Institutional Digital Asset Custody: Key Risks, Providers & Best Practices

Institutional digital asset custody is the business of securely holding cryptocurrencies and other tokenized assets on behalf of professional investors – and, more specifically, of protecting the private keys that control them on a blockchain.

Unlike traditional securities held through custodial banks and intermediaries, most digital assets function as bearer instruments: whoever controls the private key controls the asset. That makes custody both critical and unforgiving. If a key is lost or stolen, the associated assets may be permanently irretrievable.

At the same time, institutional interest in digital assets has accelerated. Hedge funds, banks, family offices, and corporates are already allocating to crypto or exploring tokenized products. In a 2022 BNY Mellon survey, 91% of institutional investors expressed interest in tokenized assets, and 41% reported direct crypto exposure.

With that exposure comes heightened expectations: regulators and clients increasingly demand that digital assets be protected with the same rigor applied to traditional funds, securities, or cash. Digital asset custody has therefore shifted from a niche back-office function to a strategic capability for any institution participating in this market.

To meet that bar, institutions must navigate a mix of technical, legal, operational, and regulatory challenges. Each shapes how custody is designed, evaluated, and supervised.

The sections that follow break down those challenges, outline the leading providers, explore real-world use cases, and highlight expert guidance to help organizations approach digital asset custody safely, confidently, and at scale.

 

Key Challenges and Requirements

Custodying digital assets at an institutional level introduces several challenges and requirements that organizations must address:

 

1. Security & Key Management

The foremost challenge is technical security. Namely, protecting private cryptographic keys against theft, loss, or unauthorized use. AIMA emphasizes that keeping a private key safe is fundamentally a technical task requiring strict “hygiene” protocols. Hackers and cybercriminals target crypto keys, and any weakness can lead to irrecoverable loss. Thus, leading custodians employ layered security controls:

• cold storage (offline wallets disconnected from the internet) to hold the bulk of funds;
• specialized Hardware Security Modules (HSMs) to store keys in tamper-resistant devices;
• multi-signature schemes or multi-party computation (MPC) so that no single insider can move funds, and;
• robust multi-factor authentication for any access.

These measures mitigate internal and external threats by eliminating single points of failure. Even so, institutions must remain vigilant. New techniques like MPC show promise but require rigorous vetting and industry standards to ensure they are truly secure.

 

2. Regulatory Compliance

In the financial sector, regulation and compliance loom large over digital asset custody. Historically, uncertain regulatory treatment of crypto discouraged institutional involvement, but this is rapidly changing.

In the U.S., regulators have begun providing clearer guidance. For instance, the Office of the Comptroller of the Currency (OCC) affirmed in 2020 that banks can offer crypto custody (Interpretive Letter 1170), and in 2025 expanded on this by allowing federally chartered banks to custody crypto and even use sub-custodians, as long as sound risk management is in place. 

The U.S. Securities and Exchange Commission (SEC) has also moved from ad-hoc enforcement to developing clear rules and guidelines for crypto custody.

Meanwhile, in Europe, the MiCA regulation (Markets in Crypto-Assets, effective 2024) introduces a harmonized licensing and oversight framework for crypto service providers including custodians.

These developments mean institutions must ensure any custody provider they use is properly licensed or chartered, and compliant with applicable laws on investor protection, know-your-customer (KYC) and anti-money-laundering (AML) controls. Another key concept is the “qualified custodian.”  Under SEC rules, investment advisers must entrust client assets to a qualified custodian (such as a regulated bank or trust company). Thus, institutional investors will favor custodians that meet these regulatory criteria and can provide independent audit reports (e.g. SOC 1/SOC 2 attestations) to verify their controls.

Failure to navigate the evolving regulatory landscape can expose institutions to compliance risks or even prohibit them from holding certain assets, so staying abreast of global and local regulations is a must.

