Safeguarding the Digital Frontier: Institutional Trust for Tomorrow’s Assets

The digital asset market has undergone rapid transformation, with its value exceeding US$3 trillion and encompassing a diverse array of crypto assets and tokenized securities. Key developments—such as the launch of Bitcoin futures on the Chicago Mercantile Exchange in 2017 and the introduction of US crypto exchange-traded products in 2024—have propelled a surge in institutional engagement. Recent surveys reveal that approximately two-thirds of institutional investors intend to increase their exposure to digital assets within the next five years.

Despite this momentum, the scalability and sustainability of institutional participation hinge on a single critical factor: trust. Secure and reliable custody solutions, foundational in traditional finance, are essential for digital assets to be adopted at scale. Without such frameworks, institutions are exposed to risks including cyberattacks, loss of funds, and legal uncertainties, all of which undermine confidence and market growth.

This article analyzes the prevailing challenges in digital asset custody and underscores the necessity for bank-grade custody frameworks to safeguard investors and support continued market expansion.

1. Challenges in Current Digital Asset Custody Models.

As institutional involvement deepens, the custody landscape reveals significant shortcomings compared to traditional finance. The main models—exchange custody, self-custody, and crypto-native custodians—each present unique vulnerabilities

1.1 Exchange Custody: High-Profile Failures and Systemic Risks.

• Combined Execution and Custody: Crypto exchanges often merge trading and custody functions, exposing clients to substantial risks.

• Case Study – FTX Collapse (2022): Billions in client assets were commingled and misappropriated due to inadequate oversight and lack of asset segregation. The absence of independent custodians or audits led to catastrophic breaches of trust, leaving customers as unsecured creditors.

• Cybersecurity Threats: Incidents such as the Bybit hack in February 2025 (US$1.5 billion stolen) highlight ongoing vulnerabilities. Historical breaches (Mt. Gox, Bitfinex, Coincheck) further illustrate the fragility of exchange-based custody.

• Regulatory Gaps: Many exchanges operate in lightly regulated jurisdictions, prioritizing liquidity and speed over robust risk controls and consumer protections.

1.2 Self-Custody: Operational Complexity and Key Management Risks.

• Direct Control, Heightened Risk: While self-custody grants institutions direct control over assets, it introduces significant operational burdens.

• Key Management Challenges: Secure management of cryptographic keys at scale requires specialized infrastructure, skilled personnel, and stringent protocols. Loss or theft of keys can result in irreversible asset loss.

• Operational Limitations: Self-custody may hinder rapid trading and requires constant security monitoring. The risk of human error or insider threats makes it impractical for many large-scale investors.

• Lack of Insurance: Institutions are exposed to amplified liabilities without external insurance or capital buffers.

1.3 Crypto-Native Custodians: Advances and Ongoing Weaknesses.

• Technological Innovation: Crypto-native custodians employ advanced security measures, such as air-gapped hardware, multi-signature wallets, and multi-party computation (MPC).

• Persistent Risks: Notable incidents, including the 2016 Bitfinex hack and vulnerabilities in BitGo’s threshold signature wallets (2022), demonstrate that even advanced solutions are not immune to operational failures or security breaches.

• Governance and Financial Stability: The collapse of Prime Trust in 2023, due to mismanagement and oversight failures, underscores the importance of robust governance.

• Sector-Wide Challenges: Even leading custodians have faced security lapses, resulting in significant financial losses and highlighting the need for mature risk management, regulatory oversight, and adequate capital reserves.

2. The Case for Bank-Grade Custody.

Institutional investors and regulators increasingly advocate for regulated banks to assume a central role in digital asset custody, leveraging their established experience and regulatory frameworks.

2.1 Regulatory Oversight and Compliance.

• Stringent Supervision: Banks are subject to comprehensive regulatory oversight, with detailed rules governing custody operations.

• Enforcement and Accountability: Regulatory bodies such as the New York Department of Financial Services (NYDFS) and the Office of the Comptroller of the Currency (OCC) enforce standards related to asset protection, record-keeping, and transparency. Regulatory interventions ensure continuous improvement and accountability.

2.2 Asset Segregation and Fiduciary Duty.

• Client Asset Protection: Regulations mandate that client assets are held separately from the bank’s own, ensuring bankruptcy remoteness and protection from creditor claims.

• Contrast with Crypto Practices: This segregation stands in stark contrast to the commingling practices observed in some crypto exchanges and custodians.

2.3 Capital Reserves and Insurance.

• Financial Stability: Banks are required to maintain substantial capital buffers and undergo regular solvency assessments.

• Insurance Coverage: Access to extensive insurance provides a critical safety net for client assets, offering greater assurance of stability and the ability to compensate clients in the event of losses.

2.4 Mature Risk Management and Governance.

• Robust Frameworks: Banks implement multi-layered security controls, independent audit functions, and continuous monitoring, all subject to scrutiny by regulators and external auditors.

• Transparency and Accountability: Clients benefit from independent attestations and clear reporting on asset handling.

2.5 Legal Clarity and Recourse.

• Defined Legal Frameworks: Banks operate within established legal regimes, providing clarity on asset ownership and recourse in cases of fraud, insolvency, or operational failures.

• Client Protection: Regulatory structures ensure that clients retain beneficial ownership and have access to established resolution processes, reducing uncertainty and enhancing confidence.

3. Building the Foundation for Scalable Trust.

While no system is immune to risk, the foundational strengths of regulated banks—regulation, capital, segregation, risk controls, and legal accountability—create a more resilient environment for digital asset custody. By bridging traditional finance and the digital asset ecosystem, bank-grade frameworks can address existing shortcomings and support broader institutional adoption.

4. The Path Forward: Hybrid Models and Institutional Confidence.

• Hybrid Solutions: The future of digital asset custody lies in hybrid models that merge the technological innovation of specialist digital asset firms with the regulatory rigor and financial strength of banks.

• Market Integration: As banks acquire digital asset expertise or partner with technology providers, they are well-positioned to deliver custody solutions that meet the highest standards of safety and reliability.

• Restoring Trust: Institutional adoption will accelerate as custody solutions achieve the same integrity, oversight, and financial soundness as traditional markets. Over time, digital assets will be seamlessly integrated into institutional portfolios and managed with proven safeguards.

Digital assets are redefining the landscape of global finance. Their successful institutional adoption depends on the development of custody solutions that foster trust and provide robust protection. By embracing the principles and practices of traditional bank custody—augmented by innovative technologies—the industry can establish a foundation for sustainable, large-scale participation. On this bedrock of trust, digital assets can realize their full potential as a mainstream component of institutional investment portfolios.