The rapid growth of tokenized assets demands innovative custody solutions that balance security, compliance, and functionality. Andreessen Horowitz (a16z) presents five foundational principles to help Registered Investment Advisors (RIAs) navigate this evolving landscape while fulfilling their fiduciary duties.
Why Crypto Assets Demand Unique Custody Approaches
Unlike traditional securities, tokenized assets introduce novel challenges:
- Shared Control Paradigm: Multiple parties may possess private key access without contractual restrictions
- Active Yield Mechanisms: Requires holder participation to unlock staking rewards, governance rights, or protocol fees
- Programmable Rights: Embedded economic and governance features inseparable from the asset itself
This complexity creates operational hurdles for RIAs seeking compliant custody solutions. Our framework addresses these challenges through principle-based guidance rather than rigid compliance checklists.
Five Core Principles for Tokenized Asset Custody
Principle 1: Substance Over Legal Classification
A custodian's regulatory status shouldn't solely determine eligibility. We recommend evaluating:
- State-chartered trust companies with robust oversight
- Entities registered under proposed federal crypto market legislation
- Any provider demonstrating equivalent client protections
Principle 2: Mandatory Safeguards Framework
All custodians must implement:
- Multi-layer security protocols
- Asset segregation (except for broker-dealers maintaining ownership records)
- Hardware source verification
Comprehensive audits:
- SOC 1/2 Type II reports
- PCAOB-reviewed financial controls
- ISO 27001 certification
- Adequate insurance coverage
- Jurisdictional bankruptcy protections
Principle 3: Preserving On-Chain Rights
RIAs should retain ability to:
- Participate in governance voting
- Stake assets for yield generation
- Access protocol-specific economic benefits
Temporary transfers for rights activation shouldn't constitute "custody withdrawals" when:
- No in-custody solution exists
- The RIA maintains equivalent protections
- Transfers are properly documented
Principle 4: Best Execution Flexibility
Asset transfers to trading venues shouldn't be treated as custody withdrawals when:
- The platform demonstrates security resilience
- Transfers enable materially better execution
- Assets return to primary custody post-trade
Principle 5: Justified Self-Custody
RIAs may self-custody when:
- No qualified third-party exists
- Internal safeguards meet or exceed available alternatives
- Required to exercise core asset rights
Annual reassessments and client disclosures remain mandatory for self-custody arrangements.
Implementing Custody Solutions: Technical Considerations
Key Management Best Practices
- Generation: Multi-party computation with physical presence requirements
- Storage: FIPS 140-2 compliant HSMs with geographic distribution
- Usage: Role-based access controls with air-gapped procedures
Operational Workflows
Pre-Custody Assessment:
- Review asset technical specifications
- Verify open-source wallet compatibility
- Audit all toolchains in key management pipeline
Continuous Monitoring:
- Quarterly risk disclosure updates
- Penetration testing schedules
- Disaster recovery validations
Regulatory Alignment and Future Developments
These principles align with SEC custody rule objectives while accommodating crypto's technical realities. As legislation evolves, we anticipate clearer standards around:
👉 Digital asset classification frameworks
👉 Cross-border custody cooperation
👉 Insurance product development for tokenized assets
FAQ: Addressing Common Custody Concerns
Q: Can RIAs use overseas custodians?
A: Yes, provided they meet Principle 2 safeguards and avoid bankruptcy-risky jurisdictions.
Q: How often should custody arrangements be reviewed?
A: Annually at minimum, with trigger-based reassessments for material changes.
Q: Are delegated staking services permitted?
A: When using qualified validators with equivalent protections to the primary custodian.
Q: What records demonstrate proper self-custody?
A: Documented security protocols, access logs, and third-party attestations of asset segregation.
Q: How should conflicts between economic rights and security be resolved?
A: Security considerations always take precedence over yield opportunities.
The Path Forward
Tokenization represents a fundamental shift in asset ownership structures. By adopting these principles, RIAs can:
- Reduce operational and legal risks
- Fully leverage asset capabilities
- Maintain regulatory compliance
- Build client trust through transparency
The framework provides actionable guidance while allowing flexibility for technological and regulatory evolution. As the space matures, we expect further refinement of standards and broader availability of qualified custody solutions.