 

3. Legal & Structural Considerations

Legal arrangements around digital asset custody significantly impact investor protection. Unlike traditional securities, crypto assets don’t fit neatly into existing legal categories, so institutions must clarify how assets are held and on whose balance sheet. Best practice is to ensure assets are held in a manner that segregates client assets from the custodian’s own assets. This way, even if the custodian faces bankruptcy, the investors’ assets remain separate and retrievable.

Potential users of a custody service should carefully review the terms of service, the legal framework governing the custodian (for example, is it a trust company with fiduciary duties?), any insurance provisions the custodian has, and the legal basis for how assets are recorded.

Insurance is especially pivotal for peace of mind. Reputable custodians carry crime insurance policies that can cover losses due to hacks or theft, often focusing on assets in cold storage. For instance, BitGo (a leading crypto custodian) offers up to $250 million in insurance for clients’ digital assets under its care.

Such insurance, however, is effective only if the custodian truly segregates client funds and follows proper processes. A cautionary tale was the collapse of Prime Trust in 2023, where operational failures (losing private keys) and commingling of customer funds led to an $82 million shortfall. The lesson is clear: segregation of assets and robust legal safeguards are not optional. They are essential requirements to protect investors’ ownership rights.

 

4. Operational Risk & Due Diligence

Running a digital asset custody operation demands strong governance and operational resilience. Institutions evaluating custodians should examine the firm’s operational controls, risk management processes, and financial stability. Key questions include:

• Does the custodian have 24/7 monitoring and incident response plans for cyberattacks?
• How does it generate and back up keys (e.g. geo-distributed backups and disaster recovery sites)?
• What internal checks prevent misuse–for example, are large transfers subject to multi-person approval or “four-eyes” review?

It’s also prudent to assess a custodian’s financial strength and insurance coverage, since a well-capitalized custodian is better able to absorb losses or liabilities. Regulators and industry bodies encourage thorough due diligence on these fronts. In practice, many crypto custodians are now expected to undergo independent audits regularly.

SOC 2 (Service Organization Control) reports, for instance, can provide an independent evaluation of a custodian’s security controls and processes. However, not all providers have such accreditation, so investors should request and review any audit certifications, security attestations, or compliance reports.

Ultimately, choosing a custody solution is as much about operational trustworthiness as it is about technical security. As one expert put it, custody involves a complex interplay of legal, technical, and operational responsibilities – all of which must be vetted and managed to ensure digital assets are safe.

 

5. Scalability & Access

Institutions require that custody solutions not only be secure, but also usable and scalable. This means having the ability to access funds when needed, integrate with trading systems, and support the range of assets and activities the institution intends. For example, hedge funds executing frequent trades may need a custodian that offers a certain portion of assets in hot or warm storage for quicker access, or one that supports off-exchange settlement to move assets between exchanges and custodial wallets efficiently.

Staking services are another consideration. If an institution holds proof-of-stake tokens, a custodian that can facilitate staking (earning rewards on holdings) adds value. 

Additionally, reporting and audit trails are important: custodians should provide detailed reporting APIs and dashboards, so that institutions can get real-time visibility into their holdings and satisfy their own auditors and regulators.

The breadth of asset support is also a factor. A custodian that can securely support a wide array of cryptocurrencies and tokens (while still maintaining compliance for each) will enable more flexibility in portfolio strategy.

In summary, a custody provider must combine security with functionality: it should make holding digital assets as seamless as holding traditional assets, without compromising on safety or compliance.

 

Leading Custody Providers and How to Evaluate Them

The landscape of institutional digital asset custody includes both crypto-native firms and established financial institutions entering the space. Notable independent custodians include firms like Anchorage Digital, BitGo, Copper, Coinbase Custody, Gemini Custody, and Fireblocks (though Fireblocks is more a technology provider). These companies pioneered crypto custody by developing specialized key management tech (such as air-gapped HSMs and MPC) and often serving crypto funds and exchanges.

