The Crypto Custody Conundrum: What Are We Even Talking About?

The following article originally appeared in Institutional Crypto by CoinDesk, a free weekly newsletter focused on crypto assets.

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The crypto asset sector is notorious for its confusing use of vocabulary.

The same can be said of the word "Custody." A complicated word at best, the traditional common law definition is being applied to crypto assets, with the result that most investors believe it means the same thing: the authorized safekeeping of property rights.

Solutions that employ best practices are emerging, which should reassure institutional investors interested in crypto assets; but without greater clarity on what we're even talking about, it is unlikely that a coherent framework will emerge in the short term, adding a further layer of risk onto a compelling alternative investment.

"An adviser has custody of client assets when it holds, 'directly or indirectly, client funds or securities or [has] any authority to obtain possession of them.'".

For the purposes of this conversation, we'll be focusing on bitcoin; it currently dominates the crypto asset market and serves as the gateway for most investors given its relative liquidity and variety of on-ramps.

The statement goes even further in highlighting the barriers of disjointed definitions: a failed broker-dealer would be liquidated in accordance with the Securities Investor Protection Act, which has a different understanding of the term "Security" than that of the SEC. This leaves broker-dealer clients who have invested in crypto assets without protection, which the SEC is understandably uncomfortable with.

It also makes it even harder for regulators to establish a coherent framework, when the standard understanding of "Ownership" and "Liability," fundamental pillars of the custody concept, crumble under the crypto lens.

In the case of bitcoin and similar crypto assets, the problem is not so much that crypto custody is so different from traditional security custody - it's that we're trying to fit a new concept into an old box that doesn't have the same dimensions.