Personal blog of Yzmir Ramirez

Not the city, the $57 million-funded cryptocurrency custodian startup. When someone wants to keep safe tens or hundreds of millions of dollars in Bitcoin, Ethereum or other coins, they put them in Anchorage’s vault. And now they can trade straight from custody so they never have to worry about getting robbed mid-transaction.

With backing from Visa, Andreessen Horowitz and Blockchain Capital, Anchorage has emerged as the darling of the cryptocurrency security startup scene. Today it’s flexing its muscle and war chest by announcing its first acquisition, crypto risk modeling company Merkle Data.

Anchorage Founders

Anchorage has already integrated Merkle’s technology and team to power today’s launch of its new trading feature. It eliminates the need for big crypto owners to manually move assets in and out of custody to buy or sell, or to set up their own in-house trading. Instead of grabbing some undisclosed spread between the spot price and the price Anchorage quotes its clients, it charges a transparent per transaction fee of a tenth of a percent.

It’s stressful enough trading around digital fortunes. Anchorage gives institutions and token moguls peace of mind throughout the process while letting them stake and vote while their riches are in custody. Anchorage CEO Nathan McCauley tells me, “Our clients want to be able to fund a bank account with USD and have it seamlessly converted into crypto, securely held in their custody accounts. Shockingly, that’s not yet the norm — but we’re changing that.”

Buy and sell safely

Founded in 2017 by leaders behind Docker and Square, Anchorage’s core business is its omnimetric security system that takes out of the equation passwords that can be lost or stolen. Instead, it uses humans and AI to review scans of your biometrics, nearby networks and other data for identity confirmation. Then it requires consensus approval for transactions from a set of trusted managers you’ve whitelisted.

With Anchorage Trading, the startup promises efficient order routing, transparent pricing and multi-venue liquidity from OTC desks, exchanges and market makers. “Because trading and custody are directly integrated, we’re able to buy and sell crypto from custody, without having to make risky external transfers or deal with multiple accounts from different providers,” says Bart Stephens, founder and managing partner of Blockchain Capital.

Trading isn’t Anchorage’s primary business, so it doesn’t have to squeeze clients on their transactions, and can instead try to keep them happy for the long-term. That also sets up Anchorage to be a foundational part of the cryptocurrency stack. It wouldn’t disclose the terms of the Merkle Data acquisition, but the Pantera Capital-backed company brings quantitative analysts to Anchorage to keep its trading safe and smart.

“Unlike most traditional financial assets, crypto assets are bearer assets: In order to do anything with them, you need to hold the underlying private keys. This means crypto custodians like Anchorage must play a much larger role than custodians do in traditional finance,” says McCauley. “Services like trading, settlement, posting collateral, lending and all other financial activities surrounding the assets rely on the custodian’s involvement, and in our view are best performed by the custodian directly.”

Anchorage will be competing with Coinbase, which offers integrated custody and institutional brokerage through its agency-only OTC desk. Fidelity Digital Assets combines trading and brokerage, but for Bitcoin only. BitGo offers brokerage from custody through a partnership with Genesis Global Trading. But Anchorage hopes its experience handling huge sums, clear pricing and credentials like membership in Facebook’s Libra Association will win it clients.

McCauley says the biggest threat to Anchorage isn’t competitors, though, but hazy regulation. Anchorage is building a core piece of the blockchain economy’s infrastructure. But for the biggest financial institutions to be comfortable getting involved, lawmakers need to make it clear what’s legal.

Visa and Andreessen Horowitz are betting even bigger on cryptocurrency, funding a big round for fellow Facebook Libra Association member Anchorage’s omnimetric blockchain security system. Instead of using passwords that can be stolen, Anchorage requires cryptocurrency withdrawals to be approved by a client’s other employees. Then the company uses both human and AI review of biometrics and more to validate transactions before they’re executed, while offering end-to-end insurance coverage.

This new-age approach to cryptocurrency protection has attracted a $40 million Series B for Anchorage, led by Blockchain Capital and joined by Visa and Andreessen Horowitz. The round adds to Anchorage’s $17 million Series A that Andreessen led just six months ago, demonstrating extraordinary momentum for the security startup.