On the other side, several traditional banks and financial services giants have launched or announced digital asset custody offerings. For example, Fidelity Digital Assets (a subsidiary of Fidelity Investments) has offered Bitcoin custody since as early as 2018. In October 2022, BNY Mellon, America’s oldest bank and the world’s largest custodian, went live with a digital asset custody platform that allows clients to hold and transfer Bitcoin and Ether. Likewise, U.S. Bank rolled out crypto custody services for institutional investment managers in 2021, and State Street and Citibank have been developing capabilities (often through partnerships or investments in fintech startups). Even payment companies like Mastercard and Visa have explored custody-related services for digital assets.

This growing roster of providers means institutions have more choices than ever – but evaluating those choices against consistent criteria is vital.

When assessing a digital asset custody provider, consider the following factors:

 

Regulatory Status & Reputation

Verify the provider’s regulatory credentials. Are they a licensed trust company or bank in a reputable jurisdiction? For instance, Anchorage obtained a federal bank charter for crypto custody in the U.S., and many others operate under state trust charters or equivalent licenses. 

A regulated status often means the custodian is subject to periodic examinations and capital/reserve requirements, adding a layer of oversight. Also consider the jurisdiction’s legal framework. Some jurisdictions (like New York with its BitLicense regime, or Switzerland’s fintech regulations) impose higher standards on custodians. 

Beyond licenses, look at reputation and track record: Has the custodian operated without major security incidents? How experienced is its management team? Given the lack of a long history in crypto, reputation and backing by credible institutions can be a proxy for trust. In short, a qualified custodian should inspire confidence by demonstrating compliance with laws and a commitment to transparency and accountability.

 

Security Infrastructure

The best custodians will detail their use of industry-leading measures, for example:

• cold storage for the majority of assets (with physical security controls guarding the offline vaults);
• multi-signature or MPC authorization to prevent any single point of compromise;
• tiered access controls with role-based permissions, and;
• strong encryption and network security practices.

Many custodians publish summaries of their security (some undergo penetration tests or cryptographic audits by third parties). So, it’s wise to ask if they hold any security certifications or if they’ve had independent assessments of their technology.

Importantly, understand their key generation and backup procedures. For example, are keys generated in a truly offline, random manner (using HSMs or secure multi-party computation)? Are backups stored in multiple geographies to mitigate natural disasters? An institutional custodian should be engineered to eliminate single points of failure and minimize attack surfaces.

Overall, a robust security setup is non-negotiable. It’s the backbone of custody.

 

Asset Segregation & Insurance

As noted earlier, proper segregation of client assets is crucial. When evaluating a provider, ensure that your assets will be held in separate accounts or wallets designated to you (or pooled only in carefully managed omnibus accounts) rather than commingled with the custodian’s own holdings. Custodians should have clear policies that client assets are bankruptcy-remote – often accomplished via trust structures or custodial agreements that state the assets are customer property, not on the custodian’s balance sheet.

Additionally, check the insurance coverage on the assets. Many institutional custodians carry crime insurance or specie insurance that covers theft of digital assets due to external hacks, internal fraud, or destruction of private keys. The scope and limit of coverage can vary widely: for example, one custodian might insure up to $50 million per incident, while another (like BitGo) offers up to $250 million in coverage for certain accounts. Understand whether the insurance is automatically provided or needs to be purchased separately, and what events are excluded. 

Fund segregation and insurance often go hand-in-hand. Keeping custody activities separate from any affiliated trading business is important, so that if (for instance) a custodian also runs an exchange, a failure of the exchange doesn’t jeopardize the funds in custody.

An evaluation of a custodian should thus include its legal structuring (e.g., do they use third-party trust companies to hold assets?) and how they would handle an extreme event like insolvency or a large breach.

 

Operational Controls & Audits

A good custody provider will have strong internal controls and independent validations of those controls. When evaluating, request information on the firm’s SOC 1 / SOC 2 audit reports or similar certifications – these reports (if available) can provide assurance that the custodian’s processes (security, availability, processing integrity, etc.) meet industry standards. 

Also consider the provider’s operational policies: Do they have strict personnel vetting and training for anyone with access to sensitive systems? What are their procedures for authorizing transactions – is there an approval workflow to prevent a rogue actor or mistake (e.g., requiring multiple approvers for large transfers, as well as enforced multi-factor authentication on all operations)?

