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Ledger CEO Gauthier and Etana CEO Russell Discuss Enterprise Crypto Wallets and Custody Services

During an after-hours event on the eve of Consensus 2023 in Austin, Texas, Blockchain Journal editor-in-chief David Berlind speaks with Pascal Gauthier, CEO of Ledger, and Brandon Russell, CEO of Etana Custody about a newly forged partnership between the two companies.

With products like its line of nanodevices, Ledger is widely known in cryptocurrency circles as a physical "cold wallet" provider that offers hardware-based solutions for the self-custodying of cryptocurrency. But Gauthier takes a broader view of Ledger as a security company that also offers management and governance solutions to businesses where no single individual can or should have full control over an organization's cryptocurrency reserves.

Meanwhile, few if any enterprises are going to self-custody cryptocurrency reserves in any significant amounts. Much the same way enterprises custody their cash and other assets with enterprise-grade custodians such as banks, Etana claims to offer safe and compliant custody of digital assets to large organizations. However, regardless of where exactly an organization's digital assets are custodied, a management and governance layer of the sort offered by Ledger is still necessary. Thus, the partnership between the two companies brings together the security technology provided by Ledger and the custodian services offered by Etana to provide greater security and governance to digital assets held by their mutual enterprise clients.

In the interview, Gauthier explains that for enterprises with significant crypto assets, it is important to have a governance layer on top of those assets to ensure that there are clear rules of engagement when it comes to who, within the organization, can access and spend those assets. Russell further explains that the role of Etana is to handle the trade lifecycle of the assets, with the goal of mitigating counterparty risks and ensuring that assets are safely kept for the benefit of the underlying clients.

Consensus

Wallet Technology

Digital Asset Custody

By David Berlind
Published:May 9, 2023

Audio-Only Podcast

David Berlind: Today is April 25th, 2023. This is the Blockchain Journal podcast. I'm David Berlind, your host. I'm in Austin, Texas, where Consensus 2023 is about to start. I'm at one of the after-hours parties that's taking place on the eve of the event. So it's late in the afternoon, it's warm outside, but standing with me are two big movers and shakers in the industry. One of them is Pascal Gauthier. You are the CEO of Ledger. Welcome to the podcast.

Pascal Gauthier: Thank you for having me. And yes, I am the CEO of Ledger.

Berlind: And then also we have Brandon Russell, who is the CEO of Etana, which is a custody company, right?

Brandon Russell: Correct. Thank you for hosting us.

Berlind: Yeah, thanks for being here. So you guys have made an announcement, and we'll get to that. It's a joint announcement that you're going to do. You're doing something for institutions and enterprises, so I do want to talk about that.

But at first, for the many people in our audience who are not familiar with who Ledger is... It's hard to believe that some people might not be familiar, but not everybody in the enterprise audience knows about wallets and Ledger and what custody is all about, and what Etana does. Let's start there. So Pascal, what does Ledger do?

Gauthier: Ledger, at heart, is a security company. So what we do — our mission — is to make critical digital assets secure and easy to use. And we do this for the retail, but also for the enterprise. And so what we do for enterprise and what we do for Etana is we give them a security platform that does two things. Security of the private keys, also governance on top of the private keys, like who has access to what, who's allowed to do what, and segregation of duties between administrators and operators. So in a nutshell, this is what we do.

Berlind: So this is an important issue because a lot of times we hear about wallets, but for [the] most part, the wallets we hear about all the time in the news and they're talked about are personal wallets. It's where you keep your crypto. Sometimes the wallet is a custodial wallet, sometimes it's a non-custodial wallet. But for enterprises, you just can't give one person a wallet and say, "Okay, you're in charge of it all," because that presents certain risks. Is that right?

Gauthier: Of course. I mean, if you see it on a billion-dollar worth of crypto and you have access to the private key and I have access to the private key, and this gentleman has it, who's going to do what? Who's going to be [the] first to go to Costa Rica? And so what you do is you want to put a governance layer on top of the coins to make sure that we know, and it's in within the security enclave, we know what are the rules of engagement toward the crypto, who can spend what, who can send what, where, et cetera. So it is a sophisticated piece of technology, and that's what we do. We only do the piece of technology, and then we power companies like Etana so they can actually do their job on top of it.

Berlind: Okay, let's go to Etana now. A lot of people don't even know what custody means. So what is custody?

Russell: Essentially, it's keeping your assets safe, at the core of it, that's what it is. Essentially, you're having a outsource company, manage your assets for you. The same way that you would have a bank look after your cash and dollars in a bank account.

Berlind: So we're all used to having somebody be the custodian of our assets. If we have a bank account, we have a custodian. Is that right?

Russell: Essentially, correct.

Berlind: But not all banks are capable of being custodians of cryptocurrency, is that right?

Russell: That is correct. There's a reluctance right now by banks because there's a lack of guidance on the regulatory side for them to get into this game.

