Towards robust institutional crypto custody frameworks

Institutional interest in crypto is growing in an accelerated way. This growing exposure however hinges on one critical factor: trust. The future growth of digital assets greatly depends on the emergence of bank-grade custody frameworks to protect investors and scale with the market.

In traditional finance, robust custody arrangements have long underpinned trust by safeguarding client assets. The same standard will be expected for digital assets as secure, reliable custody will be essential to institutional adoption. Without strong custody solutions, institutions risk hacks, loss of funds and legal uncertainty, all of which will undermine confidence.

In this blog we will go into more detail what current crypto models there are and what are their shortcomings, what institutional crypto custody may bring, and what financial institutions are entering the crypto custody environment.

Accelerating institutional interest in crypto

Institutional interest in crypto is accelerating. The crypto market is increasingly shaped by regulated investment products, stablecoin settlement infrastructure and real world asset tokenization.

Institutional crypto adoption is becoming one of the strongest indicators of long-term market demand for digital asset infrastructure. Institutional interest in crypto is increasingly tied to infrastructure maturity. Spot Bitcoin and Ether ETFs that were launched in 2024 helped validate crypto as an investable asset class. And enormous progress has been seen in real-world asset tokenization. Stablecoins have also become a major part of institutional crypto adoption enabling near real time settlement and cross border value transfer, increasingly being integrated into mainstream financial operations.

Security is however essential for further institutional crypto adoption. These products also increased demand for broader services like treasury management, policy controls and settlement operations.  Regulated exposure has become a preferred entry point for financial institutions and investors, but institutions still need operational infrastructure to manage these assets securely and efficiently.  This trend will increase demand for more institutional based custodial infrastructures. The need for secure and scalable custody models is becoming urgent for regulated safekeeping and outsourced controls.

Current crypto custody models: Challenges and shortcomings

But first what is crypto custody? Crypto custody refers to the secure storage of private keys that grant access to digital assets, such as Bitcoin (BTC) and Ether (ETH). It is similar to banks storing securities or cash for clients, but with added technical and security complexities. Crypto custodians are responsible for protecting digital assets against loss, theft, or unauthorized access, which makes their role both crucial and high-risk for institutions. The following digital asset custody models typically exist — holding assets on exchanges, self-custody or using crypto-native custodians. These however experienced various challenges and shortcomings.

• Exchange custody

Many investors initially stored digital assets on crypto exchanges, which combine execution and custody under one roof.  However this model showed various shortcomings including limited oversight, lack of basic protections, not independent, and fragility. This model has experienced various cyber-attacks and operational lapses.

• Self-custody

And there is the self-custody model, whereby the investing institution holds its own private key without relying on third-party custodians. This model however bears several and significant risks. Such as its complexity and the challenges for institutions of scaling self-custody. It places the full weight of security and fiduciary responsibility on the investing institution itself. Unlike typical traditional assets, a lost or stolen private key can mean irrecoverable loss of funds reflecting the bearer nature of the asset, with no external well-capitalized custodian to compensate for losses.

• Crypto-native custody

A third model is the emergence between exchanges and pure self-custodians, in so-called crypto-native custodians. Though crypto-native custodians made important strides to bring professional custody solutions to the digital asset market, also this model faces serious challenges, as not all custodians are created equal.

Common weaknesses include patchy regulatory oversight (state-level, off-shore or none at all), less mature risk management frameworks, limited capital buffers and uncertain legal status of assets in bankruptcy. Without industry standards or regulatory certification of custody solutions, institutions often have to trust the vendor’s word, which is not always reassuring.

Bank custodians: provide a foundation of trust

As institutions deepen the extent of their interaction with digital assets, they often encounter an ecosystem of custody options that fall short of the standards expected in traditional finance. These challenges prompt calls for higher standards. Attention is increasingly turning to a model long trusted in traditional finance — custody by regulated banks.

What may institutional crypto custody bring

Bringing that pedigree into the crypto world offers several clear advantages:

• Regulatory oversight

Banks operate under strict regulatory supervision. They explicitly require licensed custodians to protect customer assets and maintain detailed records. Regulators also enforce comprehensive compliance programs, including KYC/AML and operational risk  audits.

• Asset segregation

At  a bank custody client assets are segregated from the bank’s own assets and safeguarded under fiduciary responsibility. Regulations mandate this segregation to protect clients.

• Significant capital reserves

Banks are also  required to hold significant capital reserves to absorb losses and protect clients. They undergo regular capital adequacy assessments (e.g., Basel standards) and maintain buffers that existing crypto custodians have not needed to, providing clients more confidence in the custodian’s solvency.

• Risk management

Banks bring substantial experience in risk management, internal controls and corporate governance. They must implement multi-layered security controls including cyber and operational risks. For digital asset custody, banks can integrate those controls

• Legal clarity

Banks operate in a world of well-defined legal frameworks, which can greatly reduce the uncertainty for institutional crypto investors. There is growing legal clarity that such assets are held in trust for the client.

Traditional financial institutions are entering the crypto custody space: some examples

Major banks are lining up to enter the crypto custody space. They are no longer limited to advisory roles, they are stepping into direct crypto participation. They are building out crypto capabilities in response to rising institutional client interest in digital asset services, offering custody, lending, and other regulated services.