Good custodians will also have business continuity and incident response plans, given the 24/7 nature of crypto markets. You might ask if they’ve ever had to execute their disaster recovery plan and what the outcome was.

Another aspect is financial operations. How does the custodian handle fiat, if at all (e.g., do they offer custody of stablecoins and link to bank accounts)?

Evaluate the reporting and client service as well: institutions will want a provider that can offer real-time account statements, on-demand audit confirmations, tax reporting data, and responsive client support. Essentially, a custody provider should have the operational maturity akin to a traditional financial institution, with rigorous processes and external audits to back it up.

 

Capabilities & Integrations

Finally, consider what value-added services the custodian can provide beyond simply holding the keys. Many institutions prefer an integrated solution where they can manage their crypto assets in tandem with trading or other activities. For example, some custodians facilitate off-exchange settlements or act as an intermediary so that large trades don’t have to occur on public exchanges (avoiding slippage).

Others provide brokerage or OTC trading desks linked to custody, so an institution can buy/sell through the custodian directly. If your fund is interested in earning yield, see if the custodian supports staking or connections to lending/DeFi (with appropriate safeguards).

API integrations are also key. A solid custody platform should offer APIs that let you programmatically interface with their systems, integrating custody data or actions into your own workflows or even into prime brokerage platforms.

Additionally, check the breadth of asset support: does the custodian support only the top few assets (Bitcoin, Ether), or a wide range of altcoins and tokens? And do they have a defined process for adding new assets (with due diligence on smart contract risks, etc.)? 

Depending on your organization’s needs, these factors can differentiate a basic custodian from a strategic partner.

In summary, the best providers not only secure assets, but also help institutions deploy and manage those assets more effectively. Features like audit-ready reporting, seamless integration with trading platforms, and support for emerging digital assets can greatly enhance the utility of a custody relationship.

 

Use Cases and Examples of Institutional Custody

Institutional digital asset custody is being utilized across various scenarios in the financial industry. Here are a few prominent use cases and examples:

 

Hedge Funds and Asset Managers

Many crypto-focused hedge funds, venture capital funds, and traditional asset managers with crypto exposure rely on third-party custodians to safeguard their holdings. These funds often must use independent custodians to satisfy their investors and regulators that assets are held securely and transparently. For instance, in the hedge fund industry, operational due diligence practices strongly encourage (if not require) using a qualified custodian rather than self-custody or leaving assets on exchanges. Early crypto custodians like Anchorage and BitGo built their businesses serving such clients–they have attracted significant business from hedge funds and family offices that needed a secure way to hold crypto on behalf of investors.

By using an external custodian, fund managers also reduce counterparty risk (especially after seeing high-profile exchange failures). The collapse of FTX in 2022, where ~$10 billion of client assets went missing, was a stark reminder that keeping funds on trading platforms can be perilous. As a result, professional investors now often insist on assets being custodied with a reputable third party. This not only helps with security, but also with administrative tasks like account statements, independent verification of assets, and audit support.

 

Banks and Financial Institutions

A growing number of banks have entered the digital asset custody arena, either by building in-house solutions or partnering with crypto custodians. Banks see custody as a natural extension of their trusted role in safeguarding client assets.

For example, U.S. Bank (one of the largest U.S. retail banks) launched a cryptocurrency custody service for institutional investment managers in October 2021, becoming one of the first mainstream banks in the U.S. to do so.

In 2022, BNY Mellon went live with its digital asset custody platform, initially supporting Bitcoin and Ethereum for select institutional clients.

Standard Chartered, a major UK bank, partnered with Northern Trust to create Zodia Custody in 2021, a dedicated institutional crypto custodian.

Meanwhile, Fidelity integrated crypto custody into its offerings via Fidelity Digital Assets, targeting hedge funds and corporates.

Even global payment networks are involved. By 2023, Mastercard and Visa had announced initiatives to help banks offer crypto custody or settlement services.

