Multi-Institutional Bitcoin Custody: A Primer

Bitcoin has come a long way from the fringes of finance to its current status as a mainstream investment asset. The rise of bitcoin exchange-traded

Bitcoin has seen mainstream adoption as an investment asset, with the rise of bitcoin exchange-traded products (ETPs) and ETFs making it easier for institutional investors to gain bitcoin exposure. However, as billions of dollars flow into these products, a significant issue has emerged that warrants closer scrutiny: reliance on single custodians to hold the physical bitcoin that backs them.

For instance, the iShares Bitcoin Trust by BlackRock has over $50 billion in assets under management, making it the most successful bitcoin ETF in the market. Yet, every bitcoin held in that fund is kept in custody solely by Coinbase. While BlackRock is a titan of finance, the reality is that Coinbase – in addition to BlackRock – is a key source of counterparty risk for investors. This single point of failure exposes the fund to a risk of catastrophic loss about which few investors are likely to be aware.

The potential fallout of this arrangement is clearly spelled out in the iShares Bitcoin Trust’s SEC registration statement: "...in the event of an insolvency or bankruptcy of the Bitcoin Custodian... customers’ assets – including the Trust’s assets – may be considered the property of the Bitcoin Custodian, and customers – including the Trust – may be at risk of being treated as general unsecured creditors of such entities and subject to the risk of total loss or markdowns on value of such assets."

In simpler terms, if Coinbase were to declare bankruptcy, holders of iShares Bitcoin ETF units could find themselves at the back of the line, treated as unsecured creditors with no guaranteed claim to the bitcoin backing their shares. Notably, Coinbase’s credit rating of BB– from S&P Global Ratings places it in "junk" status. As of this writing, there is no reason to question Coinbase’s ability to continue holding bitcoin in custody on behalf of its clients. But, before we dismiss this scenario as unlikely, remember that bitcoin history is littered with examples of custodian collapses – from Mt. Gox, to FTX, to Prime Trust.

Single-custodian models are a holdover from traditional finance, where assets are often pooled with a single clearinghouse or bank. However, bitcoin is fundamentally different. It doesn’t require a centralized custodian, so relying on one undermines the very principles that make bitcoin valuable: trust minimization and resilience against centralized points of failure.

The failure of a single custodian can happen for various reasons. Beyond bankruptcy and fraud, there’s the risk of state attacks, cyberattacks, and operational failures. Any of these events could render the assets inaccessible, even if the bitcoin itself is still visible on the blockchain. In a market that values speed, security, and autonomy, many institutional investors consider this an unacceptable risk.

This is the problem solved by multi-institutional custody (MIC). MIC uses bitcoin’s native multi-signature technology to distribute custody across multiple independent institutions in different jurisdictions.

Instead of one institution holding all the keys in a multi-signature quorum, MIC distributes them across several regulated custodians. This means that no single custodian can authorize transactions on its own, because a quorum of keys (for example, 2 out of 3) is required to move funds. Even if one custodian goes bankrupt or is compromised, the depositor’s bitcoin remains secure and accessible.

By combining custodians in different countries with independent regulatory regimes, MIC minimizes risk of coordinated asset freezes or seizures. This distributed approach mitigates many, but not all, of the risks associated with bitcoin custodians, and is a more robust custody solution for institutional-scale investments than the solutions used most often today.

The demand for secure, scalable bitcoin custody has never been higher. As ETFs, ETPs, corporate treasuries, and strategic reserves gain momentum, institutional investors will need solutions that address the risks posed by single custodians. Bitcoin service providers such as Onramp offer a multi-institution custody framework that integrates the best elements of traditional security protocols with the resilience of bitcoin’s decentralized architecture.

The benefits of MIC extend beyond just security. By involving multiple custodians, institutions diversify their exposure, reducing the risk of catastrophic loss due to a single point of failure. Multi-sig setups provide cryptographic proof of reserves and require multiple parties to approve transactions, increasing oversight and accountability. Institutions can customize their custody arrangements to suit governance and compliance requirements, with the ability to add or rotate custodians as needed.

One reason that trust structures are gaining traction again is that they can utilize MIC while offering tax-efficiency. Unlike ETFs, which generally require cash settlements, trusts can facilitate in-kind delivery, meaning investors can receive the underlying bitcoin itself rather than fiat cash. This eliminates a taxable event and preserves the long-term upside of holding bitcoin directly.

For pension funds, endowments, and family offices seeking direct exposure to bitcoin without introducing additional counterparty risk, MIC-enabled trusts present a compelling alternative. By combining the ease of traditional financial products with the security of decentralized custody, these structures offer institutions a more efficient and resilient way to gain bitcoin exposure.

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