Why custody matters more in crypto

In traditional finance, custody is boring. Your hedge fund’s assets sit at a prime broker (Goldman, Morgan Stanley, JP Morgan), held in segregated accounts under well-established legal frameworks. Nobody loses sleep over it. The custodial chain has been stress-tested for decades.

Crypto is different. Digital assets are bearer instruments. Whoever controls the private keys controls the assets, full stop. There’s no central clearinghouse, no SIPC insurance backstop, no decades of case law clarifying what happens when a custodian goes bankrupt. When FTX collapsed, customer assets were commingled with the exchange’s own funds. Billions evaporated. Funds that had kept assets on-exchange as a matter of convenience learned an expensive lesson about the difference between custody and a trading account balance.

That’s why custody has become the single most discussed topic in crypto fund due diligence. It’s the question allocators ask first, and the answer shapes everything else about the risk assessment.

The most common custodians used by crypto funds

We track custodian data for the 300+ funds in our Performance Database. Here’s the distribution of which custodians show up most frequently:

Coinbase Custody’s dominance isn’t surprising. It operates as a qualified custodian under New York state banking law, offers SOC 1 and SOC 2 audited controls, and supports over 470 assets. For U.S.-based funds, it’s the default. BitGo’s market share has grown since it received its OCC national bank charter in late 2025 and filed for an IPO in early 2026. Fireblocks is a slightly different category: it’s more of a custody technology platform that integrates with other custodians than a custodian itself, though many funds list it as their primary custody solution.

The “other / multiple” category includes funds that use Zodia (backed by Standard Chartered), Komainu (Nomura/Ledger/CoinShares), Sygnum Bank, Bitcoin Suisse, and various regional custodians. It also includes funds that split custody across two or more providers, which is increasingly common as a counterparty risk mitigation strategy.

Custody models: full, hybrid, and self-custody

Not every fund uses custody the same way. The three main models:

Full third-party custody

All assets are held by a qualified custodian. The fund manager has no direct access to private keys. Transactions require custodian approval workflows, multi-signature authorization, or policy-engine-based controls. This is the gold standard for institutional allocators and the model most pension funds, endowments, and large family offices require.

Hybrid custody

This is what most active trading funds actually use. The bulk of assets (typically 70-90%) sits with a qualified custodian. A working capital balance stays on centralized exchanges for trading execution. The fund has policies governing the maximum exchange exposure and sweeps assets back to the custodian on a regular schedule (daily or weekly). Off-exchange settlement solutions from Copper (ClearLoop), Fireblocks, and others have made this more sophisticated: funds can trade on exchanges without pre-funding, settling through the custodian after the fact.

Self-custody

The fund holds its own private keys, usually in hardware wallets or multi-signature setups. This is more common among smaller, crypto-native funds and funds running DeFi strategies where on-chain interactions require direct key control. Institutional allocators are skeptical of self-custody, and rightly so. It concentrates key-person risk and eliminates the independent oversight that a third-party custodian provides. That said, some legitimate use cases exist: a DeFi yield farming fund needs to interact directly with smart contracts, which most traditional custodians don’t support (yet).

The major custodians and what they offer

A few things worth noting from this table. Fidelity’s $1 billion insurance coverage is the largest in the industry, which reflects the weight of its parent company’s balance sheet. Anchorage’s federal bank charter gives it a regulatory moat that few competitors can match. BitGo’s recent IPO filing and OCC charter have made it a much more credible institutional option than it was two years ago. And Fireblocks occupies a unique position: it’s a technology layer that many funds use for key management and transaction policy enforcement, but it’s technically not a custodian in the regulatory sense. Funds using Fireblocks often pair it with a qualified custodian like BitGo or Anchorage for the actual fiduciary custody relationship.

What allocators should ask about custody

The custodian name is the starting point, not the finish line. Here are the questions that separate surface-level DD from real operational understanding:

What percentage of AUM is with the qualified custodian at any given time? If it’s less than 60%, ask why. Active trading strategies may justify more exchange exposure, but you should understand the split and whether there are documented limits.

How does the fund handle key management? Multi-signature, MPC (multi-party computation), or HSM (hardware security module)? Each has different risk profiles. Multi-sig is well-understood but operationally heavier. MPC is more flexible but newer and harder to audit. HSMs are the traditional gold standard but can be a single point of failure if not properly distributed.

Is asset segregation documented and independently verified? The fund’s assets should be in segregated accounts, not commingled with the custodian’s own assets or with other clients’ assets. This is what failed catastrophically at FTX.

What happens if the custodian fails? Who has the keys? What jurisdiction’s bankruptcy law applies? Does the fund have a backup custodian or contingency plan? These aren’t hypothetical questions anymore.

Does the custodian support the assets the fund trades? A fund trading obscure DeFi tokens may find that its custodian doesn’t support half the portfolio. That means those assets are either self-custodied or on exchanges. Both add risk.

For a full DD framework covering custody, counterparty risk, service providers, and more, see our due diligence checklist for allocators.

Insurance and proof of reserves

Insurance in crypto custody is better than it was three years ago, but still has limits. Most institutional custodians carry crime/specie insurance covering theft (external hacks, internal theft, collusion). Coverage amounts range from $125 million (Gemini) to $1 billion (Fidelity Digital Assets). But these policies typically don’t cover market losses, smart contract exploits, or the custodian’s insolvency. Read the fine print.

Proof of reserves has become more common since FTX. Some custodians offer on-chain verification that allows allocators (or their auditors) to independently confirm that fund assets are where they’re supposed to be. This is particularly valuable for funds using Coinbase Custody or BitGo, where on-chain attestation tools are available. But proof of reserves only proves the assets exist at a point in time. It doesn’t prove they’re unencumbered (not pledged as collateral or lent out). For that, you need a full audit.

Regulatory landscape for crypto custody

The regulatory picture has clarified significantly since 2024. In the U.S., the repeal of SAB 121 removed a major barrier that had prevented banks from offering crypto custody. The OCC has clarified that national banks can hold digital assets, and BitGo’s national bank charter in late 2025 set a precedent. Anchorage Digital remains the only crypto-native company with a full federal bank charter, which it has held since January 2021.

In Europe, MiCA (Markets in Crypto-Assets) regulation has standardized custody requirements across EU member states. Custodians operating in Europe now need specific authorization, and client asset segregation rules are more clearly defined than they were pre-MiCA.

For allocators, the practical takeaway: ask whether the fund’s custodian is a qualified custodian under applicable law. In the U.S., that means a state-chartered trust company, a national bank, or a federal savings association. If the custodian doesn’t fit one of those categories, understand what legal protections (if any) exist for the fund’s assets in the event of a custodian failure.