Key to the future: What is digital asset custody, and how does it work?

[SINGAPORE] Japan’s Lower House of parliament recently passed a Bill that would eventually bring cryptocurrencies under the same regulatory framework as stocks, in a move that’s set to expand access to digital assets.

Experts said that the market is evolving from experimental trading to real institutional interest. Tracking this evolution, there has also been growing conversations around digital asset custody.

Regulation is accelerating, experts pointed out, with the Genius Act in the US, Mica in Europe and Hong Kong’s stablecoin ordinance. In Singapore, the Monetary Authority of Singapore has rolled out a tokenised bills pilot and stablecoin regulatory regime.

Francois Verlaine, the regional head of financing and securities services for Asean and South Asia at Standard Chartered, said the bank’s client base is also broadening beyond crypto-natives.

It now includes more traditional institutional investors such as pension funds, sovereign wealth funds and asset managers, he said.

As the uses of digital assets expand, custody is no longer a niche service, he said. “It becomes part of the critical infrastructure needed for safe market growth.”

Suvir Loomba, the regional head of securities services (Asia) at HSBC, said digital custody solutions will “enable institutional scale”. Ryan Marsh, the head of digital asset product at Citi Investor Services, said it will “enable the next phase of finance”.

The Business Times gives the lowdown on digital asset custody and how it works.

What exactly is digital asset custody?

Digital assets – which include cryptocurrencies, stablecoins and tokenised real‑world assets such as bonds, funds or gold – are items of value with a digital form that can be owned, issued and transferred using a distributed ledger such as a blockchain.

“They are on-chain and reflected in wallets – enabling faster, more programmable settlement, reconciliation and servicing,” said Loomba.

But he cautioned that faster settlement does not necessarily remove risk. He noted that it often shifts risk towards technology, cyber and operational controls instead, “which is why robust governance and the right partner matters”.

Marsh explained: “In the early years of custody, assets were mainly physical such as paper certificates, so custody was about securing these assets in physical vaults.”

Central securities depositories, which hold digital records, were introduced with the electrification of assets and market infrastructures, he said. Today, digital programmable and tokenised assets are changing the way they are kept safe.

Verlaine highlighted four key differences between traditional and digital custody.

First, the control model. In traditional custody, ownership is proven via account records; in digital custody, however, ownership and control is typically exercised through cryptographic private keys.

Second, the irreversibility. Many blockchain transfers are difficult or impossible to reverse, increasing the impact of operational errors.

Third, the threat profile. Digital custody introduces heightened cyber and key‑management risks, alongside traditional operational risk.

And fourth, the operating model. Settlement for digital custody may be close to real‑time, increasing the premium on pre‑trade controls and automated checks.

What are the key technologies behind it?

“People may think that digital asset custody is simply holding a private key the way a custodian holds a share certificate,” Verlaine said. But it actually involves new infrastructure, he explained.

It is not “just a wallet”, Loomba said. “Institutional custody is a full safeguarding and control framework.”

Secure key management systems and controlled transaction approvals are “achieved by using a mixture of cryptographic security technologies and key infrastructure solutions enabling cold storage solutions, access controls and encryption management”, he said.

Verlaine breaks this down further. 

Hardware security modules are tamper-resistant hardware for generating, storing and using keys securely. Multi-party computation splits signing authority across multiple devices so the full key is never held in one place.

Cold storage, meanwhile, refers to storing key material offline to reduce exposure to cyberattacks. While it is “often seen as the gold standard”, it creates operational friction for those looking to transact frequently, Verlaine said.

In contrast, a hot wallet stores key material online for frequent transactions.

“Institutional models typically combine offline and online storage with layered controls – to balance security and operational agility,” he added.

Said Loomba: “The aim is to reduce the risk of unauthorised access, vulnerabilities, bad actors and points of failure within digital asset systems.”

What custody solutions are out there?

Common indicators of a good custodian highlighted by experts include regulatory standing, strong governance and accountability, robust security infrastructure, operational resilience, clear segregation and transparency, scale and connectivity, and client service.

“Our clients want a single custodian for all asset classes, traditional and digital, and this provides the optimal portfolio service and operating model,” added Marsh.

A spectrum of solutions exists in digital custody.

One common model is the use of centralised exchanges, where custody is bundled with trading. The strength of these platforms are their convenience – but users are exposed to contracted counterparty risks, the experts agreed.

In decentralised exchanges, on the other hand, users hold their own keys. These platforms are usually used in self-custody, the experts said.

But the belief that custody is “inherently safer” because of greater control is a common misconception, said Marsh. “It also introduces significant risks of loss or theft that professional custodians are built to mitigate.”

Verlaine summed it up by saying: “The trade‑off is simple: It removes intermediary risk while increasing personal operational responsibility.”

The experts agreed that institutional investors typically prefer the protections provided by qualified custodians.

Said Verlaine: “Exchanges co-mingle client assets and are primarily trading venues. A proper custodian provides legal segregation, independent safekeeping and fiduciary accountability – the FTX collapse illustrates exactly why this distinction matters.”

Regulated custodians, such as financial institutions, have stronger governance, segregation, security and risk management, compliance with regulation and asset protection frameworks.

But trade-offs include potentially higher costs and slower product iteration (where storage solutions are continuously refined based on testing and feedback), said Verlaine. He added that institutional custodians may have narrower asset or chain coverage and more onboarding frictions.

Finally, Loomba noted that off-exchange settlement models are also emerging, to reduce counterparty exposure while still enabling trading. In this format, a custodian and the exchange venue are separate. 

Verlaine pointed out that this method reduces exposure to exchange failure and supports institutional controls while accessing liquidity – but requires more complex workflows and integrations, creates additional operational dependencies and requires robust settlement design.

What’s next?

Loomba sees “responsible growth” fuelled by clearer regulation, more institutional-grade infrastructure, broader tokenisation and trusted custody.

Verlaine suggests that we could see more separation of powers mirroring protections in traditional markets, and a greater emphasis on operational resilience. 

He also envisions tokenised real‑world assets at scale, with funds, bonds and deposits represented digitally and custody and settlement integrated into existing market processes.

Marsh said: “As the industry continues to mature beyond cryptocurrencies towards the tokenisation of securities and real-world assets, trusted custody becomes essential.” 

He added: “This infrastructure has the potential to unlock trillions of dollars of existing assets and bring them into the digital economy and financial markets.”