Choosing the right digital asset custodian is a pivotal decision—whether you're managing assets for a hedge fund, corporate treasury, or investment firm. With the rise of blockchain and decentralized finance (DeFi), securing digital assets isn't just about storage; it's about control, compliance, efficiency, and long-term strategic advantage.
However, navigating the digital asset custody landscape can be complex. Unlike traditional finance, this space evolves rapidly, with evolving regulations and fragmented security models. To help you make an informed decision, here are six critical questions to ask when evaluating a digital asset custodian.
1. What Type of Custodian Is It?
Digital assets are secured by cryptographic private keys—long strings of code that grant ownership and control over blockchain-based value. The role of a custodian is to protect these keys.
Custodians can be categorized by how they store and manage private keys:
i) Cold Storage Custodians
Traditional custodians—often affiliated with exchanges or legacy financial institutions—typically use cold storage. This method keeps private keys offline in hardware security modules (HSMs), similar to how banks safeguard physical gold.
While highly secure, cold storage introduces operational friction. Accessing funds requires multi-step approval processes, often taking hours or even days. More importantly, these custodians hold your keys, meaning you don't have direct control over your assets.
👉 Discover how modern custody solutions offer better control without compromising security.
This arrangement may legally constitute a bailment (a transfer of possession), which could impact asset recovery in the event of custodian insolvency.
ii) MPC-Based Custody
Multi-Party Computation (MPC) is a breakthrough in cryptographic security. Instead of storing a single private key, MPC splits key material across multiple parties or devices. No single entity ever holds the full key, reducing the risk of theft or misuse.
Some MPC solutions store key shares in the cloud, while others distribute them between client and provider systems. The critical factor is ensuring secure key management and recovery protocols to prevent irreversible loss.
iii) Self-Custody
The mantra "Not your keys, not your coins" reflects the ethos of self-custody—where organizations retain full control over their private keys.
While this offers maximum autonomy, it also brings significant operational risks: human error, insider threats, or loss of access due to poor key management. Many institutions lack the infrastructure to manage these risks effectively.
Qredo offers a decentralized custody model using MPC, enabling true self-custody without the burden of managing keys directly. You maintain full ownership and control while layering in enterprise-grade governance, insurance, and compliance tools.
2. What Are the Fees?
Costs matter—especially for smaller funds where margins are tight.
Most custodians charge:
- A one-time setup fee (up to $10,000)
- Monthly management fees (averaging around $3,000/month)
- Transaction-based fees
Qredo takes a different approach: zero custody fees, no setup costs, and only a minimal transaction fee of 0.5 basis points per trade—making it one of the most cost-efficient institutional custody solutions available.
3. How Does the Custodian Balance Security and Accessibility?
Security shouldn’t come at the cost of usability. Yet many traditional custodians prioritize protection over access, leading to slow withdrawal times and rigid workflows.
Let’s explore how modern solutions bridge this gap:
i) Insurance Coverage
Even with strong security, breaches can occur due to insider threats or cyberattacks. That’s why insurance is essential.
Most MPC custodians include crime insurance covering employee theft and third-party hacking. Cold storage providers may only insure hot wallet holdings—not the bulk of assets in cold storage.
Qredo offers standard crime insurance and enables integration with custom insurance policies—including DeFi-native coverage and upcoming physical asset insurance options.
ii) Asset Isolation
Institutional investors demand transparency and segregation. Pooling client assets in shared wallets increases counterparty risk and reduces auditability.
With Qredo, every organization has isolated Layer 2 wallets. All inflows and outflows are visible via the Qredochain block explorer—ensuring full transparency and compliance readiness.
iii) Audits and Compliance
Reputable custodians undergo regular audits by independent firms. Look for SOC 1 and SOC 2 certifications, which validate internal controls around data privacy, security, and financial reporting.
Additionally, smart contract and penetration testing should be standard for any tech-driven custody solution.
4. Does It Provide Access to Yield and DeFi Opportunities?
In a low-interest environment, digital assets offer unique yield-generating opportunities through DeFi protocols.
But not all custodians allow access:
- Cold storage custodians typically block DeFi interactions due to offline key storage.
- MPC-based platforms, like Qredo, enable seamless access to DeFi through integrations such as MetaMask Institutional—allowing secure participation in lending, staking, and liquidity provision.
👉 See how institutions are unlocking DeFi yields securely today.
Moreover, some custodians facilitate access to centralized exchanges or market makers. However, transferring assets externally introduces new risks.
Qredo integrates fiat gateways and exchange access directly into its network—enabling trading without exposing assets to counterparty risk. Upcoming features like PowerSwap will offer direct liquidity access across chains.
5. Is the Custodian Operationally Efficient?
Efficiency impacts everything from onboarding speed to scalability and daily operations.
Key factors include:
Setup Time
Onboarding can take weeks—especially if integration with existing systems is required. APIs and dedicated support teams can accelerate deployment.
Scalability
As your team grows, so should your custody solution. Traditional multi-sig setups often require creating new wallets to adjust permissions—a cumbersome process.
MPC allows dynamic adjustment of signing policies and user roles without rebuilding infrastructure.
Workflow Automation
Governance rules—who can approve transactions, change policies, or initiate transfers—are vital for internal controls.
Qredo provides granular governance controls, allowing customized approval workflows tailored to your organization’s hierarchy and risk tolerance.
Reporting & Audit Trails
Real-time reporting is crucial for accounting and regulatory audits. Many custodians rely on manual spreadsheets or opaque dashboards.
Qredo records all activity on-chain, creating a transparent, immutable audit trail that can be exported instantly.
Programmable Custody
Automation reduces errors and enables advanced strategies like arbitrage or instant trade execution.
Qredo is pioneering computational custody—where transactions are automatically evaluated and processed based on predefined rules (e.g., amount thresholds, whitelisted addresses), enhancing both compliance and efficiency.
6. Is the Custodian Future-Proofed for Regulation?
Regulators worldwide are applying traditional financial rules to crypto—including KYC/AML requirements and the Travel Rule, which mandates sharing sender/receiver data for transfers.
Qredo’s compliance infrastructure supports seamless data sharing to meet global Travel Rule obligations.
Furthermore, while Qredo operates as a decentralized custody network (and thus not classified as a regulated custodian), you can designate your own licensed custodian to sign transactions—retaining regulatory compliance while benefiting from Qredo’s advanced features.
Frequently Asked Questions (FAQ)
Q: What is the main risk of using cold storage custodians?
A: The primary risk is loss of control—since the custodian holds your keys, you may face legal and operational challenges if they become insolvent or restrict access.
Q: Can MPC custody prevent insider threats?
A: Yes. By distributing key material and requiring multi-party authorization, MPC significantly reduces the risk of single-point failures or malicious insiders.
Q: How does asset isolation improve security?
A: Isolated wallets prevent commingling of funds, reduce exposure to other clients’ risks, and simplify auditing and tax reporting.
Q: Why is programmable custody important?
A: It enables automated transaction screening, reduces human error, supports real-time compliance, and unlocks high-frequency trading strategies.
Q: Do I need a regulated custodian?
A: In many jurisdictions, yes—especially for fiduciaries or regulated entities. With Qredo, you can integrate a licensed custodian while still using its advanced infrastructure.
Q: Can I access DeFi without giving up security?
A: Absolutely. MPC-powered platforms like Qredo allow secure DeFi access through institutional-grade wallets with full governance controls.
👉 Start your journey toward secure, efficient, and compliant digital asset custody now.
By asking the right questions—and choosing a custody solution built for institutions—you can protect your assets while unlocking the full potential of blockchain innovation.