What a Crypto Custody Licence Requires

The term qualified custodian has a specific meaning that varies by jurisdiction and shares a common core. Understanding what it requires explains why the custody market is concentrated.

The common requirements

Segregation of client assets. Client holdings must be identifiable and separate from the firm’s own. In an insolvency, segregated assets should not form part of the estate available to the firm’s creditors.

Capital requirements. The firm must hold capital proportionate to the assets under custody and the risks of the business.

Governance. Defined roles, separation of duties, and controls preventing any individual from moving assets alone.

Audit. An external auditor must be able to verify holdings, which requires the custodian to produce evidence of control over specific assets at a point in time.

Business continuity. Documented arrangements for continuing operations, and for orderly wind-down.

Reporting. Regular submissions to the supervisor, and notification of incidents.

Fit and proper assessment. Of the firm and its senior management.

What this costs

Substantial and mostly fixed. Compliance staff, audit fees, capital that cannot be deployed, and systems built to produce evidence rather than merely to function.

That fixed cost is the reason custody concentrates: the economics favour scale heavily, and the number of firms able to carry it is small.

Why segregation matters more than the rest

It is the provision that determines what happens in the failure case.

Client assets that are genuinely segregated and held in a bankruptcy-remote structure should be returnable to clients regardless of the custodian’s own solvency. Assets that are not are a claim against the estate, ranking with other unsecured creditors.

The difference is the difference between an inconvenience and a total loss, and it is determined by legal structure rather than by how the arrangement is described.

Where exchanges fit

A trading venue is not automatically a qualified custodian. Several large exchanges operate a separate custody entity, legally distinct from the trading business, precisely so that it can hold a licence the trading entity could not.

For a customer, the relevant question is which entity holds their assets and under what terms. That is in the terms of service, and the answer differs between platforms and sometimes between products at the same platform.

The practical use for an individual

Most people do not need a qualified custodian. They need to know which parts of what they hold are exposed to a company failing.

The structural answer remains the same: a working balance at a venue, sized so its loss would be an annoyance, with long-term holdings in self-custody. Where a venue is regulated and publishes its arrangements, such as a provider handling cross-border payments in fintech, the working balance carries less risk, and that is the correct place to use it rather than as a reason to leave more there.