BitGo’s Hybrid Custody Model Claims Compliance with SEC Rules

BitGo has introduced a hybrid custody model that combines multi-signature wallets with a qualified custodian framework, aiming to comply with the U.S. Securities and Exchange Commission’s (SEC) evolving custody rules. This approach seeks to balance institutional investors’ demand for control over private keys with regulatory requirements for asset security and segregation, marking a potentially significant development in crypto asset custody standards.

What happened

BitGo, a digital asset custody provider registered as a qualified custodian under SEC rules, has developed a hybrid custody model designed to meet the SEC’s updated custody requirements. According to Mike Belshe, BitGo’s CEO, the model integrates multi-signature wallets—which require multiple private keys to authorize transactions—with the oversight and fiduciary responsibilities of a qualified custodian. This architecture enables institutional investors to retain a degree of control over their private keys while BitGo fulfills regulatory mandates concerning asset security and segregation.

The SEC’s proposed custody rule updates emphasize enhanced protections, including strict segregation of client assets, improved security protocols, and comprehensive risk mitigation measures for digital asset custodians. BitGo claims its hybrid model aligns with these demands by combining direct client control with custodial safeguards. Institutional clients reportedly show growing interest in custody solutions that allow operational control alongside regulatory compliance, a market need BitGo’s solution aims to address.

Industry analyses interpret BitGo’s hybrid custody model as a pragmatic attempt to reconcile the SEC’s stringent custody rules—which traditionally favor third-party control of assets—with institutional investors’ preference for direct access and control of their crypto holdings. Some commentators suggest this approach could influence future regulatory frameworks by demonstrating that security and control need not be mutually exclusive. However, alternative views caution that ongoing regulatory evolution might challenge the viability of hybrid custody models if rules shift toward requiring exclusive third-party control without client key access.

Why this matters

The emergence of BitGo’s hybrid custody model highlights a critical tension in the regulation of digital asset custody: how to ensure robust investor protections without compromising the operational preferences of institutional asset holders. The SEC’s updated custody proposals reflect growing concerns about safeguarding client assets against theft, loss, and commingling, but they have also raised questions about the feasibility of existing custody frameworks in the crypto industry.

By combining multi-signature technology with the formal legal status of a qualified custodian, BitGo’s model attempts to bridge the gap between regulatory compliance and client autonomy. This could set a new industry standard, particularly for institutional investors who require both regulatory assurance and operational flexibility. If widely adopted, the hybrid custody approach might influence how regulators and market participants conceptualize custody risk and control in digital asset markets.

Moreover, the model’s development comes amid heightened regulatory scrutiny of crypto custodians and growing institutional participation in digital assets. The ability to demonstrate compliance with SEC custody rules while accommodating client control demands may be critical for custodians seeking to expand their institutional client base and navigate an uncertain regulatory environment.

What remains unclear

Despite these developments, several important questions remain unanswered. The current disclosures and interviews do not clarify how BitGo’s hybrid custody model will handle enforcement and audits under finalized SEC custody rules, particularly regarding proof of asset segregation and demonstration of client control. There is no publicly available information on how the model manages potential disputes or breaches within this framework.

Additionally, it is unknown to what extent institutional clients will accept a shared control custody model over the long term, given possible operational risks or liabilities associated with maintaining private keys alongside a qualified custodian. Details about insurance coverage, liability protection, and how these compare to fully third-party custody solutions have not been disclosed.

Furthermore, no public SEC enforcement actions or official feedback have been found that explicitly validate or challenge BitGo’s claims of compliance with the custody rules. Independent audit reports or third-party verifications of BitGo’s custody controls and segregation mechanisms are also absent, which limits the ability to assess the robustness of the hybrid model.

Finally, the SEC custody rule itself remains a work in progress. As the regulatory framework evolves, current interpretations and compliance claims may be subject to revision, adding an element of uncertainty to the long-term sustainability of BitGo’s approach.

What to watch next

• The finalization of the SEC’s custody rules, including any amendments or clarifications that may affect hybrid custody frameworks.
• Regulatory guidance or enforcement actions from the SEC that address or reference BitGo’s hybrid custody model specifically.
• Independent audit or third-party verification reports assessing BitGo’s custody controls, asset segregation, and compliance mechanisms.
• Institutional client feedback or case studies detailing operational experiences and acceptance of BitGo’s hybrid custody solution.
• Developments in insurance coverage and liability protections related to hybrid custody compared to fully third-party custody models.

BitGo’s hybrid custody model represents a noteworthy attempt to reconcile regulatory compliance with institutional demand for control over digital assets, but significant uncertainties remain. The evolving regulatory landscape and lack of independent verification mean that the model’s long-term viability and broader impact on crypto custody standards are yet to be determined.

Source: https://beincrypto.com/mike-belshe-bitgo-secs-custody-rules/. This article is based on verified research material available at the time of writing. Where information is limited or unavailable, this is stated explicitly.