What Are Custody Wallets?

Institutional custody wallets provide a secure, compliant, and efficient storage solution for managing digital assets at scale. Trusted third-party custodians assume responsibility for private key management, employing high security measures including multi-signature protocols, cold storage, and advanced encryption to mitigate operational risks and safeguard assets. 

These wallets ensure regulatory compliance through rigorous AML/KYC processes and offer comprehensive audit trails, insurance coverage, and controlled access. 

What Are Custody Wallets?

A custody wallet represents a secure storage solution in which a reputable third party assumes the critical responsibility of managing private keys. This arrangement not only bolsters security but also provides refined access control and ensures adherence to regulatory standards.

In contrast to self-custody wallets, which require users to maintain control and bear the associated responsibilities, custody wallets deliver institutional-grade protection and regulatory assurance, making them the preferred choice for managing substantial asset holdings.

Why Institutions Need Digital Asset Custody Solutions

Unlike individual investors, institutions require highly secure, regulated, and insured environments to manage large-scale digital holdings. Custody wallets provide an effective solution by utilizing multi-signature protocols, cold storage, and comprehensive compliance measures, thereby reducing exposure to cyber threats and fraud. 

Types of Custody Wallets

There are many different types of custody wallets. 

Engineered for long-term security, custody wallets are managed exclusively by a dedicated custodian that safeguards all three cryptographic keys in an offline, cold storage environment. This design leverages bank-grade vaults and adaptable security policies to ensure maximum asset protection. 

When transactions are initiated, clients operate through the custodian's secure storage system, where rigorous, multi-layered verification protocols authorize asset movements. Custody wallets meet regulatory standards as qualified custody solutions, offering institutions an added layer of trust, security, and compliance.

Self-Custody Hot Wallets

Self-Custody Hot wallets enable rapid transactions by connecting directly to the internet, which introduces security risks. To mitigate these vulnerabilities, providers and users can implement multi-layered safeguards. For example, splitting wallet keys across multiple locations and requiring multi-signature approval means that compromising one key is insufficient for unauthorized access. 

Additionally, setting strict account controls such as limits on transfer frequency, amount, and approved recipient addresses help minimize potential losses. When properly secured, hot wallets deliver the liquidity needed for frequent transactions, making them ideal for platforms and market makers. Typically, organizations keep a portion of their assets in hot wallets for liquidity while safeguarding the majority in cold storage.

Self-Custody Cold Wallets

For institutions emphasizing enhanced security and operational control, self-custody cold wallets enable clients to manage their digital assets entirely offline. In this model, clients retain two of the three cryptographic keys, ensuring that private keys remain securely isolated from the internet and resistant to cyber threats.

Transactions are initiated and partially signed in an offline environment before being transmitted to a secure co-signing platform ensuring that the client’s key is never exposed online. This approach is especially advantageous for firms that execute infrequent, high-value transactions or must comply with strict jurisdictional requirements for key storage.

Trading & Staking Directly from Custody Wallets

Institutions can enhance their digital asset strategy by engaging advanced custody solutions that support both secure trading and income generation. Through these platforms, assets can remain safely in cold storage while trades are executed directly—minimizing risk exposure and ensuring full custody is maintained. 

Staking solutions enable organizations to put otherwise idle assets to work, generating passive income without compromising security. This integrated approach allows institutions to optimize asset utilization and maintain rigorous compliance standards in a rapidly evolving financial landscape.

Frequently Asked Questions (FAQ) for BitGo Digital Asset Custody Solutions

Does the insurance policy cover all assets under custody, or does it apply only in limited circumstances?

BitGo offers insurance coverage of up to $250 million for digital assets held in qualified custody, underwritten by a syndicate of insurers from Lloyd's of London and the European Marketplace. 

This policy specifically covers assets stored in cold storage within BitGo Trust Company and includes protection against:

• Theft or copying of private keys

• Insider theft or dishonest acts by BitGo employees or executives

• Loss of keys

It's important to note that this insurance does not extend to assets held in hot wallets or self-managed digital asset custody solutions, as BitGo does not maintain sole control over the private keys in these scenarios. 

Are multi-signature approvals available to prevent unauthorized transactions?

Yes, BitGo utilizes a multi-signature (multi-sig) architecture for both hot and cold wallets. This ensures that transactions require multiple approvals, reducing the risk of unauthorized transfers. Institutions can configure custom security policies, such as threshold-based approvals or geographically distributed signers, to further enhance security.

Does BitGo provide transaction reports suitable for regulatory audits, and how frequently are they generated?

BitGo offers comprehensive transaction reporting features designed to assist institutions in meeting regulatory and tax audit requirements. These reports are accessible through the BitGo dashboard or can be integrated into existing compliance systems via API. Key features include:

• Real-time transaction logs: Monitor and retrieve detailed information about transactions, including amounts, timestamps, block height, fees, and co-signer confirmations. 

• Flexible reporting options: Generate reports on a daily, weekly, or monthly basis to suit organizational needs.

• Regulatory compliance records: Access documentation demonstrating adherence to standards such as SOC 2 Type 2, ensuring robust security controls are in place. 

By leveraging these tools, institutions can maintain comprehensive records that facilitate compliance with regulatory requirements and streamline tax audits.

Can custody wallets be used as collateral for loans or leveraged trading?

Yes, BitGo offers collateral management digital asset custody solutions, allowing institutions to use digital assets held in qualified custody as collateral for loans or leveraged trading. This is facilitated through tri-party agreements, where BitGo acts as a neutral custodian, ensuring that collateral is segregated and securely managed.

Can trades within BitGo’s new BitGo’s Full-Service OTC wallets be executed?

Yes, with BitGo’s Full-Service OTC Desk, institutions can trade directly from within their BitGo custody wallets without needing to move assets to an external exchange or third-party trading platform.