Client Asset Rules and What They Actually Do

Of everything in crypto regulation, one provision does most of the work: client assets must be kept separate from the firm’s own and cannot be used by it. A useful reference for how this works commercially is a crypto custody provider with segregated client assets, whose disclosures are public.

Why it is decisive

It matters at one moment, and only that moment: when the firm fails.

Segregated client assets are not part of the estate. They are identified and returned to clients.

Commingled assets are not distinguishable, and clients become unsecured creditors in a process measured in years.

Every large failure that destroyed customer funds involved exactly that commingling.

The three arrangements

Commingled with the firm’s own. Should disqualify a provider for any amount you care about.

Omnibus segregated. Client assets pooled together, separate from the firm’s own, with internal records attributing holdings. The standard arrangement, sound provided records are accurate and independently verified.

Individually segregated. Wallets attributable to a single client. Cleanest, most expensive, usually above a threshold.

How omnibus attribution works

The blockchain shows a pooled balance. Your claim to a share lives in the firm’s records.

Identical in structure to securities custody in traditional finance, and it works for the same reasons: records are audited, reconciliation against on-chain balances is frequent, and a supervisor can inspect both. At institutional scale the equivalent question runs through a platform built for institutional allocations, with reporting attached.

The questions are therefore how often reconciliation runs and who provides assurance over it. Daily, with an independent report, is what good looks like.

The shortfall case

If pooled wallets hold less than records say clients are entitled to, the shortfall is shared proportionally rather than by who withdrew first.

That is why reconciliation frequency matters. It is the control preventing a shortfall existing undetected.

Rehypothecation

Using client assets to support other activity. This is how several failures became insolvencies rather than inconveniences.

A proper agreement prohibits it explicitly and unqualifiedly. Read the clause rather than accepting a verbal assurance, because silence is not prohibition.

What to confirm in writing

Which arrangement applies to your account specifically, since a provider may offer several.

Where assets are held legally and under which jurisdiction’s client asset rules.

How often reconciliation runs and who provides assurance.

What happens on a shortfall.

Whether the provider may use client assets at all.

The comparison to make

Legal arrangement first, technology second.

The technical differences between serious providers are small. The legal differences are not, and they only become visible on the day they matter. On execution, a regulated European crypto platform publishes its fee schedule and corporate onboarding terms in full.