As concerns about inflation persist and the prospect of negative interest rates looms, even the most conservative institutional investors—such as corporate treasurers—are exploring the allocation of surplus cash to digital assets. According to Gartner, 5% of CFOs and senior finance executives plan to incorporate Bitcoin into their balance sheets. However, the existing digital asset infrastructure often falls short of meeting institutional requirements. Many custody solutions struggle to ensure both security and liquidity, let alone provide the financial tools necessary for automated workflows, liquidity management, and comprehensive reporting.
Corporate treasurers holding cryptocurrencies typically rely on a patchwork of tools to manage these assets. A combination of hot and cold wallets is commonly used, but this approach introduces significant operational security risks and complicates reporting, often requiring employees to spend hours consolidating data from disparate sources to gain a clear view of the company’s position.
Institutional cryptocurrency custody infrastructure is generally implemented in one of three ways: self-custody, joint custody, or third-party custody. Each model offers distinct advantages and challenges, which we explore in detail below.
Self-Custody: Full Control Over Digital Assets
Unlike institutional investors who are often required to use qualified custodians under regulatory custody rules, corporate treasurers have the option to embrace the concept of financial sovereignty—holding and managing their own digital assets. This approach is analogous to storing gold in a private vault. With cryptocurrencies, however, control is exercised through the possession of private keys, which are cryptographic codes that grant ownership of the assets.
Single-Signature Wallets
Smaller enterprises might opt for self-custody using a single-signature hardware wallet. The private key is stored on a secure USB-like device that can be connected to a desktop or mobile device to sign transactions.
Advantages
A single-signature wallet provides an individual with complete control over assets, allowing a CEO or treasurer to execute transactions quickly.
Disadvantages
For all but the smallest companies, requiring a single executive to participate in every transaction is impractical. While it is possible to share a wallet among different staff members, this process is cumbersome and eliminates accountability, as it becomes difficult to track who authorized each transaction.
Moreover, single-signature wallets represent a single point of failure. The individual holding the wallet could pass away, potentially making the funds irrecoverable, or they might abscond with the assets or fall victim to a hacking incident.
Multi-Signature Wallets
The security concerns and lack of flexibility associated with single-signature wallets lead most corporate treasurers to consider multi-signature solutions. If a single-signature wallet is akin to a gold vault with one key, a multi-signature wallet is like a safe with a set number of private keys (M), requiring a specific subset (N) to open it. Here, M represents the total number of private keys, and N is the number required to authorize a transaction. Typically, configurations might require 2 out of 3 or 4 out of 5 signatories to reach consensus before a transaction is approved.
Advantages
Multi-signature wallets can be configured with different permission levels, allowing private keys to be distributed among key employees within a multi-step approval framework.
Disadvantages
The more signatures required to approve a transaction, the more cumbersome, time-consuming, and expensive the process becomes. On-chain transactions can take hours to clear during periods of blockchain congestion, and fees can accumulate quickly for routine operations.
Even with sophisticated signing procedures, the risk of collusion remains—particularly when employees holding private keys leave the company. Multi-signature solutions also lack flexibility because they are tied to specific blockchain addresses. Changing custody policies, such as adding or removing a party, necessitates transferring funds to a new multi-signature arrangement on the underlying blockchain. Additionally, most multi-signature solutions support a maximum of 15 signers, making it challenging to scale for large organizations.
Furthermore, on-chain multi-signature transactions are visible on public ledgers. If addresses are shared, the transaction chain becomes exposed, potentially revealing sensitive signing arrangements and workflows to attackers.
Joint Custody: Sharing Control with External Co-Signers
Joint custody involves delegating authority to a third party that acts as a backup or active co-signer. This can be implemented using multi-signature setups or through Multi-Party Computation (MPC) based on Threshold Signature Schemes (TSS). A common joint custody arrangement requires the asset owner to retain two private keys while entrusting a third key to a semi-custodial service, thereby reducing the risk of a single point of failure.
On-Chain Joint Custody with Multi-Signature
In a joint custody setup using a multi-signature wallet, a corporate treasurer might hold two out of three private keys and assign the third to a trusted third party.
Advantages
This approach enhances operational security by distributing the burden of private key management across multiple parties.
Disadvantages
It shares the same drawbacks as standard multi-signature setups and introduces an additional security vulnerability in the form of a trusted third party.
Off-Chain Joint Custody with MPC TSS
MPC TSS (Multi-Party Computation with Threshold Signature Scheme) can also be used for joint custody. The key difference lies in implementation: while multi-signature wallets typically operate on-chain, MPC TSS moves the signing process off-chain, relying on a single signature created by distributed nodes that each hold a portion of the private key.
Advantages
Transactions can be signed more quickly off-chain, as they are not dependent on the slower underlying blockchain. Off-chain signing avoids network fees, and there is no need for multiple wallets for different blockchains, simplifying management and reporting. While multi-signature wallets are chain-specific, MPC leverages standardized cryptographic algorithms (like ECDSA) that are compatible with most blockchains. MPC TSS also offers enhanced privacy, as transactions are not visible on-chain, preventing attackers from gleaning insights into corporate signing arrangements.
