Segregated Custody

Overview

Meaning and scope

Segregated custody holds a client’s assets separately from the custodian’s own property and, depending on the arrangement, from other clients’ assets. A production model for Segregated Custody should state beneficial ownership, signing control, segregation, withdrawal rights, provider dependencies, and reconciliation responsibilities. Operations for Segregated Custody should connect legal entitlement with the accounts, wallets, approvals, external balances, and records used to safeguard and return the assets.

Mechanism and operation

Segregation can be legal, accounting, operational, on-chain, or a combination. A unique address alone does not prove legal segregation, and an omnibus account can sometimes provide legally recognized client segregation through records. Conversely, internal labels may fail during insolvency if title, agreements, liens, or asset use conflict with the claimed structure. Clients should review account title, ownership, reuse or lending rights, sub-custodians, insolvency treatment, statements, and withdrawal procedures. Evidence should connect each client’s claim to controlled assets and legal documentation. For Segregated Custody, risks include key compromise, insider abuse, commingling, inaccurate books, unsupported tokens, provider insolvency, sub-custodian failure, blocked withdrawals, lost recovery material, and ambiguous liability.

Practical payment example

A custodian assigns separate records or accounts to customer assets. An auditor checks legal title, contractual reuse rights and insolvency treatment rather than assuming a unique blockchain address guarantees segregation.

Operational checks

For Segregated Custody, controls should combine least privilege, separation of duties, verified destinations, asset segregation, limits, monitoring, and continuity tests. Records for Segregated Custody should reconcile on-chain or provider balances with customer entitlements and the internal ledger by asset, network, account, and cutoff. For Segregated Custody, pending deposits, locked assets, staking, fees, conversions, forks, unsupported transfers, and manual adjustments require separate treatment and review.

Distinctions and limits

Assets may be held in individually titled accounts or distinct wallets, while records and contracts identify the beneficial owner and restrict custodian use.

Related reading

Related definitions: reconciliation.