Blog CryptoDigital asset custody: A new role for banks?

Digital asset custody: A new role for banks?

Control is still a key promise of digital assets like crypto. But as the market grows, user needs change. Digital finance expert Xavier Lavayssière lays out how custody services are responding.

19 MARCH 2025

6 min read

Do you remember how you kept your treasures as a child? As an avid reader of spy stories, I became fascinated by caches in mundane objects, such as hollow books.The early days of crypto assets involved similar personal strategies. Users, mostly technology enthusiasts, would carefully generate and store their secrets. Using self-custodial wallets, individuals can have perfect individual control, but bear all the risks and responsibilities. However, as interest in digital assets grows, individual and institutional needs to store and use digital assets become more diversified. This is where custody solutions come into play.

The new needs of digital asset custody

A large number of retail users have invested in digital assets. In some countries, more people directly own digital assets than own stocks. Young audiences, in particular, have joined the space. While some are attracted by the excitement of volatile meme coins, it also represents a fundamental change in how younger generations view and interact with financial assets. However, newcomers may lack the expertise to securely manage assets and the maturity to establish a safekeeping strategy. As we will see, this evolution has led to new offers combining better user experience and security.Financial institutions are also exploring digital assets. They are investing directly in this new asset class, experimenting with tokenized financial assets, and offering products to a variety of clients to meet the current demand. But financial institutions require security, audits, and processes that individual wallets cannot cover. Having “Bob from accounting” store a seed phrase on a sticky note is not an acceptable security strategy.

What does custody of digital assets mean?

Custody of digital assets is not just a technology question. Controlling a digital asset means controlling the private key that authorizes its transfer. But custody has a more legal and commercial dimension. To ‘custody assets’ means to hold assets for another person. In other words, a custodian holds the assets on your behalf, while contracts and regulations ensure that you remain the legal owner. In practice, the custodian of your digital assets protects your private keys, or at least part of them, while offering you the means to control them.

The risks of custody

The history of crypto assets is rich in examples of what can go wrong with asset custody when not done properly.

Hacks and technical failures

The crypto ecosystem is highly adversarial. Most major exchanges have been hacked. Unlike physical bank robberies, digital asset thefts can happen instantly, at scale and across borders. Industry estimates suggest that over $19 billion worth of crypto assets have been lost to hacks and scams since 2011. The custody services that I discuss below can offer solutions to prevent these issues.

Human factors

Operational errors and outright fraud have also caused significant losses. For example, QuadrigaCX's founder allegedly died with sole access to millions of dollars in customer funds, locking them away forever. Mt. Gox, dominating the market in the early days, lost thousands of bitcoins due to what seems to have been a combination of hacks and mismanagement.

Insolvency and misuse of funds

The collapse of Celsius and FTX showed that these platforms didn't custody assets on behalf of their users. Not only were user funds used in risky investments, but when bankruptcy occurred, users had no legal protection. These failures highlighted the importance of proper custody, pushing investors toward regulated institutions or technology solutions.

The role of banks

Custodianship is one of the historical roles of banks, from valuables to financial instruments. Some early adopters of Bitcoin went as far as engraving their private keys on metal plates and storing them in bank vaults. Banks are increasingly stepping into the digital asset custody space, offering custody services to their clients and partnering with players in the space. While depositing your digital assets with a bank means you cede some control over them, you retain legal ownership‌ — ‌along with added benefits.

Institutional expertise

Banks bring centuries of experience in asset protection, regulatory compliance, and risk management to the digital asset space. They are transforming "not your keys, not your coins" into “your assets, our expertise." Their institutional approach can provide comprehensive services beyond basic custody, including insurance coverage or reporting solutions, helping clients with tax compliance, and portfolio management.

Regulatory clarity

Regulators are increasingly defining clear frameworks for digital asset custody. Notable examples include the efforts of the Monetary Authority of Singapore and the European Markets in Crypto-Assets Regulation (MiCA). This regulatory oversight provides an additional layer of protection for investors: Institutions must register and prove that they are competent and have put in place the right strategies to minimize risks to users’ funds.

Enterprise-grade security

Most banks offering custody of digital assets partner with specialized companies to offer enterprise-grade security. These providers follow standards, are regularly audited, and generally use state-of-the-art technology beyond anything used in traditional finance. That includes hardware security, geographic distribution of keys, and continuous monitoring.

The future of digital asset custody

The key evolution of digital asset custody is the possibility to offer the best of both worlds: technological and institutional guarantees combined with flawless user experiences. However, the devil is in the details.

Hybrid custody solutions

Control over digital assets can be assisted or shared to guarantee you some technology control, in addition to the institutional guarantees of working with a custodian. For example, you might maintain self-custody of your assets while having institutional backup for recovery. An advanced solution, Multi-Party Computation (MPC), consists in splitting a key among several people. It allows them to sign together without creating a single point of failure. Shards from the initial key are shared between you and custodians to facilitate signature and recovery.

User experience and revenue

The need for better user experiences is at the center of digital asset custody evolution. Financial institutions need to distribute control among several people and sometimes across organizations. Retail users need clarity, ease of use, and protection against fraud and hacks. Meeting these needs requires partnerships across the ecosystem to interconnect applications, wallets, and other services seamlessly.Access to new financial opportunities must also be simplified. Through "staking" and composability, digital assets can generate revenue for their owners. This is also true for tokenized financial assets. These opportunities require custodians to adapt and partner to provide opportunities to digital asset owners.

Hardware security and post-quantum cryptography

With digital assets, retail users have become familiar with hardware wallets. Secrets are stored on a secure chip, offering more protection than software wallets. The same technologies are used in the institutional space with hardware security modules (HSM) in servers and hardware elements for user access.Of course, we need to keep an eye on developments in quantum computing. Cryptography primitives used to secure digital assets are vulnerable to quantum computers. Fortunately, post-quantum cryptographic algorithms designed to resist such attacks are almost ready. The National Institute of Standards and Technology in the U.S. held a competition in 2024 to select standard algorithms.

A richer custody landscape

Digital asset custody represents an important evolution in financial services. It upgrades traditional financial services with technological security, while also allowing institutions to respond to the needs of retail and institutional users of digital assets.Banks — with their deep experience, established reputations, and strong regulator relationships — are well-positioned to serve as the nexus for comprehensive solutions. By combining robust technology, regulatory compliance, and user-friendly services, they could support a wide range of digital asset users.Ultimately, the demand for secure, compliant, and convenient digital asset custody reflects a broader need for a new generation of trustworthy financial services.