What to Look for in an Institutional Crypto Custody Provider

The cryptocurrency market faces unique risks. Not only does it contend with hackers and regulatory uncertainty, but Fortune magazine reports that the private keys granting access to over $100 billion worth of Bitcoin have been lost forever. 

For firms engaged in institutional crypto trading, choosing the right institutional crypto custody provider goes beyond key storage. It involves risk management, regulatory compliance, and operational control.  

Here’s what to look for in an institutional digital asset custody provider. 

Key Takeaways

• Cold storage, multi-signature wallets, hardware security modules, and multi-factor authentication (MFA) are critical safeguards against internal and external threats.

• The best institutional crypto custody providers offer value-added trading services like staking, over-the-counter (OTC) trading, easy API integration, and audit-ready reporting.

The Need for Institutional Crypto Custody

Digital wallets store private keys, which grant access to assets on the blockchain. As the market evolved, asset holders have moved from the complexity of self-managed wallets to the simplicity of exchange custody. But after the collapse of FTX and the loss of nearly $10 billion in client assets, traders became acutely aware of counterparty risk in cryptocurrency markets.  

Major institutions or registered investment advisors (RIAs) offering digital wealth management have fiduciary obligations. Self and exchange-custody management may be appropriate for retail traders, but professional investors can’t afford the risk.  

In short, they need institutional crypto custody solutions tailored to their needs. 

Evaluating Custody Providers: What to Look For

No two platforms are the same. But the best institutional crypto investor solutions incorporate the following: 

Security

Institutional investors have teams of people spread across roles and geographic locations who may be interacting with any given key. How do they make sure that an asset is secure when a trader, a compliance officer, or even operations personnel might need access?  

• Offline Storage: It’s normal to facilitate the speed of day-to-day trading by keeping some assets in online hot wallets. However, most funds should be stored in offline cold wallets, which help protect against cyber threats by placing private keys in hardware that’s disconnected from the internet.  

• Hardware Security Modules (HSM): This is hardware specifically designed to store sensitive cryptographic keys. Random numbers generate keys in secure offline environments, and access is only granted to authorized personnel or quorums. As an added security measure, they’re also designed to be tamper-evident, leaving a clear trail of access.  

• Multi-Site Storage: Requiring private keys to be accessed and authorized in varied geographic locations creates redundancy if sites are unavailable, and it provides security by separating authorization across multiple locations. 

• Multi-Signature Approval: By requiring multiple parties to approve transactions, a single point of failure won’t compromise security.  

• Multi-Factor Authentication (MFA): Most are familiar with two-factor authorization (2FA) text messages by now. But combining additional authentication modes, like email or authenticator apps, into 3FA or 4FA brings added layers of protection.  

Institutions may need some or all of these features. When implemented effectively, these controls reduce the risk of private key exposure, whether through hacking, physical theft, or operational failure.  

Insurance and Fund Segregation

Custodians that offer insurance understand that insurance is a must for institutional investors to perform due diligence and feel comfortable entering the digital asset space. No matter how many security measures are in place, something can still go wrong. 

In most cases, institutional-grade insurance will cover cold storage and criminal acts. However, broader policies may also cover scenarios involving key management, theft, internal collusion, or administrative errors and omissions. For reference, BitGo offers up to $250 million in coverage for loss, theft, and misuse in scenarios where BitGo holds all the keys. 

Fund segregation is another critical safeguard. Some custodians operate affiliated trading platforms, which can introduce risk if legal entities or asset flows are not clearly separated. Segregated funds mean client assets are isolated in the event the custodian’s trading platform goes bankrupt.  

Trading Services

The right institutional crypto custody provider is valuable to profit margins and trading desks on a day-to-day basis. Key capabilities to look for include: 

• Off-Exchange Settlement and Over-the-Counter (OTC) Trades: Sizable trades on exchanges can move markets and negatively impact strike prices. Custodians that facilitate off-exchange trading tend to offer more competitive prices. 

• Staking: Some coins use proof-of-stake consensus mechanisms to validate transactions and secure their network. For institutional investors, that means they can earn rewards (often greater than 3%) in exchange for locking funds for a period of time.  

