The Custody Question Institutions Actually Ask (And the Answer That Matters)

When we talk to asset managers about tokenization, they don't ask "is blockchain secure?" They ask "who holds my asset if something goes wrong?"

That's the real question. Everything else is secondary.

Most custody content is abstract. It talks about segregation and insurance and audit trails like these are technical features. For institutions, custody is existential. It's the difference between sleeping at night and not. It's the reason CFOs hesitate and treasurers push back.

Let's talk about what institutions actually need to know.

The Real Custody Fear

An institution evaluating tokenization is asking: "If I move my $100 million bond portfolio onto a blockchain, and something catastrophic happens—the custodian goes bankrupt, the custodian turns out to be fraudulent, a smart contract bug erases my holdings—what recourse do I have?"

That's not paranoia. That's fiduciary responsibility.

The answer determines everything. If you can't answer "I will get my assets back," you can't move. No institution will risk billions on infrastructure where they can't guarantee asset recovery.

Three Layers of Protection: How Real Institutional Custody Works

Institutional custody is built in three layers, and institutions need all three.

Layer 1: Segregation. Your tokenized bonds must be held separately from the custodian's own assets and separately from every other client's assets. This is non-negotiable. If the custodian has a financial crisis, your assets aren't subject to their creditors. Segregation means they're untouchable. Ask custodians explicitly: "Are my assets in a segregated account?" If they hesitate, move on.

Layer 2: Insurance. Qualified custodians carry fidelity insurance that covers fraud, theft, and negligence. This is standard for traditional custodians like banks and trust companies. It should be standard for tokenization custodians too. Insurance covers the gap between "the custodian goes bankrupt" and "I get my assets back." Ask: "What fidelity insurance do you carry? What's the coverage limit? Who's the insurer?" A credible custodian has answers.

Layer 3: Legal Liability. The custodian is legally liable for your assets. If they fail to protect your holdings, you can sue. This liability is backed by capital requirements—custodians are required to maintain reserves so they can actually pay out settlements. Ask: "What are your capital requirements? Who regulates your custody operations?" Regulated custodians (banks, trust companies) have regulatory oversight and capital mandates. Unregulated players don't.

All three layers together create institutional confidence. No one layer is enough. Segregation without insurance is risk. Insurance without legal liability is just paperwork. All three together mean: "If the worst happens, I will be made whole."

How to Evaluate a Custody Partner

When you're evaluating a custodian for your tokenized assets, ask three questions:

First: Are my assets segregated from yours and from other clients? If not, move on.

Second: What insurance do you carry, and what's the coverage limit? Any qualified custodian should answer this without hesitation. If they're vague, they don't have it.

Third: Who regulates your custody operations? Are you licensed? What are your capital requirements? Regulated custodians (SEC-registered, bank-chartered, or equivalent in your jurisdiction) have oversight. Unregulated custodians are taking on risk you shouldn't accept.

If a custodian can't answer these three questions clearly, they're not institutional-grade.

Why This Matters for Your Tokenization Timeline

Custody is the foundation. Without institutional-grade custody, tokenization doesn't work for serious capital. This is why some institutions are moving now and others are waiting: custodians that meet all three standards are still emerging.

The institutions that move first are those willing to work with early custodians that have credible answers to these three questions. The institutions that wait are making a sound decision—waiting for a broader ecosystem of proven custodians.

Either way, know what you're looking for. Custody is not a technical detail. It's the answer to "will I get my assets back?"

That's the question that matters.