These moves illustrate that banks are responding to client demand: a recent study found 70% of Gen Z and Millennials would switch banks for better digital asset services, pressuring banks to act. By providing custody, banks aim to leverage their brand trust and regulatory expertise to attract customers who might otherwise go to crypto-native firms. Banks often start with custody as a “safe” first step in crypto, because it aligns with their existing competencies in secure asset holding and compliance. From there, some expand into related services like facilitating crypto trading for clients, offering stablecoin-based payments, or enabling loans collateralized by crypto.

A notable point is that banks frequently use sub-custodians or fintech partnerships for the underlying technology. For example, BNY Mellon integrated fintech solutions (Fireblocks for tech and Chainalysis for compliance analytics) into its custody platform. Using sub-custodians can allow a bank to offer services quickly, but regulators have cautioned that banks must do thorough due diligence on any crypto sub-custodian’s licensing, controls, and financial stability.

Overall, the entrance of banks into digital asset custody is bridging traditional finance with the crypto world, providing more options to institutional investors who prefer to deal with established names.

 

Corporate and Treasury Uses

Some corporations that hold digital assets on their balance sheet (for example, companies that have purchased Bitcoin as a treasury asset, or that receive crypto payments) leverage institutional custody providers to secure those holdings. A high-profile example was Tesla, which in 2021 bought $1.5 billion in Bitcoin; while Tesla’s specific custody arrangements aren’t public, large corporates typically contract regulated custodians to mitigate the risk of managing keys internally.

MicroStrategy, another company famous for accumulating Bitcoin, disclosed that it uses external custodial services for its crypto treasury.

The use case here is straightforward: corporations need the same level of security and assurance for crypto as they would demand for cash in a bank, so they turn to professional custodians with insurance and robust controls.

This extends to the realm of tokenized assets as well. If a company or asset manager issues tokenized securities or stablecoins, they will often use a custody/trust structure to hold the backing assets or manage the tokens, ensuring compliance and investor confidence. 

Institutional custody thus underpins many emerging use cases. From holding tokenized central bank digital currency (CBDC) reserves to managing collateral for DeFi activities (with some custodians offering connections to decentralized finance while keeping keys secure).

 

Public Sector and Others

Even government-related entities have started to require digital asset custody solutions. For example, law enforcement agencies that seize cryptocurrency in criminal cases need a secure custodian to hold those assets until they are auctioned or returned.

Some central banks and sovereign wealth funds exploring digital assets also use institutional custody providers for pilot programs and research purposes.

These use cases, while niche, demonstrate the broadening scope of digital asset custody. The common theme is that any institution with significant digital asset exposure will likely engage a custody solution rather than take on the risk of self-custody. The costs and responsibilities of secure key management at scale (hiring experts, setting up military-grade storage, etc.) are such that outsourcing to a trusted custodian is often the most prudent choice.

 

Best Practices and Expert Insights

Industry experts and practitioners have been actively sharing guidance on how to approach digital asset custody. Here are some top tips and insights from the field.

 

1. Understand the Core Principles of Custody

Experts emphasize that institutions must understand the fundamental principles of digital asset custody before allocating capital, including private key management, hot–cold storage tradeoffs, and the controls required to safeguard assets. As PwC’s Haydn Jones notes, even a small share of the $100T+ overseen in traditional finance moving into crypto makes mastery of safe custody essential. Organizations should educate internal teams and consult specialists early to build a strong foundation for secure digital asset operations.

 

2. Don’t Skimp on Security, Despite Evolving Tech

Although technology and regulation continue to evolve, experts stress that protecting private keys remains the unchanging core of secure digital asset custody. Institutions should avoid adopting new custody technologies without rigorous due diligence, instead prioritizing proven practices and layered defenses. If relying on third-party custodians, organizations must demand demonstrably high integrity, robust controls, and strong security standards to match the responsibility of safeguarding client assets.

