The top ways regulation could strengthen crypto custody set the foundation for trust, interoperability, and scalable solutions

Without clear regulatory frameworks, the risks of mishandling user funds or losing institutional capital loom large.

On the legislative front, momentum is undeniable. In the United States, the GENIUS Act and the updated Clarity for Payment Stablecoins Act are making waves in Congress, aiming to define standards for asset segregation, audit trails, and custodial responsibilities. 

Meanwhile, the Consumer Financial Protection Bureau (CFPB) has proposed new guidelines requiring digital asset custodians to adhere to strict disclosure and safekeeping rules, echoing best practices from traditional finance.

Across the Atlantic, the EU’s MiCA framework (Markets in Crypto-Assets) has begun enforcement, mandating clear custody policies, liability coverage, and capital reserves. 

These legislative efforts reflect one common truth: Top ways regulation could strengthen crypto custody are no longer theoretical—they’re unfolding in real-time.

As digital assets mature, so does the need for a dependable backbone. That backbone is secure, regulated custody. 

The following sections unpack how smarter regulation is poised to transform crypto custody from a risk factor into a competitive edge—from mandatory insurance provisions to real-time audits and beyond.

Why Custody Is the Crypto Weak Link

Despite the excitement around digital assets, crypto custody remains the industry’s Achilles’ heel. From the $615 million Ronin Bridge hack to Celsius’s frozen withdrawals, custody failures continue to erode user confidence. 

The absence of unified regulatory frameworks means even major platforms lack standardized protections, making institutional investors think twice.

Top ways regulation could strengthen crypto custody start with tackling the most glaring issues: cyber‑security gaps, insufficient capital reserves, and poor transparency. 

Many custodians operate in fragmented jurisdictions where audits are optional, insurance is scarce, and user assets aren’t legally segregated from company holdings. As a result, retail and institutional clients alike face unquantified risks.

According to Cointelegraph, the industry’s hesitance to adopt advanced custody technologies like Multi-Party Computation (MPC) stems partly from regulatory uncertainty. Without clear rules around liability and technological standards, firms are slow to implement next-gen security measures. 

Reddit and Finance Magnates both highlight how even well-capitalized exchanges delay upgrades—despite the availability of safer solutions.

The Times recently reported that most custodial platforms still fall short of transparency in Proof-of-Reserves disclosures, especially in high-volatility markets. 

Meanwhile, Investors.com and MarketWatch emphasize that the lack of uniform compliance frameworks in countries outside the EU and US has left users exposed to arbitrary platform failures.

This is where the top ways regulation could strengthen crypto custody become critical. Strong legal mandates could force custodians to implement advanced encryption, adopt full-reserve models, and offer third-party insurance. 

Regulatory clarity would also empower institutions to enter crypto markets with confidence, knowing that there are enforceable standards behind the scenes.

In short, custody is the barrier between crypto as a retail play and crypto as a full-fledged financial infrastructure. Without stronger rules, it’s the weak link that threatens the whole chain.

Regulation Today: The Changing Landscape

Across jurisdictions, lawmakers are finally acknowledging the vulnerabilities in digital asset custody. The top ways regulation could strengthen crypto custody are already in motion—from audit mandates to legal clarity on asset classification. Below is a breakdown of the most impactful developments across the globe.

U.S. Developments

The GENIUS Act, passed on July 18, 2025, is a landmark bill for stablecoins and custodians alike. It mandates 1-to-1 asset backing, independent audits, and liquid reserve holdings. 

Critically, it opens the door for custody platforms to become licensed stablecoin issuers, establishing direct accountability. According to Wikipedia, this act is already reshaping how custodians structure internal risk controls.

Meanwhile, the Clarity for Payment Stablecoins Act, bundled with FIT21, finally addresses one of crypto’s longest-standing uncertainties: whether a token is a security or a commodity. 

By providing a regulatory home, it enables custodians to build compliant custody frameworks based on asset classification. 

This legal clarity is one of the top ways regulation could strengthen crypto custody, especially for institutional custody providers managing diverse digital portfolios.