Disadvantages
MPC TSS solutions implemented in centralized databases are attractive targets for hackers. For instance, cryptographic keys have been leaked from cloud infrastructures like Intel’s SGX. If all MPC nodes are controlled by a single centralized entity, assets remain vulnerable to theft by employees, cloud providers, or colluding partners. As the QuadrigaCX incident demonstrated, malicious insiders can be a significant source of digital asset loss. Organizational signing structures, such as approval thresholds, are often implemented in an opaque software layer operating independently from the blockchain, which can undermine system security. Additionally, these solutions may offer limited ability to produce immutable audit logs for reporting.
Third-Party Custody: Depositing Assets with a Trusted Third Party
Corporate treasurers may choose to delegate custody entirely. This is equivalent to depositing gold with an insurance company and is typically accomplished using multi-signature wallets controlled by the third party.
Advantages
Entrusting digital assets to a custodian eliminates the need for in-house technical expertise.
Disadvantages
Handing assets over to a third party that can freeze or restrict access undermines the appeal of cryptocurrencies as a safe haven. Assets may be subject to seizure or hacking, reducing their ability to provide personal sovereignty and financial privacy. Cryptocurrency custodians often commingle assets in opaque omnibus accounts rather than storing them in segregated accounts, forcing asset owners to rely on trust rather than being able to verify holdings on-chain. The list of bankrupt cryptocurrency custodians grows annually, and even traditional financial custodians have failed to protect client assets in the past. Custodians also charge fees, which can accumulate significantly over time. Transferring funds to and from custodians is often slow and expensive, with withdrawal requests typically limited to business hours and subject to multi-day processing times.
A New Paradigm: Decentralized Custody for Decentralized Assets
Innovative solutions are emerging that offer a new paradigm: decentralized custody for decentralized assets. These utilize cryptographic techniques like Multi-Party Computation (MPC) to distribute private keys across an independent blockchain network. This allows corporate treasurers to implement any combination of self-custody, joint custody, or third-party custody without forcing a trade-off between security and accessibility.
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Such platforms enable instant transfers, allowing companies to execute transactions quickly in volatile digital asset markets. They provide treasurers with real-time coordination of assets across custodians, brokers, and financial institutions. Additionally, they offer a single dashboard for managing digital assets, delivering clear visibility into balances, transactions, and positions across bank accounts, funds, client wallets, and group entities.
Integration with traditional treasury systems is facilitated through open-source software and REST APIs, enabling seamless connectivity to existing financial management systems. Delegation of authority is flexible, allowing organizations to assign transaction initiation, approval, and reporting rights to multiple parties using customizable M-of-N threshold schemes with support for an unlimited number of signers.
These solutions also provide immutable audit logs recorded on a Layer 2 blockchain, ensuring a tamper-proof record of all inflows and outflows. Compliance with emerging regulations, such as the Travel Rule, is supported through built-in messaging features that allow transactions to include sender and receiver identity information.
Security is reinforced through multiple layers of protection, including MPC implemented via a decentralized network secured by custom hardware and even insured by reputable providers.
Frequently Asked Questions
What is the main difference between self-custody and third-party custody?
Self-custody gives the asset holder full control over private keys and funds, emphasizing security and sovereignty but requiring technical expertise. Third-party custody delegates key management to a trusted service, reducing operational burden but introducing counterparty risk and potential access restrictions.
Why would a company choose joint custody?
Joint custody strikes a balance between self-custody and third-party custody. It distributes control among multiple parties, reducing single points of failure while maintaining some degree of operational flexibility and security. It is often chosen by organizations seeking to mitigate internal risks without fully outsourcing custody.
How does MPC TSS improve upon traditional multi-signature wallets?
MPC TSS moves the signing process off-chain, enabling faster transactions, lower fees, and enhanced privacy. It uses a standardized cryptographic approach compatible with most blockchains and avoids the address-bound limitations of traditional multi-signature solutions, offering greater scalability and flexibility.
What should treasurers consider when selecting a custody solution?
Key factors include security track record, operational flexibility, integration capabilities with existing systems, compliance features, cost structure, and the ability to generate reliable audit trails. The choice often depends on the organization’s risk tolerance, technical capacity, and transaction volume.
Are decentralized custody solutions secure?
Decentralized custody solutions leverage advanced cryptography and distributed networks to enhance security. However, their safety depends on implementation details, such as node distribution and hardware security. It is crucial to choose solutions with proven architectures, insurance coverage, and transparent operational practices.
How can institutions ensure compliance when using crypto custody?
Look for solutions that offer built-in compliance features, such as identity verification, transaction monitoring, and support for regulatory rules like the Travel Rule. Integration with traditional reporting systems and the ability to produce immutable audit logs are also critical for meeting regulatory requirements.