• Integrated Trading APIs: Direct integration with brokers, exchanges, and internal systems is critical for scale. 

• Asset Coverage: With hundreds of coins on the market, broad coin coverage enables portfolio flexibility without compromising compliance standards. 

• Audit-Ready Trade Reporting: A top-tier custodian supports real-time trade reconciliation, reporting, and audit logs, helping satisfy internal controls and regulatory requirements without having to build those systems. 

Institutional Crypto Custody in a Regulatory Context

The cryptocurrency market is relatively young. And unlike the traditional financial sector, the regulatory environment is still taking shape. Nevertheless, clearer frameworks for institutional crypto custody providers are beginning to solidify. 

• The U.S. is shifting from a “regulation by enforcement” approach to one dictated by clear rules and SEC guidelines.  

• The European Union’s Markets in Crypto-Assets Regulation (MiCA), aimed at creating a harmonized framework for crypto-assets, went into effect in December 2024.  

• The United Arab Emirates (UAE), in an effort to become a fintech hub, also recently established its comprehensive crypto-asset framework.  

Furthermore, while the SEC hasn’t established definitive requirements for qualified custodians, it has issued enough guidance that a framework has emerged. Qualified custodians are expected to: 

• Maintain client assets in segregated accounts, protecting them from misuse and protecting them if the custodian goes bankrupt. 

• Utilize up-to-date cybersecurity measures such as cold storage, multi-signature wallets, 2FA, cryptography protected hardware, and robust access protocols.  

• Provide insurance against theft, loss, or misuse. 

• Create redundant human processes, such as triggering officer reviews when transactions exceed certain thresholds.  

• Comply with know-your-customer (KYC) and anti-money laundering (AML) rules. 

• Undergo independent audits on a regular basis. 

One key audit benchmark is SOC accreditation, issued by the American Institute of Certified Public Accountants (AICPA). SOC reports reflect an independent assessment of a custodian’s financial controls, data integrity, and security practices. Despite being industry standard, many crypto custodians are not accredited. 

BitGo’s Qualified Custody Solutions

Institutional crypto custody is about safeguarding clients, reputations, and operational futures in an emerging asset class. 

BitGo offers regulated, qualified custody solutions tailored to institutional needs.  

With SOC 1 Type II and SOC 2 Type II certifications, BitGo demonstrates the strength and reliability of its security and financial controls. Its custody offerings include up to $250 million in insurance for accounts where BitGo holds all the keys. And its infrastructure is built to exceed global regulatory expectations.  

From qualified custody to self-custody wallets, BitGo delivers the digital asset infrastructure institutions rely on to manage digital assets with control, compliance, and confidence. 

FAQ

What is institutional crypto custody?

Institutional crypto custody refers to third-party services that securely hold digital assets on behalf of professional investors. These providers offer enterprise-grade infrastructure, regulatory compliance, and risk management tools that go beyond what’s available to retail investors on regular exchanges.  

How do institutional crypto custody providers enhance security?

They implement advanced security measures, such as cold storage, multi-signature wallets, hardware security modules (HSMs), and multi-factor authentication (MFA) to safeguard private keys and prevent unauthorized access. Many also undergo independent audits, maintain insurance coverage, and design systems with geographic and operational redundancies to eliminate single points of failure.  

What features should I look for in a crypto custody provider?

Find a provider that understands a financial institution’s unique needs. For instance, multiple employees serving different functions (from compliance to trading and operations) may need access to a particular crypto key.

Does that provider offer a security protocol that accounts for those users while also providing timely access to cold storage assets? 

Why is institutional custody necessary for digital assets?

Institutions face higher fiduciary, legal, and operational standards than retail investors. The right provider helps meet those standards by reducing counterparty risk, complying with regulations, and ensuring assets are held securely, are auditable, and readily accessible. 

What are the risks associated with institutional crypto custody?

While institutional custody significantly reduces risk compared with exchange custody, it still carries the risk of custodian insolvency, internal breaches, and human error. However, these risks can be mitigated by choosing a regulated, audited, and insured custodian with a proven track record.