The Consumer Financial Protection Bureau (CFPB) is also stepping in. A 2025 proposal mandates refund protections for hacked accounts, similar to traditional bank reversals. 

The rule would require platforms to maintain sufficient reserves and ensure users are not left vulnerable after major breaches. Barron’s and the Financial Times note this is a direct response to the 2024 Ledger Connect data breach.

In addition, SAB 122, which replaces the controversial SAB 121 accounting rule, has removed the custodial liability burden from banks. 

This has made custody services more accessible to legacy financial institutions, clearing a key obstacle that hindered their entry. As Coincub, several major banks—including Wells Fargo and BNP Paribas—are now piloting digital asset custody under this revised regime.

These U.S. reforms show that top ways regulation could strengthen crypto custody aren’t just about risk—they’re about inclusion, credibility, and growth.

EU and UK

Europe’s response is equally strategic. The Markets in Crypto-Assets (MiCA) framework, already active in 2025, demands that custodians segregate client assets, register under a pan-EU license, and offer stablecoin transparency on backing and redemption mechanics. 

According to Reddit and Protechbro Media, MiCA is pushing the industry toward higher resilience and operational redundancy across custodian networks.

In the UK, the Financial Conduct Authority (FCA) released proposals CP25/14 and CP25/15. These include minimum security standards, system resilience checks, and stablecoin regime alignment with the Bank of England. 

Cointeeth and Finance Magnates note that custodians operating in the UK must now adopt event-based incident response frameworks, signaling a more proactive approach to cyber threats.

Again, these updates showcase how top ways regulation could strengthen crypto custody include both prevention (via audits, licensing) and response (via insurance, access controls), ensuring stronger protections for both retail and institutional users.

Asia and Other Markets

In Asia, regulatory clarity is becoming the norm. Japan has recognized digital assets as financial instruments, placing custody providers under capital reserve, AML, and reporting obligations. Protechbro Media reports that firms like SBI Holdings have already launched regulated crypto trust services in response.

South Korea’s VAUPA law (Virtual Asset User Protection Act) mandates that exchanges and custodians hold at least 80% of assets in cold storage, enforce real-time monitoring, and maintain insurance coverage. 

These rules are cited in Wikipedia, KMA Files, and Cointeeth as some of the strictest custodial mandates globally.

In Singapore, the Financial Services and Markets Act (FSMA) and directives from the Monetary Authority of Singapore (MAS) require custody providers to obtain broad-based licenses, adopt auditing regimes, and segregate user funds. 

LinkedIn reports suggest that MAS is also tightening outbound compliance for cross-border custodial services.

Globally, the OECD’s Crypto-Asset Reporting Framework (CARF) is gaining traction. It compels custody providers to collect KYC and tax-residency data, and report transactions internationally. 

While not a security measure per se, this framework boosts transparency—a foundational element among the top ways regulation could strengthen crypto custody across borders.

Top Ways Regulation Could Strengthen Crypto Custody

Below, we explore each pillar in depth, connecting it directly to real-world regulatory progress.

Mandatory Asset Segregation & Reserve Backing

One of the top ways regulation could strengthen crypto custody is through enforced client asset segregation and 1:1 reserve backing. When custodians mix client funds with operational capital—as seen in the FTX collapse—risks compound quickly.

The GENIUS Act mandates that digital assets under custody be fully backed by liquid reserves and held in segregated accounts. Similarly, the EU’s MiCA regulations prohibit the commingling of assets, requiring custodians to prove solvency and ensure on-demand redemption. These steps help protect investors while promoting liquidity stability.

Compulsory Independent Audits & Public Disclosure

Transparency is non-negotiable. Monthly CPA audits, on-chain proof-of-reserves, and public disclosures of asset holdings represent another critical regulatory solution. 

The top ways regulation could strengthen crypto custody must include third-party verification—not just internal reporting.

The GENIUS Act and prior STABLE Act proposals require independent audits and regular attestations by licensed auditors. 

These initiatives mirror traditional finance controls, where trust hinges on third-party validation. With custodians facing billions in assets under management, unverified reserve claims are no longer acceptable.

