Clear DefinitionsDigital Asset Custody Regulations
1 min read
Pronunciation
[di-ji-tl as-et kus-toh-dee reg-yuh-ley-shuhnz]
Analogy
Think of digital asset custody regulations like bank vault regulations that dictate how vaults must be built, monitored, and audited to protect depositors’ money.
Definition
Laws and guidelines governing how service providers must store, secure, and manage clients’ digital assets (cryptocurrencies, tokens) to ensure consumer protection and system integrity. These regulations cover operational controls, auditing, segregation of assets, and incident reporting.
Key Points Intro
Custody regulations set standards for safe handling and accountability of digital assets.
Key Points
Segregation: Client assets must be held separately from firm assets.
Security controls: Multi‑sig, cold storage, and encryption requirements.
Audit & reporting: Regular third‑party audits and mandatory incident disclosure.
Governance: Licensing, capital requirements, and operational policies.
Example
A crypto custodian obtains a regulatory license requiring quarterly SOC 2 audits, uses HSM‑backed cold storage, and publishes proof‑of‑reserves reports.
Technical Deep Dive
Providers implement KMS with FIPS‑140 certified HSMs for key management, enforce multi‑party approval for withdrawals, segregate hot and cold wallets, and integrate SIEM for real‑time monitoring. Audit trails are stored on‑chain via hashed logs.
Security Warning
Noncompliant custody practices risk asset theft, regulatory fines, and loss of user trust.
Caveat
Stringent requirements can raise operational costs and limit service agility.
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