A bunch of keys are stored in "cold-storage" in a bank-grade vault in South Dakota.
That may conjure up images of a stark, concrete bunker built deep underground. But Jody Mettler, the president of BitGo Trust Company, said the image is a little more subtle.
“It’s not in a dungeon, we don’t have to wear fuzzy jackets," Mettler said. "But it’s very secure.”
Those keys belong to the company and customers of the collapsed cryptocurrency exchange FTX. The "cold storage" is actually hard drives located inside a vault in a Sioux Falls business office. The keys are a string of numbers stored on those hard drives, which never touch the internet.
“Meaning the whole signature process is held offline," Mettler said. "There’s no parts of it that are held online.”
Those keys are essentially passwords used to access cryptocurrency accounts and withdraw funds.
Cryptocurrency is a digitally "mined" asset generated by computers after they solve a complex numerical problem. Access to those assets is controlled by whoever has the keys.
Enter FTX—a company once valued at $32 billion dollars in virtual currencies. It filed for bankruptcy in November after concerns were raised that the company was insolvent and moving money illegally.
Mettler said BitGo Trust is preventing any further losses from hacking.
“So, essentially, what they were asking us to do is to safeguard their end client’s assets to ensure there was no more money movement, protect against hacks, all those types of things, while the bankruptcy proceeding played out," Mettler said. "So the consumer could get as much money as they could back.”
FTX Founder Sam Bankman Fried was arrested in the Bahamas Monday night. He’s been charged with fraud, conspiracy and other charges.
John Ray is the new CEO of FTX. Ray has worked to clean up companies such as Enron after its 2001 accounting fraud scandal. Ray said the FTX mess may be even bigger than Enron.
One of Ray’s first acts as head of the company was signing a contract with BitGo. Ray estimates they’ve secured over $1 billion in FTX assets and placed it into BitGo cold storage. That’s a fraction of what was lost.
During a House Committee on Financial Services meeting, Ray said assets in the company’s name are getting moved into cold storage. The totals in FTX’s accounts, or so-called wallets, may not be clear.
“The question really is are there wallets we don’t know about?" Ray said. "Certainly, that is the potential because the way this company was organized there may be wallets that don’t have our names, we don’t know where they are.”
Ray said cybersecurity experts are tracking the company’s remaining crypto accounts and will learn more about its assets in the coming weeks.
BitGo Trust’s Jody Mettler said the assets are secure once they’re in cold storage.
“So, we take the keys offline, so the assets won’t move without very specific direction," Mettler said. She said South Dakota is a good place for BitGo to operate.
In 2018, the trust company reported it was the first qualified custodian deliberately built to store digital assets. It’s regulated through the South Dakota Division of Banking.
“So, it’s very much a traditional finance trust tool, but that’s retrofitted for a digital asset," Mettler added.
State regulations hold BitGo to account—requiring that it act as a fiduciary to its clients, hold assets in separate accounts and meet the state’s regulatory standards.
South Dakota’s banking and trust law came under scrutiny following the Pandora Papers investigation last year. That focused on the state’s role as a tax haven for the rich.
Mettler spent two decades working for Citi Bank in Sioux Falls. She hopes the regulation at the state level brings some stability to the world of cryptocurrency.
“Crypto, in general, I think has always had a little bit of a bad rep. Quite honestly, this FTX stuff doesn’t help," Mettler said. "At the end of the day it’s an amazing asset class that has so much upside.”
Mettler said the FTX issue boils down to financial fraud, not an issue with cryptocurrency. Still, she said there’s a need for cryptocurrency regulation and consumer protections to make the industry safe for everyone.