Insurance & Custody Liability Rules

Cyber theft, insider fraud, and exchange collapses are persistent threats. That’s why one of the top ways regulation could strengthen crypto custody is by mandating fault and theft insurance along with well-defined liability rules.

The CFPB’s 2025 proposal introduces bank-style refund protections for consumers who suffer wallet hacks—ensuring that users aren’t left empty-handed after digital disasters. 

This mirrors FDIC-type protections in banking and forces custodians to maintain minimum coverage. The U.K. and South Korea also require insurance thresholds for registered custodians, a rising global norm.

Licensing & Capital Adequacy Requirements

Licensing custodians isn’t just red tape—it’s essential risk management. Capital requirements, governance checks, and operational oversight are core to how regulated custodians maintain long-term solvency.

In Japan, custody providers operate under financial instrument regulations, subject to both AML laws and capital adequacy ratios. Singapore’s FSMA does the same, issuing licenses only to those who meet strict criteria on reserves and security infrastructure. 

These approaches illustrate how the top ways regulation could strengthen crypto custody include filtering out undercapitalized or noncompliant actors from the system entirely.

Technology-Agnostic, Principles-Based Custody Standards

Regulation must evolve with the tech—not freeze it. That’s why one of the top ways regulation could strengthen crypto custody is by setting technology-agnostic, principles-based standards. 

This allows custodians to adopt the best available security—be it Multi-Party Computation (MPC), Hardware Security Modules (HSMs), or multi-signature solutions.

As discussed in recent FCA consultations and SEC roundtables, custodial standards should emphasize data integrity, private key safety, and access control protocols, without prescribing specific software or hardware. 

This ensures flexibility and future-readiness, especially as custody models adapt to quantum computing risks or cross-chain interoperability.

Robust KYC/AML and Transaction Oversight

Another pillar among the top ways regulation could strengthen crypto custody is enhanced monitoring. Custodians must be equipped to detect illicit flows, comply with AML/KYC requirements, and report suspicious activity.

The OECD’s Crypto-Asset Reporting Framework (CARF) and FinCEN’s 2024 guidelines now require custodians to collect tax residency data, apply automated transaction screening, and share reporting with global regulators. 

Without such mechanisms, custody platforms can be exploited for money laundering, sanctions evasion, or terror financing.

Cross-Border Regulatory Cooperation

Crypto is global—regulation must be, too. Fragmented rules lead to jurisdictional arbitrage and weak compliance loopholes. Therefore, one of the top ways regulation could strengthen crypto custody is through international harmonization.

The International Organization of Securities Commissions (IOSCO) and OECD are working on unified recommendations to align definitions, audit requirements, and enforcement mechanisms across borders. 

The Washington Post and Reddit forums highlight how this cooperation can level the playing field and reduce regulatory whiplash for cross-jurisdictional custodians.

Consumer Protection Mechanisms & Dispute Remedies

Finally, the top ways regulation could strengthen crypto custody must include the right to redress. Consumers should be able to recover funds, file complaints, and access mediation services when custody fails.

The CFPB’s proposed rules would grant crypto users bank-like protections, such as refunds for unauthorized transactions and guaranteed access to assets during outages. 

The Financial Times notes that these proposals could transform custody from a “buyer-beware” model into one of fiduciary responsibility.

Conclusion

As this article has shown, the top ways regulation could strengthen crypto custody converge around a common goal: building systems that are transparent, insured, tech-resilient, and globally aligned.

From mandatory asset segregation and real-time audits to cross-border cooperation and consumer protection rules, regulators are beginning to establish the foundation for safe and scalable custody infrastructure. Yet, the true strength of these frameworks lies not in rigidity but in adaptability.

Policymakers must prioritize flexible, principle-driven regulations that accommodate emerging technologies like MPC and decentralized custody while holding providers to strict accountability standards. 

At the same time, custodians must align now—not later—with global best practices around disclosure, licensing, and capital adequacy to prepare for an interoperable, regulated future.

The opportunity is clear: with the right safeguards in place, crypto custody can evolve from the industry’s weak link into its strongest pillar.