Berlind: When I write a check that's from my bank, then the bank is the one that settles the transaction for me essentially. So I'm assuming that when you act as a custodian for your corporate clients, your enterprise clients, you handle the settlement side of things?

Russell: Yeah, it's a little bit more complicated than that. From Etana's point of view, we are much more interested in the trade life cycle. We want to see counterparty risk mitigated, so we don't want to see assets put onto exchanges and we have an FTX event. And then what that really means is we are seeing assets held at Etana Oil for the benefit of the underlying client. And then all those trade workflows, the post-trade settlements, and the clearing, Etana handles all those instructions downstream, which is why the partnership with Ledger really makes a lot of sense.

Berlind: Okay, so you guys have made a big announcement here and both of you bring something to make the whole greater than the sum of its parts. So you have the custodian part taken care of, you have the ledger, the wallet technology taken care of, the security. Without the private keys, I'm assuming that's going on here. So tell me, who wants to talk about what exactly the two of you are doing?

Russell: Yeah, I think the first part is to understand the nuance of custody. So when we talk about custody, what we mean by that is that we are [a] regulated custodian, that in our case it's under the division of banking in the state of Colorado. But the custody to us is more than just holding an asset, it's literally that we have oversight and that we are meeting certain checkboxes when it comes to satisfying institutional interests in this space. Without that, institutions are not really going to adopt anything that's happening in the crypto space.

Berlind: So institutions can... Because you understand compliance and regulation, institutions are basically outsourcing the compliance to you by using you as a custodian?

Russell: Yes. At the heart of it, that is the gist of it. Institutions increasing, [if] they want to get involved in [the] space, there's so many hurdles they have to overcome. The one is they have to first get comfortable with the crypto space itself, which is this outlying asset. The second thing they have to do is say, "Right, who are the council parties that we want to trade with?" How many do we actually trust? If we put assets over there, do we know that tomorrow they're still going to be there?" And then lastly, "Is the actual components holding the digital asset? Can that wallet infrastructure be hacked? How secure is that? What is the insurance on it?" There's a whole lot of thought that goes into this process of engaging the space that this partnership makes possible.

Berlind: So Ledger supports somewhere over something like 1,800 different cryptocurrencies. Are you bringing the governance part of that, the enterprise governance part of it to this partnership? Is that where you fit in?

Gauthier: Yeah, so we are custody technology and they're the custodians. So they're a financial service, [and] we are a technology company. And so you need those two bricks basically to build that role. But what's happening right now was very interesting, and this is sort of a post-FTX movement, and actually, it is only that crypto is becoming [a] much more traditional finance. Because in in traditional finance, the exchange is not the custodian and you got the segregation of duty between the exchange piece and the custody piece. It was not the case, actually, in crypto. And the FTX, the bankroll is all about this. FTX was the custodian and the execution engine for the exchange. And what's happening right now, what we're trying to build with Etana is actually this — where [the] exchange is going to do the trading piece, but the custody is going to be done by a regulated custodian.

And so we are trying to be the best partners possible with Etana so they can actually bring that in[to] the market and which means more security for investors because if the coins are not on the exchange, you don't have that counterparty risk anymore. And so what's happening right now is very profound for the industry and it's happening now when 12 to 18 months ago would've been more difficult because the exchanges were keeping the funds.

Berlind: It seems like what you're saying is that until things started to restructure this way, that was a major obstacle to adoption by a lot of institutions. Was that kind of structure where the exchange did everything?

Gauthier: Yeah, I think that's correct. And two things need to happen. One, the technology needed to be out there and which is what we have now, but also you needed some players like Etana to take that pilgrim baton and do the work.

Berlind: I was always very surprised, when you think about something like FTX or any other company that's structured like that, the New York Stock Exchange is not a brokerage house. Why is that? Well, I think there's a separation of church and state and there's something about regulation that makes sure that that's the case. But here, you had an exchange that was both a custodian, they were also kind of a brokerage, and they also run a chain and have a Stablecoin. These things, these seem like competing interests that should not be under one roof. Is that right?

Russell: It's a nascent asset class and so you're going to get this. The infrastructure did not exist when a lot of the exchanges came to play and so they became all things to all men. They were the execution venue, they're the custodian, [and] the settlement venue, they're absolutely everything. I think as the industry matures, and this is what we're starting to see now, you're starting to see different players actually start to play their role[s]. And I think a regulation when it comes into play will actually dictate that. I think there is a foreshadowing over year by the exchanges where they're starting to realize that the framework is actually about to change, and they're starting to actually have meaningful conversations about adopting traditional capital market infrastructure.

Berlind: Certainly, this week is a big week. There's a bunch of conversations taking place in Washington DC right now about that very thing. I think you've got regulators and lawmakers sort of at each other's throats, it's an interesting situation. Going back to the fact that Ledger already supported something like 1800 cryptocurrencies, are you guys going to support that many cryptocurrencies in what you're doing, or is there going to be, is it like a subset of those 1800?

