Crypto Custody for Hedge Funds: Security and Compliance

Digital assets are no longer on the sidelines for hedge funds.  

PwC reports that nearly half of hedge funds had exposure to digital assets in 2024, but that regulatory uncertainty remained a key concern preventing wider adoption.  

However, the newly formed Crypto Task Force is currently developing the next generation of U.S. digital asset regulations. Forward-looking hedge funds are exploring qualified custody providers in anticipation of upcoming regulatory clarity.  

This article explores the intersection of hedge fund crypto security and regulatory compliance, providing insight into the ways institutions are adapting and how qualified custodians like BitGo contribute to secure digital asset management.  

Key Takeaways

• The Crypto Task Force, a U.S. regulatory body established to address gaps in digital asset oversight—is actively soliciting public opinion to shape new regulations. Hedge funds need custody partners who stay ahead of trends.

• With more than $100 billion in Bitcoin lost to mismanagement or theft, hedge funds need partners with tech stacks and internal controls that ensure no single point of failure can compromise client assets.

• Custodians can add value beyond security and compliance by streamlining operations, boosting investor confidence, and supporting scalable operations without expensive internal overhead.  

What Is Crypto Custody?

Crypto custody refers to the secure storage of private keys and wallets that grant access to assets on the blockchain. While retail investors often self-custody or rely on exchanges, crypto custody for hedge funds means entrusting assets to third-party qualified custodians.  

Because misplaced or stolen keys mean losing access to funds forever, crypto custody involves specialized security solutions that ensure no single point of failure compromises client assets, including multi-signature wallets, cold storage, and hardware security modules (HSMs). More on these solutions later. 

Custodians also implement internal controls, such as the principle of least-privilege access, fraud monitoring, and compliance reporting, to prevent employees from misusing access. 

In short, digital asset custody is the institutional-grade equivalent of a bank vault for digital assets, ensuring hedge fund assets are protected, insured, and managed under proper oversight. 

Analyzing the Need for Hedge Fund Crypto Custody

Given the choice, hedge funds certainly have the resources to develop a compliant and secure self-custody process, and forthcoming Securities and Exchange Commission (SEC) regulations may allow them to do so in certain situations.  

However, qualified custodians offer digital asset benefits similar to those in traditional finance: They reduce operational and compliance burdens, enhance investor confidence, and provide safeguards that mitigate risks of internal errors, fraud, and security breaches. All are critical to hedge fund crypto security. 

Security

Fortune magazine reports that private keys granting access to over $100 billion worth of Bitcoin have simply been lost, highlighting the industry's unique cybertheft risks.  

Here’s how the leading qualified custodians address digital asset security in the cryptocurrency market: 

• Cold Storage: Private keys are kept on hardware devices that never connect to the internet. For hedge funds managing significant assets, this approach adds a manual step that reduces fraud and accidental transfer risk while simultaneously protecting funds from data breach attempts.  

• Hardware Security Modules (HSMs): Long trusted in traditional finance, cryptographic HSMs further secure private keys. Top-tier custodians combine cold storage with geographically distributed redundant backups, protecting client assets against data breach and physical damage.  

• Multi-Signature Wallets (Multi-Sig): Instead of relying on a single key to authorize a transaction, multi-sig wallets require approval from multiple parties. For example, BitGo custody solutions require both a client and BitGo key to authorize transactions, creating a built-in check against unauthorized activity. 

• Access Management and Segregation of Duties: Effective Bitcoin security also means enforcing tight operational controls. Role-based permissions limit who can access or authorize transactions, ensuring that no single employee has unilateral power over large transfers.  

Compliance

Regulatory uncertainty has long complicated crypto custody for hedge funds. Regulators have yet to answer a foundational question: Are cryptocurrencies securities, commodities, or neither? Without an answer, many institutions understandably hesitated to invest in the sector.  

Clarity may be on the horizon, however.  

The Crypto Task Force, established by President Donald Trump in January 2025, is developing the next generation of digital asset rules. It has held numerous public roundtables soliciting input from institutional stakeholders.  

No concrete announcements have been made. However, regulators have acknowledged the consequence of ambiguity.  

“If investment advisers do not know which crypto assets are securities [or] what types of entities are qualified custodians … [they] may not be able to serve their clients’ best interests,” said Crypto Task Force leader Hester Peirce. 

Furthermore, Peirce plainly said on May 19: “Traditional securities in tokenized form are still securities.”  

As simple as that statement may be, black-and-white statements from SEC leadership are an optimistic signal for the future.  

Hedge funds concerned about crypto security and regulatory compliance can expect the right custody provider to pay close attention to the regulatory conversation. Part of their job is to mitigate operational, legal, and counterparty risk on behalf of institutions.  

Evaluating Crypto Custody Solutions for Hedge Funds

When choosing a custodian, look for providers who are both SOC 1 Type 2 and SOC 2 Type 2 compliant. Certified organizations have demonstrated to independent third-party auditors that their security and internal control processes are properly designed and functioning at the highest levels. 

Institutional crypto custodians bring a range of critical capabilities to digital asset management: 

• Technology Stack: Cold storage, multi-sig wallets, and hardware security modules work in tandem to ensure no single point of failure can compromise client assets. Additionally, institutional custody solutions will include APIs that seamlessly integrate with internal operations. 

• Withdrawal Protocols: Institutional custodians should provide fine-grained control over fund access. This includes whitelisting pre-approved wallet addresses for convenience, caps on withdrawal amounts or frequency, and role-based permissions. Such controls prevent errant or fraudulent access. 

• Regulatory Standing: Digital asset infrastructure providers and custodians can and should adhere to the same qualified custodian standards governing the traditional finance industry, including segregation of client assets, regular audits, insurance, security standards, and fiduciary responsibility. 

• Jurisdictional Compliance: Digital asset investing is a borderless endeavor, but regulations differ from country to country. Europe’s Markets in Crypto-Assets Regulation (MiCA) regulations came into full force at the end of 2024, the Crypto Task Force in the U.S. will soon propose new regulations, and new frameworks are taking shape across both Asia and the Middle East. The right custody provider stays current on global developments. 

BitGo’s custody solutions for investors prioritize security, regulatory compliance, and operational efficiency. As a regulated, insured, and independently audited qualified custodian, BitGo supports institutional investors in navigating complex digital asset markets. 

For more insights on digital asset security and regulatory developments, visit the BitGo blog. 

FAQ

Still have questions? Here are some quick answers about crypto custody for hedge funds. 

What is crypto custody for hedge funds?

Crypto custody for hedge funds refers to the secure storage and management of digital assets by a regulated third party. In contrast to traditional finance, digital asset custodians are responsible for managing the private cryptographic keys that grant access to the blockchain. 

Why do hedge funds need crypto custody solutions?

Regulators may permit hedge funds to self-custody client assets in certain circumstances. However, by using a specialized third-party custodian, institutions can mitigate security risks, satisfy regulatory obligations, and access institutional-grade infrastructure that builds investor trust and ensures operational efficiency.  

What challenges do hedge funds face in crypto custody?

The greatest challenges include navigating unclear and evolving regulatory expectations, asset security, and finding a provider that is also operationally efficient and easy to use.  

What are the benefits of using a crypto custody service for hedge funds?

Qualified custodians reduce operational risk, streamline compliance, offer robust security solutions, and provide tools that enable hedge funds to scale digital asset strategies with confidence and transparency, all without investing in an expensive internal process.