and financial institutions to invest in crypto using the everyday exchanges that retail crypto investors use.
The onboarding of institutional investors to the crypto space is an essential development in ensuring the longevity of digital currencies and broader blockchain technologies. BitGo has already attracted significant venture investment and is positioning itself as a critical player in a not-yet-crowded market. The company is, therefore, one to watch.
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