US  banks including BNY Mellon, JP Morgan Chase, Goldman Sacks, Standard Chartered, U.S. Bank, State Street, HSBC and EU based Deutsche Bank and BNP Paribas are already active in the crypto custody world and continue expanding digital asset services. Last year also Clearstream launched its crypto custody framework.

This year three of the world’s largest banks including Morgan Stanley, Citigroup and Barclays all made announcements related to crypto custody. Their adoption is a signal that they view what was once a frontier tech as maturing.

• Clearstream to launch crypto custody in April 2025

Luxembourg-based Clearstream, introduced institutional crypto custody and settlement last year, offering initial support for Bitcoin and Ethereum. Expansion into additional cryptocurrencies will be considered, based on client demand.

Crypto Finance, another Deutsche Börse Group entity, thereby act as the sub-custodian. Crypto Finance laid the groundwork for this initiative by securing the Markets in Crypto-Assets regulation (Mica) licence, allowing the company to serve clients across Europe while ensuring regulatory compliance. This partnership with Crypto Finance reinforced Deutsche Börse Group’s position in preparing crypto assets for broader adoption.

The institutional-grade solution provides institutional clients with secure and rapid access to digital assets, while integrating with Clearstream’s established post-trading systems. Clients of Clearstream’s International Central Securities Depository (ICSD) will be able to access cryptocurrency custody and settlement via their existing accounts at Clearstream Banking SA. Clearstream’s custody and settlement service will allow institutional investors to conduct cryptocurrency trading activity at any time across multiple trading venues.

• Morgan Stanley Applies for OCC National Trust Bank Charter

Early this year Morgan Stanley applied for a de novo national trust bank charter, expanding its digital asset ambitions. If approved, the charter would make Morgan Stanley one of the first major U.S. banks to provide direct, federally regulated crypto custody.

This charter would grant Morgan Stanley authorization to provide digital asset custody services for its client base, reducing reliance on third parties while expanding staking and trading services for institutional clients  The proposed entity, named Morgan Stanley Digital Trust, National Association, would operate as a wholly owned subsidiary of Morgan Stanley. It would facilitate digital asset custody on behalf of clients, execute purchases, sales, swaps, and transfers of digital assets to support client investment activities, and facilitate fiduciary staking of digital assets.

Morgan Stanley has revised its initial filing for the Morgan Stanley Bitcoin Trust, naming new service providers for the proposed fund. The amendment to its Form S-1 identifies Coinbase Custody Trust Company and The Bank of New York (BNY) as bitcoin custodians. The update marks a concrete step in the bank’s plan to launch a spot bitcoin exchange-traded product. The vehicle will hold bitcoin directly and will not use leverage or derivatives. BNY will act as administrator, transfer agent, and cash custodian for the trust. Coinbase will serve as prime broker alongside its custody role.

Taken together, those steps suggest the bank is preparing for deeper client engagement across custody, product structuring, and direct participation in blockchain-based services such as staking

• Citi Plans Institutional Bitcoin Custody

Citigroup has revealed intentions to introduce institutional Bitcoin custody services during 2026, embedding them into existing traditional asset management frameworks. CitiI conducted research among its institutional client base and discovered they prefer not to handle wallets and private keys directly. Instead, they seek Bitcoin access through established banking infrastructure. The bank has been building custody infrastructure for the past two to three years and expects to roll it out soon.

Citi aims to incorporate Bitcoin into identical custody, reporting, and taxation systems currently deployed for conventional assets such as stocks and bonds. Clients would gain the ability to initiate transactions through SWIFT messaging, APIs, or graphical user interfaces. Citi would manage all clearing and settlement procedures behind the scenes.

The financial institution additionally intends to enable clients to maintain Bitcoin positions alongside U.S. Treasuries, international bonds, and tokenized money market funds within a unified custody account. This framework would permit cross-margining between cryptocurrency holdings and traditional asset classes. That changes the collateral game for institutions running crypto alongside equities and fixed income.

• KBC selecting Taurus as custody

Belgium-based  KBC has selected Taurus as its custody partner for crypto assets, to support its regulated crypto offering. Custody will be provided through Taurus-PROTECT, Taurus’ banking-grade digital asset custody platform, which enables secure safekeeping of digital assets within a controlled and auditable environment. The platform integrates seamlessly with KBC’s existing risk management, compliance, and operational frameworks, allowing the bank to retain full oversight and control. By partnering with Taurus, KBC ensures that crypto assets are safeguarded using institutional-grade technology designed specifically for regulated financial institutions. By working with Taurus, KBC can offer crypto services supported by banking-grade custody, ensuring the same level of security, governance, and control that defines their approach across the organization.

Bovenkant formulier

Onderkant formulier

With this initiative, KBC becomes the first Belgian bank to offer crypto trading within a fully regulated banking framework. As of the week of 16 February, private investors in Belgium are able to buy and sell crypto assets through Bolero, KBC’s online platform for self-directed investors. The custody setup supports a closed operating model in which crypto assets bought and sold via Bolero remain within the platform, helping to mitigate operational, fraud, and security risks. This approach relieves clients of the need to manage private keys or choose between different crypto exchanges. At launch, the offering covers Bitcoin and Ether and will operate on an execution-only basis for self-directed investors.

