How To Evaluate Who Is Holding Your Digital Assets

The failures that have cost consumers most in this sector have generally not been failures of the underlying technology. They have been failures of businesses holding other people's assets, and the outcomes depended on custody arrangements agreed in terms nobody read.

The core question

Ask whether the assets are held for you as your property, segregated from the company's own, or whether depositing them makes you a general creditor of the business.

This distinction determines what happens in an insolvency. Assets held in a properly segregated custodial arrangement are treated differently from assets that became the company's property when you deposited them. The answer is in the user agreement, in language that repays careful reading.

Read the terms for lending

Some arrangements permit the business to lend, pledge or otherwise use deposited assets, sometimes in exchange for a yield paid to you. That yield is compensation for risk you are taking, whether or not the marketing frames it that way.

If a product offers a return, establish what generates it. Yield without an identifiable source is a warning rather than an opportunity.

Proof of reserves and its limits

Some platforms publish attestations that they hold assets matching customer balances. These vary in rigour, and a snapshot showing assets at a moment says nothing about liabilities not included in the exercise.

An attestation is better than nothing and considerably less than an audit of a regulated custodian.

Self-custody trades one risk for another

Holding assets yourself removes counterparty risk and substitutes operational risk: losing the keys means losing the assets, with no recovery mechanism.

Anyone self-custodying needs a genuine backup arrangement and a plan for what happens if they die or are incapacitated, since assets nobody can access are lost as thoroughly as assets stolen.

Regulatory status

In New York, check whether the business is licensed to operate here. Supervision does not eliminate risk, but it imposes requirements around custody, capital and disclosure that unregulated offshore entities do not carry.

This is general information, not financial advice. Nothing here is a recommendation to buy or sell anything; speak to a licensed adviser about your own position.