Custody is the only question that has ever mattered

Look at the large failures in crypto over the last decade and the pattern is not protocol failure. It is custody: somebody held other people’s assets and used them, misreported them, or lost the keys.

The distinction

Self-custody — you hold the keys. Nobody can freeze or lend your assets, and nobody can help you if you lose them.

Custodial — an exchange or provider holds them. You have a claim against a company, not an asset. In an insolvency you are usually an unsecured creditor.

Most users are in the second category and believe they are in the first. That gap is where the losses have come from.

Proof of reserves, and its limits

After several collapses, exchanges began publishing proof-of-reserves attestations. These demonstrate assets at a point in time. They generally do not demonstrate liabilities, which is the more important half.

An attestation showing assets without a verified liability side tells you almost nothing — a firm can borrow to cover a snapshot. Look for whether liabilities are included and who signed off.

What regulation is converging on

Segregation of client assets, restrictions on rehypothecation, and capital requirements. Unexciting, and directly aimed at the failure mode that has actually caused the losses.

The practical read

If you hold anything, know which category you are in. If it is custodial, that is a credit decision about a company, and it should be assessed like one.

Not financial advice. Digital assets are volatile and you can lose everything.

Reported at CoinDesk and Decrypt; analysis ours.