“As a custodian, our work is focused on building financial plumbing that other companies depend on for their operations to run smoothly. In this regard we have always looked at Visa as a model,” Anchorage co-founder and president Diogo Mónica tells me.

“Visa was ‘fintech’ before the term existed, and has always been on the vanguard of financial infrastructure. Visa’s investment in Anchorage is helpful not only to our company but to our industry, as a validation of the entire ecosystem and a recognition that crypto will play a key role in the future of global finance.”

Cold-storage, where assets are held in computers not connected to the internet, has become a popular method of securing Bitcoin, Ether and other tokens. But the problem is that this can prevent owners from participating in governance of certain cryptocurrency where votes are based on their holdings, or earning dividends. Anchorage tells me it’s purposefully designed to permit this kind of participation, helping clients to get the most out of their assets like capturing returns from staking and inflation, or joining in on-chain governance.

As three of the 28 founding members of the Libra Association that will govern the new Facebook-incubated cryptocurrency, Anchorage, Visa and Andreessen Horowitz will be responsible for ensuring the stablecoin stays secure. While Facebook is building its own custodial wallet called Calibra for users, other Association members and companies hoping to dive into the ecosystem will need ways to protect their Libra stockpiles.

“Libra is exactly the kind of asset that Anchorage was created to hold,” Mónica wrote the day Libra was revealed. “Our custody solution enables online participation with offline assets, so that asset-holders don’t face a trade-off between security and usability.” The company believes that custodians shouldn’t dictate which coins their clients hold, so it’s working to support all types of digital assets. Anchorage tells me that will include support for securing Libra in the future.

You’ve probably already used technology secured by Anchorage’s founders, who engineered Docker’s containers that are used by Microsoft, and Square’s first encrypted card reader. Mónica was at Square when he met his future Anchorage co-founder Nathan McCauley, who’d been working on anti-reverse-engineering tech for the U.S. military. When a company that had lost the password to a $1 million cryptocurrency account asked for their help with security, they recognized the need for a more idiot-proof take on asset protection.

“Anchorage applies the best of modern security engineering for a more advanced approach: we generate and store private keys in secure hardware so they are never exposed at any point in their life cycle, and we eliminate human operations that expose assets to risk,” Mónica says. The startup competes with other crypto custody firms like Bitgo, Ledger, Coinbase and Gemini.

Last time we spoke, Anchorage was cagey about what I could reveal regarding how its transaction validation system worked. With the new funding, it’s feeling a little more secure about its market position and was willing to share more.

Anchorage ditches usernames, passwords, email addresses and phone numbers completely. That way a hacker can’t just dump your coins into their account by stealing your private key or SIM-porting your number to their phone. Instead, clients whitelist devices held by their employees, who use the Anchorage app to submit transactions. You’d propose selling $10 million worth of Bitcoin or transferring it to someone else as payment, and a minimum of two-thirds of your designated co-workers would need to concur to form a quorum that approves the transfer.

But first, Anchorage’s artificial intelligence and human staff would check for any suspicious signals that might indicate a hack in progress. It uses behavioral analysis (do you act like a real human and similar to how you have before), biometric signals (do you look like you) and network signals (is your device what and where it should be) to confirm the transaction is legitimate. The same process goes down if you try to add a new whitelisted device or change who has permission to do what.

The challenge will be scaling security to an ever-broadening range of digital assets, each with their own blockchain quirks and complex smart contracts. Even if Anchorage keeps coins safely in custody, those variables could expose assets to risk while in transit. Now with deeper pockets and the Visa vote of confidence, Anchorage could solve those problems as clients line up.

While most blockchain attention has focused on the cryptocurrencies themselves and the exchanges where you can buy and sell them, a second order of critical infrastructure startups is emerging. Companies like Anchorage could make Bitcoin, Ether, Libra and more not just objects of speculation or the domain of experts, but safely functioning elements of the new world economy.