Not All Custody Is Created Equal: A Guide to Choosing the Right Custodian

In the wake of the FTX scandal, many crypto investors are taking a deeper look at the security of their assets. To help make an informed choice, we’ve put together this primer on crypto custody and what to look for when choosing a partner.

How the term “custody” gets used in crypto

In traditional finance, a “custodian” refers to an entity that holds the assets on your behalf and protects them against loss, theft, or misuse.

In crypto, however, the term “custody” tends to be used much more loosely. Many “custody” providers simply offer hot wallets and do not actually custody anything. Because they’re connected to the internet, these software solutions do a great job keeping funds liquid, but they also come with greater surface area for hackers to attack. The quality of the security technology backing the wallets can vary widely, too.

Ultimately, many “custody” providers are just giving you a tool to hold the assets yourself; they’re not actually holding them for you.

The concerns don’t end there, however. Even custodians who do hold your assets — including in offline cold storage — may still have the ability to misuse your funds. You hand them the keys and then hope they have your best interests at heart.

So, who do you trust?

Defining “qualified custody”

Unlike the more generic way “custodian” gets used in crypto, a “qualified custodian” means something much more specific, defined by regulators.

A qualified custodian is a regulated entity (like a bank or a trust) that:

• Has a fiduciary duty to its clients

• Holds client funds in segregated accounts

• Meets rigorous regulatory standards and audits that help protect client funds against loss, theft, or misuse

Because whoever holds the keys controls the coins, working with a qualified custodian — rather than a mere “custodian” — becomes critical. You need to be able to trust your custodian, and a qualified custodian has a fiduciary responsibility to look out for your best interests.

Qualified custodians may offer a number of services that provide extra security, including:

• Cold storage, where the keys are kept offline

• Remoteness from bankruptcy, so your funds are protected if the company goes under

• Segregated accounts, so funds are never commingled

• Backup keys

• Battle-tested security technology

• Redundant human processes

• Insurance against theft, loss, or misuse

Key questions to ask

When evaluating a custodian, here are some key questions to ask:

Wallet security:

• Do you offer hot and cold wallets both?

• How many key shares does each wallet consist of, and where are they held?

• What technology do you use to secure your wallets?

• Do you have SOC 1 and/or SOC 2 certifications?

Custodial services:

• Are you a qualified custodian?

• Where are you regulated?

• What happens to my funds in case of bankruptcy?

• What processes do you use to prevent loss, theft, or misuse?

Insurance:

• Are my funds protected by insurance and under what conditions?

• How much insurance coverage do you hold?

What BitGo offers

BitGo offers both hot wallets and cold custodial wallets. Many of our clients keep a portion of their funds in hot wallets for greater liquidity and the rest in cold storage for maximum security.

All our wallets divide keys into multiple pieces and require a minimum threshold to sign any transaction, meaning an attacker would need to compromise multiple keys in order to actually gain control.

Moreover, our custodial wallets are provided by our four regulated trust companies, each of which serve as a qualified custodian. We also maintain up to $250M in insurance coverage against loss, theft, and misuse in situations where we hold all keys to a wallet.

To learn more about our services, please contact our team for more information