Custodian Evaluation Guide: Factors to Consider

When safeguarding your crypto funds, you might decide to keep and manage your own keys — or you could store them with an entity that you trust. Reasons why some people choose self storage include how they don’t want to be dependent on anyone else, and they want greater access to their assets. They may also not know whom to trust as a custodian.

Challenges with self storage include that, if the funds are lost through accident or theft, this can mean that they’re gone for good. Picking the wrong custodian could lead to a similar situation.

If your organization can’t risk having a compromised wallet and you decide to use a custodian’s services, how can you tell which one is best and most trustworthy? Here are issues to consider in this overview of BitGo’s custodian evaluation guide.

Regulated Versus Unregulated Custodian

Custodians can gain regulatory approval by meeting rigorous standards and undergoing audits. This isn’t an easy process, and so many custodians don’t go through the steps. So, they are actually unregulated custodians without a fiduciary duty to their client. They may or may not have external accreditations; whether they do or don’t, though, they’re basically asking you to just trust them.

When seeking a custodian, check to see if they:

• are regulated
• will hold a fiduciary duty with your organization
• will hold funds in a segregated way

The term of “qualified custodians” refers to ones that are regulated in the United States through the Investment Advisers Act of 1940. They must meet the specifics described above and be a specific type of entity such as a state trust. Qualified custodians may offer additional protections like backup keys, customizable wallet policies, and insurance. The Security and Exchange Commission (SEC) is currently considering whether to make it required for certain investor types to use a qualified custodian for their digital assets; watch for updates from BitGo on the subject.

The next issue in our custodian evaluation guide focuses on wallets.

Types of Wallets Offered

These could include hot wallets, custodial cold wallets, and non-custodial cold wallets. Hot wallets are connected to the internet; your organization would hold the majority of the keys with these wallets providing easy access to tokens/coins. Hot wallets could therefore be loosely comparable to a debit card.

Cold wallets aren’t connected to the internet. When a custodian holds the keys, you might think of them like a bank vault with maximum security. When they’re self-managed cold wallets, you would hold the keys while leveraging the custodian’s vault technology. This can be compared to managing asset security in your own home.

You may decide to use a hot wallet for a small percentage of your funds while keeping the rest in a custodial wallet to balance security and speed. Assets can be rebalanced as necessary. If you’re located in a certain jurisdiction or need a more advanced setup, a self-managed cold wallet may also be used.

When seeking a custodian, check to see if they:

• offer both hot and cold wallets
• cover most to all of the tokens or coins you want to hold
• maintain insurance against theft, loss, or misuse (with extra insurance available to purchase)
• provide backup wallet keys
• have SOC1 and SOC2 accreditations
• complement their security technology with human processes
• allow you to set wallet policies; these can include whitelisting, transaction limits, and user permissions

Once you’re done checking these items, the next topic in our custodian evaluation guide is funds deployment.

Deploying Your Funds

Consider the ways in which you’ll want to put your assets to work. This can include trading, staking, borrowing, lending, settlement, and integrations with DeFi and other partner exchanges. When deciding which custodian to use, see how well their offerings dovetail with what you need and how easy they are to use. Make sure that you can trade, settle, and stake from cold storage and can benefit from quality price execution on your trades. Find out how the custodian selects validators, and make sure they offer a reasonable fee structure.

Next up in our custodian evaluation guide: building platforms.

Building Platforms

If you offer crypto services to your own customers, it’s often more streamlined and effective to leverage the wallet infrastructure offered by your custodian than it is to start from scratch to create your own. Your platform can be built upon these foundations with relevant integrations and layers of marketing, branding, and AML/KYC procedures added.

When considering which custodian to use, analyze how this type of wallet can be connected with your technology and what digital asset types they support.

Each of the topics discussed in this blog post are described in more depth in our full Custodian Evaluation Guide. We encourage you to find even more information there and, when you’re ready to talk to the experts, reach out to BitGo!

©2023 BitGo Inc. (collectively with its affiliates and subsidiaries, “BitGo”). All rights reserved. BitGo Trust Company, Inc., BitGo Inc., and BitGo Prime LLC are separately operated, wholly-owned subsidiaries of BitGo Holdings, Inc., a Delaware corporation headquartered in Palo Alto, CA. No legal, tax, investment, or other advice is provided by any BitGo entity. Please consult your legal/tax/investment professional for questions about your specific circumstances. Digital asset holdings involve a high degree of risk, and can fluctuate greatly on any given day. Accordingly, your digital asset holdings may be subject to large swings in value and may even become worthless. The information provided herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. BitGo is not directing this information to any person in any jurisdiction where the publication or availability of the information is prohibited, by reason of that person’s citizenship, residence or otherwise.