Securing Digital Assets: How Custodians Mitigate Insider Risks

In the world of digital assets, insider threats pose a significant risk to the integrity of custodial services. Whether accidental or malicious, internal breaches can result in severe consequences for institutional clients. Safeguarding against these risks requires robust, multi-layered security measures designed to protect digital assets from unauthorized internal access.  

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What is an Insider Threat in the Context of Digital Assets?

An insider threat in the digital assets world refers to the risk posed by individuals within an organization who have access to sensitive data, systems, or digital assets and either intentionally or unintentionally compromise their security. These insiders can be employees, contractors, or partners with authorized access to critical infrastructure, making them uniquely positioned to exploit weaknesses from within.  

Key examples of insider threats Include:  

• Unauthorized access to digital wallets or custodial systems.

• Misuse of privileged roles to initiate fraudulent transactions.

• Data leaks or the intentional sharing of sensitive information to third parties.

• Human errors that lead to security breaches or loss of digital assets, often through mishandling private keys or sensitive data.  

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Why are Insider Threats so Dangerous in Digital Asset Management?

Unlike external threats that rely on breaking through layers of firewalls and security protocols, insider threats arise from within, often bypassing many of these defenses. Insiders already have authorized access to sensitive systems and data, making it easier for them to cause damage without immediately raising alarms.  

In digital assets, a successful insider breach can result in:  

• Substantial financial losses, potentially affecting digital asset portfolios.  

• Damage to institutional trust, which can take a long time to rebuild.  

• Regulatory penalties may arise from failing to maintain secure systems.  

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How Custodians Prevent Insider Threats in Digital Asset Management

Digital asset custodians recognize the high stakes of managing these assets and have developed advanced security and governance measures to safeguard against insider threats. These measures are designed to limit unauthorized access, detect suspicious activities, and provide accountability for every action taken within the system. Some of the key measures include:  

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Whitelisting and Address Restrictions

To prevent unauthorized transfers of digital assets, many digital asset custodians implement whitelisting protocols. Whitelisting allows only pre-approved addresses to receive transfers, minimizing the chance of funds being sent to unauthorized or malicious parties. For example, if an institutional client only deals with a set group of counterparties, their digital assets can only be transferred to these whitelisted addresses. If an insider attempts to send funds to an unknown or unauthorized address, the transaction will be blocked, and an alert will be triggered for further investigation.  

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Audit Trails

Audit trails create detailed logs of every action taken within the system, from login attempts to transaction approvals. These logs provide a transparent view of all activities, allowing financial institutions to quickly trace any unusual or unauthorized actions back to the responsible party.  

At Rakkar, we implement comprehensive audit trails and activity logs to internally monitor and ensure accountability across our platform, providing an additional layer of security for our clients' digital assets.

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Authentication Transfers

To add further security, digital assets custodians use an advanced authentication system, such as FIDO (Fast Identity Online), PIN codes, and video speech prompts, based on the value or risk level of the transaction. This multi-step process makes it significantly harder for unauthorized users to execute transactions, even if they manage to access privileged systems.  

Quorum-Based Engine  

Quorum-based approval mechanisms provide an additional safeguard by requiring multiple authorized individuals to approve any high-value or high-risk transactions. This approach means that no single employee or insider can independently initiate or approve sensitive transactions without consensus from other trusted team members. In practice, digital asset custodians establish a predetermined quorum—often involving senior team members or different departments—for authorizing specific types of transactions. This consensus-driver process helps prevent fraudulent activities by insiders, as no single person holds sole power over the transaction process.  

At Rakkar, an added layer of protection is provided through our quorum-based engine, which requires a minimum of two approvals per transaction. This approach mitigates collusion risk by involving multiple parties in each authorization, ensuring a transparent and secure transaction flow. Additionally, Rakkar’s active insurance policies offer coverage against internal threats, providing a crucial final line of defense in our security framework.

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Conclusion

Insider threats represent a unique challenge in digital asset management due to the access privileges these individuals hold. By implementing layered security measures such as whitelisting, audit trails, advanced authentication protocols, and quorum-based engines, custodians like Rakkar can mitigate these risks and provide institutional clients with the highest level of protection for their digital assets.