Qualified custodian

The term comes from the SEC’s custody rule under the Investment Advisers Act, which generally requires advisers with custody of client funds or securities to keep them with a qualified custodian. Eligible entities include banks and savings associations, registered broker-dealers, futures commission merchants, and certain foreign financial institutions. State-chartered trust companies with fiduciary powers are commonly used for digital assets.

For crypto, qualified custodians must safeguard private keys, segregate client assets, maintain insurance and controls, and undergo regular audits and examinations. Regulators have issued guidance on how banks and trust companies may custody crypto, and spot crypto ETFs rely on qualified custodians to hold their underlying coins. Holding assets at a qualified custodian rather than on an exchange reduces commingling and counterparty risk.

For allocators, using a qualified custodian is often a precondition for investment committee approval and for compliance with fiduciary obligations. Example: a wealth manager allocates to bitcoin for clients and holds the coins with a state-chartered trust company that stores keys in segregated cold storage.