Crypto trading will be conducted in line with applicable European regulation, including the MiCAR framework, and will be accompanied by mandatory risk disclosures and investor education.

Crypto custody regulation: towards more stringent rules

In the meantime various organisations including the BIS, the Fed and CIRO in Canada are pressing towards more stringent rules.

• BIS Warns Crypto Self-Custody Could Become New AML Loophole

The BIS recently warned self-custodied crypto could undermine anti-money laundering enforcement. They face no transaction or holding limits

According to the BIS self-hosted wallets occupy a particularly sensitive position because they do not rely on an identifiable intermediary to perform customer due diligence, monitor transactions or file suspicious activity reports, making them more attractive for illicit use.

This weakens the overall effectiveness of AML/CFT frameworks and necessitates regulatory and supervisory intervention. Uneven regulation can actively redirect bad actors toward it provide an incentive for malicious actors to shift from cash to self-hosted crypto asset wallets.

• The Fed’s Basel III Pivot Unlocks Institutional Bitcoin Custody

The US Fed recently announced a proposed framework for operational risk, designed to “appropriately reflect business activities,” specifically naming custody services as a key area for this recalibration. If Bitcoin custody is treated under this broader service definition, it would allow Tier 1 banks to offer these services without the prohibitive capital overhead that has previously driven up fees for corporate clients.

By bringing activities like high-scale custody back into the regulated banking fol, Bitcoin custody becomes a more transparent, standardized banking product that fits within existing Basel III market-risk and operational-risk frameworks. Providing the “safe and sound” institutional infrastructure—benefit from being housed within the oversight of the federal banking system.

• Canada Issues New Cryptocurrency Custody Rules

Canadian Investment Regulatory Organization (CIRO recently unveiled a new Digital Asset Custody Framework, a regulatory plan intended to avert the kinds of catastrophes that have plagued cryptocurrency markets for years. Those regulations may change how digital assets are safeguarded and stored in Canada. The new regulations require Canadian cryptocurrency trading platforms to mostly rely on qualified third-party custodians, who are separate companies in charge of protecting digital assets. Strict requirements for insurance coverage, cybersecurity infrastructure, and financial stability must be met by these custodians.

Additionally, a tiered system is introduced by the framework, based on their capital reserves, security procedures, and regulatory supervision. Up to 100% of client assets might be held by the strongest custodians—those who meet the highest standards. Tighter restrictions, sometimes capped at 40% of holdings, apply to lower-tier providers.

The new laws need strict security and auditing criteria that go beyond custody restrictions. Custodians are required to maintain robust cybersecurity safeguards, go through frequent independent inspections, and frequently have insurance that can cover significant asset losses. Self-custody is arguably the most prominent restriction. This implies that rather than being stored within the company’s own systems, the majority of Bitcoin handled by Canadian exchanges must be held by independent custodians.

Banks vs Crypto-Native Providers: towards greater cooperation

The emergence of bank crypto custody however does not completely displace crypto-native custodians. It just reorders the competitive landscape.

Bank crypto custodians bring a important set of advantages. Such as integration with existing counterparty relationships, strong regulatory standing, balance-sheet capacity for financing, and the reporting and reconciliation infrastructure. Bank custody dramatically simplifies the due diligence conversation.

On the other hand banks are slower to add new tokens to their custody platforms, they are less connected to on-chain execution venues, and unlikely to support the full breadth of DeFi protocols that sophisticated crypto strategies require. Crypto-native custodians and prime brokers retain decisive advantages in asset coverage, on-chain connectivity, and product innovation.

Core Bitcoin and Ethereum positions, along with tokenized cash and near-cash instruments, are migrating to bank custody frameworks as those platforms mature. Trading, DeFi access, and exposure to assets outside the bank’s supported token list continue to flow through crypto-native primes.

In the future we however will see more cooperations between banks crypto custody platforms crypto-native technology experts. Several such arrangements are already in operation, and their prevalence is likely to grow as banks seek to accelerate their custody build-out without developing all relevant technology in-house.

Forward thinking

Institutional adoption is likely to grow through deeper operational integration. This trend increased demand for custodial infrastructure that really brings trust and security. Bank-led custody offers a path forward. Proper bank custody can fill the gaps plaguing crypto custodians ensuring customer assets are truly safe, segregated and supervised.

Regulated banks could dramatically improve trust and safety in digital asset custody. The foundational elements banks bring — regulation, capital, segregation, risk controls and legal accountability — create a much sturdier foundation for trust. These strengths make a compelling case that regulated bank custody is the path to scale for institutional crypto, bolstering the legitimacy and resilience of the crypto market..

With more financial institutions joining the institutional crypto custody landscape,   digital asset custody and related services are moving closer to the core of regulated financial infrastructure, the convergence of traditional finance and crypto is entering a new, decisive phase.

The future of finance is digital, regulated, and already underway.