When people think about the challenges of custodianship of digital assets, cybersecurity is always top of mind.  But it isn’t the only big challenge.  The other is ‘forking,’ which is understood, as an event whereby a new piece of software is added to a cryptocurrency’s blockchain such that several new cryptocurrencies are created.

Forking seems to be great for holders of cryptocurrencies (literally, free money!!), but it can create enormous headaches for custodians—perhaps none bigger than how do you get the forked cryptocurrencies into the hands of investors who may have owned the original cryptocurrency?

The issue has enormous economic consequences. Usually shortly after a fork, for perhaps several days or weeks, the ‘new’ version of a cryptocurrencyenjoys considerable interest, and rises in value, much like the first hours of trading after the IPOof a new company’s stock.  During this time, the ability to monetize the cryptocurrency is prized; if it takes too long, the holders of the new cryptocurrency might lose their shot at making a profit.

But if you’re a custodian, just getting the cryptocurrency into the hands of your customers can be difficult—and expensive.  New systems may have to built, plus engineering resources might have to be devoted to building operational systems to make the transfer.

For this reasons, it strikes me that the disclosures exchanges–federally regulated or not–offer to customers are vitally important. Do they promise to get forked cryptocurrencies to customers in a timely manner, and if so how quickly (and how can they credibly commit to doing so)? Similarly, what are the security protocols used by the custodians for forked digital assets? And how successful have these protocols been, and what are the material risks to customers?

If you can’t solve the challenge, at least let customers know, in clear and understandable terms, the risks.

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