Gauthier: So our sub-custodial layer is a function in terms of the support is a function of what our partners can support. So we can custody 1800 crypto assets or whatever the number is that Ledger continued to evolve into. The reality from the trading side is a little bit different. We certainly want to make sure that we are mindful of what the SEC and the CFTC are pushing down our lane in terms of what we are actually able to support from a trading perspective as it relates to settling those assets.

Berlind: How many institutions are, or enterprises I should say, are trading for the purposes of investment, and how many are just keeping crypto and reserve for the purpose of paying chain fees based on whatever volume of transactions are doing on the chain and whatever costs at any given moment to transact?

Russell: I was hoping you would pass the mic to him. I have no idea what the answer is.

Gauthier: No idea, no idea. It's a great question. No idea.

Berlind: Nobody knows the answer to that. Well, so are you doing this primarily in service of the institutions that are on the investing side?

Russell: We see demand from traditional financial institutions, professional money managers, [and] hedge funds like that, who want to access digital markets in a safe and compliant fashion. And that's really the primary inertia for this conversation. I think the retail side of it will follow in hand because it is a because it is an asset class that is really heavily retail-focused.

Berlind: What about the data side of things? So you guys are essentially in the workflow of all of this, all of these transactions, ERP systems are particularly lacking when it comes to their ability to work with crypto. There are a few companies out there like Bitwave that take care of this. What assurances do the various enterprises, [the] institutions have that the data that surrounds transactions or whatever their activities are with the combined solution that you're putting together will properly record in their systems?

Russell: Great question. I think at the heart of it is from a data perspective, we have the ability to collect a lot of it and we can share that. We don't really have a lot of guidance on where that is directed right now. I think partnerships like Bitwave and like that where they are thought leaders and they blaze that path. I think partnering with people like that really attends to that problem that you spoke to.

Berlind: Pascal, what is a typical governance setup in an enterprise? How many people have their hands on the enterprise wallet? Who's doing what, how does that work so that nobody runs off with everything?

Gauthier: It's a bit of a trick question because it really depends — and my answer will be not satisfactory to you and the viewers — but it really depends on the institution. I think what the most important thing is the segregation of duties with administrators on one side and operators on the other. And you don't want the administrators to be operating the funds as well, because otherwise —

Berlind: Let me pause you there. What's an administrator and what's an operator?

Gauthier: Administrator is the person who's going to decide on how the operators can engage with the funds, but the administrator himself cannot engage with the funds, if you see what I mean.

Berlind: Like a transaction decision-maker?

Gauthier: Correct. So typically we have Ledger enterprise for Ledger for treasury management because we hold coins. I'm an administrator, but my finance team is the operator. So I decide the rules of engagement and my finance team is executing within the rules of engagement. So they cannot do anything that is without the rules that were pre-decided. And me, I cannot engage, I cannot operate the funds myself because I'm an administrator.

Berlind: And is it your technology that has all of the permissions and the identities to manage all of that?

Gauthier: Yes, correct. This is what you program first and you program in a security layer. And so the administration of the funds is enforced by the security layer.

Berlind: And so somebody sets all the policies, maybe a Chief Blockchain Officer —

Gauthier: So the CEO and the CFO in our case, so I'm talking the case of Ledger, CEO, and CFO set the policy and operators from the financial team can then operate within those policies.

Berlind: But in a really big enterprise, it might not be the CEO and the CFO. There might be other people in the organization that are doing this sort of thing?

Gauthier: Probably, but you still have a set of administrators that won't be operators and a set of operators that won't be administrators. And then you can have as many administrators as you want and as many operators as you want. But administrators usually it's a small set and operators can be a big set of people.

Berlind: Does this live separate from identity access management systems that are already in place at enterprises? Is it completely separate? Do you integrate with those in a way that there could be a central way of managing all that?

Gauthier: No, it's separate, I would say. Were you talking about different things that are related in, that are in this chain of custody? The rules of engagement that are under the security hood, [are] really the way that people engage with funds. I'll give you an example — Société Générale, Jerome Kerviel

Was it $4 or $5 million that got traded and sort of lost? The big question and the reason why Jerome Kerviel got fired was nobody understood whether he was allowed to do what he did or not. And so the chain of custody wasn't clear. At least that's what Société Générale said and that's why Jerome Kervial sort of lost the lawsuit. He claimed different.

With our technology, none of that can happen. No one can spend money at Etana or no one can send money at Etana if it has not been pre-approved by the administrator. So you cannot have suddenly $10 million that goes to an unknown address or misspend, that's not possible.

Berlind: And we're standing next to the administrator right here.

Russell: Right.

Berlind: Okay. Well, Pascal Gauthier, CEO of Ledger, Russell Brand, Brandon Russell. I almost made you a movie star and yeah. Brandon Russell, thank you very much for joining us on the Blockchain Journal podcast.

Russell: Awesome. Thank you very much.

Gauthier: Thank you. Merci.

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