Who will win the crypto custody wars?

Good morning. Today we’re going to look at the differences between crypto custody and traditional global custody.

Every Wednesday, we’ll share an article exploring the the global custody sector. Every Friday, we’ll bring you a curated roundup of the most important news and insights affecting our industry.

What Is Crypto Custody?

Crypto custody refers to the secure storage and management of digital assets like Bitcoin, Ethereum, and other cryptocurrencies. Unlike traditional assets, crypto custody relies on safeguarding cryptographic private keys—unique codes that grant access to blockchain-based holdings. Custodians in this space use advanced technology, such as cold storage (offline wallets) and multi-signature protocols, to prevent unauthorized access and theft.

The rise of decentralized finance (DeFi) and institutional crypto adoption has amplified the demand for specialized custodians. Unlike global custody, which handles stocks, bonds, or commodities, crypto custodians must navigate blockchain’s irreversible transactions and the absence of centralized intermediaries like banks. This creates unique challenges and opportunities for asset protection.

Why Is Crypto Custody Different from Global Custody?

Crypto custody diverges from global custody in three key areas: technology, regulation, and operational risks. Global custodians rely on established financial market infrastructures (e.g., depositories, brokers) and a network of legacy platforms communicating via SWIFT messages to manage assets, while crypto custodians operate in a heavily decentralized ecosystem that uses more modern distributed ledger and API technology. Private keys, not legal titles, determine ownership, making security breaches often irreversible and far costlier.

Regulatory frameworks also differ. Global custody adheres to well-defined laws (e.g., SEC guidelines, PFMI guidelines), whereas crypto regulations remain fragmented globally. Additionally, crypto custodians must monitor transactions 24/7 to counter hacking attempts. This demands real-time responsiveness and cutting-edge cybersecurity measures. With the recent repeal of the SAB 121 accounting rule in the USA, many major custody banks will enter the crypto custody business.

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What Are the Risks of Crypto Custody?

The primary risks include hacking, phishing attacks, and insider threats. Unlike traditional assets, stolen cryptocurrencies are nearly impossible to recover due to blockchain’s anonymity and immutability. Custodians also face the risk of “rug pulls” (DeFi scams) and vulnerabilities in smart contracts, which can lead to catastrophic losses.

Market volatility and regulatory uncertainty compound these risks. Governments may impose sudden restrictions on crypto transactions, impacting custodians’ operations. Furthermore, reliance on third-party exchanges or wallet providers introduces substantial unregulated counterparty risk—a challenge less prevalent in heavily regulated global custody ecosystems.

How Are Risks Managed by Specialist Custodians?

Specialist crypto custodians reduce risks by using multiple layers of security. They keep over 95% of assets in cold storage (offline wallets) to protect them from online attacks. They also use hardware security modules (HSMs) to encrypt private keys, and multi-signature wallets that require several approvals before a transaction can go through, ensuring there’s no single point of failure. Additionally, insured custodial services provide financial protection, so if a breach occurs, clients have recourse.

Compliance is another focus area. Leading custodians adhere to evolving standards like the Crypto Asset Governance Framework (CAGF) and partner with regulators to bridge gaps in oversight. Regular audits, penetration testing, and partnerships with cybersecurity firms further strengthen defenses, ensuring compliance with both existing and emerging regulations.

What Could Future Operating Models Look Like?

Future operating models could combine the strengths of decentralized and traditional custody. Hybrid custodians might seamlessly integrate crypto and traditional assets, allowing institutions to manage their portfolios as a single, cohesive whole. At the same time, decentralized custody protocols powered by blockchain could automate key management through smart contracts, minimizing the need for human intervention.

We may also see industry standards evolve to include AI-powered threat detection and advanced encryption. As regulatory frameworks become clearer, partnerships between crypto custodians and global banks could form, leading to unified platforms. In the long run, the tokenization of traditional assets might further merge the worlds of crypto and global custody, creating more interoperable ecosystems.

Key Takeaways

• Crypto custody revolves around securing private keys, unlike global custody’s focus on legal ownership in databases at central securities depositories.

• Technology gaps, regulatory uncertainty, and 24/7 operational demands distinguish crypto from traditional custody where market hours and batch processing still dominate.

• Top risks include hacking, irreversible transactions, and regulatory shifts.

• Specialist custodians use cold storage, multi-sig protocols, and insurance to mitigate threats.

• Future models may merge DeFi innovations with traditional finance, supported by stronger cybersecurity protections.

What’s next?

For the next few Wednesday editions, we’ll keep exploring digital assets in more detail and how they are very different from other asset classes when it comes to global custody and what institutional clients will need from an asset servicing viewpoint. We’ll keep sending our industry news roundup every Friday.