 

3. Apply Traditional Best Practices to Digital Assets

A consistent theme from experts is that digital asset custody must adopt the same rigor long established in traditional securities custody. This includes regulatory oversight, segregation of client assets, clear legal accountability, robust capital and insurance protections, and disciplined operational controls. Institutions should expect custodians to meet these standards–or select established players that already align with them–to ensure crypto custody is as reliable as custody for stocks and bonds.

 

4. Plan for Compliance and Oversight from Day One

Regulatory developments have expanded what banks and institutions can do in crypto, but they also heighten the need for strong compliance and risk management frameworks. Experts advise establishing dedicated governance structures, adapting AML/CTF programs to crypto, and ensuring third-party risk management is updated for digital asset service providers. Clear client communication and proactive oversight build trust and reduce regulatory exposure as institutions scale crypto custody offerings.

 

5. Leverage Expert Guidance and Industry Collaboration

Because the digital asset ecosystem evolves rapidly, institutions benefit greatly from industry collaboration and shared expertise. Using guides from organizations like AIMA, engaging in forums and working groups, and attending webinars helps teams stay current on best practices and emerging risks. Custodians and experts are often willing to collaborate closely, and tapping into this collective knowledge helps institutions innovate responsibly while avoiding common pitfalls.

 

Digital Asset Custody Considerations for Banks

Banks deserve special attention in the context of digital asset custody, because they operate under distinct regulatory regimes and have unique strengths (and challenges) when entering this space.

In recent years, regulators have increasingly signaled that banks can play a key role in providing crypto custody–provided they do so in a safe and sound manner. For banks evaluating digital asset custody, here are some key considerations.

 

Regulatory Green Light (with Conditions)

Regulators have clarified that banks may offer crypto custody–supported by OCC Interpretive Letters 1170, 1183, and 1184, the Federal Reserve’s eased approval requirements, and MiCA in the EU–but only with strong risk management and supervisory engagement. These frameworks allow banks to custody assets in fiduciary or non-fiduciary capacities, partner with sub-custodians, and even support trading or settlement, while still meeting capital, information security, and governance expectations. With obstacles like SAB 121 removed, the regulatory path is clearer, but execution now requires deep involvement from compliance, risk, and audit teams to ensure safe and sound operations.

 

Strategic Rationale

Offering digital asset custody helps banks stay relevant as crypto ownership grows and customers increasingly look outside traditional finance for solutions. Custody leverages banks’ core strengths in security and fiduciary trust while creating a foundation for future services like trading, settlement, and tokenized assets. Whether banks build in-house or partner with providers, the goal is to meet client demand quickly while differentiating through the stability, compliance, and trust advantages only a regulated bank can provide.

 

Risk Management for Banks

Crypto custody requires banks to extend traditional controls to new risks such as key management, cyber threats, and oversight of any sub-custodian or technology partner. Regulators expect rigorous governance, multi-layered access controls, strong vendor management, and clear board-level understanding of the business. Fortunately, many existing custody practices–dual control, audit trails, enterprise risk assessments–map cleanly to digital assets and can be adapted with crypto-specific safeguards.

 

Opportunities for Growth

Once custody capabilities are established, banks can expand into adjacent services like 24/7 trading, tokenized asset custody, stablecoin payments, and blockchain-based settlement efficiencies. These offerings allow banks to unify traditional and digital portfolios, strengthen client engagement, and position themselves competitively against early adopters like JPMorgan and Citi. With a measured, compliance-first rollout, digital asset custody becomes both a defensive strategy to retain clients and an offensive strategy to unlock new revenue and innovation.

 

The Path Forward for Institutional Custody

Institutional digital asset custody is now a foundational component of the crypto ecosystem, requiring organizations to blend rigorous security, compliance, and operational discipline with the unique demands of blockchain-based assets.

As the industry converges on higher standards–through multi-layer security, audits, insurance, and clearer regulatory frameworks–institutions must approach custody with the same seriousness and due diligence expected in traditional finance.

Ultimately, strong custody is what enables trust, and trust is what allows digital assets to evolve into a safe, scalable, and fully integrated part of the global financial system.