Summary: If your trading desk wants to post collateral across multiple decentralized custody rails, U.S. regulators will still measure you against the same core questions: who is the legal custodian, who truly controls the keys, how are assets segregated, and what happens in an insolvency or failure. Since mid‑2025, the SEC, OCC, and NYDFS have each updated or clarified positions that materially affect how you can structure smart‑contract custody alongside bank and trust‑company “qualified custodians.”

Our Trading Desk Wants to Post Collateral at Multiple Decentralized Custody Solutions: How Regulators View Smart‑Contract Custodians vs Traditional Custodians

Decision‑makers ask us two hard questions every week: can we post collateral through smart contracts and still be compliant, and what—precisely—counts as a “custodian” in the eyes of regulators?

The short answer today:

A smart contract itself is not a legal custodian. Under the SEC’s investment adviser custody regime, “qualified custodian” status still attaches to entities (banks, trust companies, broker‑dealers, FCMs, certain foreign FIs)—not code. (law.cornell.edu)
However, 2025 brought important shifts that make bank/trust custody easier to pair with on‑chain collateral workflows: the SEC withdrew its 2023 “Safeguarding” proposal; the OCC reopened bank crypto‑custody without prior non‑objection; New York tightened expectations for sub‑custody and FBO titling; and the SEC staff broadened broker‑dealer custody relief for crypto asset securities. (sec.gov)

Below is a practical guide to what changed, what hasn’t, and how to design a multi‑custodian, on‑chain collateral program that satisfies regulators and your auditors.

What changed in 2025 (and why it matters for collateral)

SEC withdrew the 2023 “Safeguarding Advisory Client Assets” proposal on June 12, 2025. That proposal would have imposed tougher “qualified custodian” conditions that many crypto firms feared they could not meet. Withdrawal means the 2009 custody rule remains the baseline. Practically: advisers can continue using state/federal trust companies and banks as qualified custodians while using smart contracts as workflow tools—not custodians. (sec.gov)
OCC reopened the door for bank crypto‑custody without a pre‑approval chokepoint. Interpretive Letter 1183 (Mar 7, 2025) reaffirmed that national banks/federal savings associations may provide crypto custody, hold stablecoin reserves, and participate in DLT—without first obtaining supervisory non‑objection—so long as risk management is robust. IL 1184 (May 7, 2025) further clarified outsourcing and sub‑custody are permissible with strong third‑party risk controls. This unlocks more tri‑party models where a national bank is your legal custodian while smart contracts orchestrate collateral flows. (occ.gov)
SEC staff replaced the 2020 “special purpose broker‑dealer” narrow path with a broader 15c3‑3 staff statement on Dec 17, 2025, outlining how any broker‑dealer can deem itself to have “possession or control” of crypto asset securities if it implements specified policies (e.g., private‑key protection, lawful‑order responsiveness, and transfer arrangements in resolution). This facilitates broker‑dealer participation in crypto collateral markets without siloing into SPBDs. (sec.gov)
NYDFS updated custody guidance (Sept 30, 2025) with prescriptive sub‑custodian expectations: prior DFS approval, FBO titling, explicit segregation both on‑chain and on ledgers, and contractual limits on liens/set‑off. If any leg of your collateral stack touches a NYDFS‑regulated entity (BitLicensee or NY trust), your documents and wallet setups must reflect this. (dfs.ny.gov)
SAB 121 is gone. On Jan 24, 2025, the SEC revoked Staff Accounting Bulletin 121, removing the controversial on‑balance‑sheet liability treatment for public companies that safeguard customer crypto. Banks and public custodians can now scale digital asset custody with less capital drag—crucial for collateral networks that previously struggled to onboard banks as primary custodians. (reuters.com)

What did not change: who is a “custodian” for advisers

For SEC‑registered investment advisers, the rule that matters is still 17 CFR §275.206(4)‑2 (the “Custody Rule”). It requires client funds and securities be maintained by a “qualified custodian,” generally:

a bank or savings association (including trust companies),
a registered broker‑dealer,
a futures commission merchant, or
certain foreign financial institutions.

Smart contracts, MPC networks, or DAOs are not qualified custodians; they can be risk controls or workflow layers under a custodian’s control, but they are not the custodian. The rule’s definitions and obligations (segregation, statements, surprise exams) still apply. Design your stack so an entity that clearly fits the rule “owns” custody while code enforces policy. (law.cornell.edu)

How U.S. regulators frame smart‑contract custody vs traditional custody

SEC (advisers): Code can evidence segregation and controls, but the “qualified custodian” must be a regulated entity. If your firm can unilaterally move client assets via a smart contract (e.g., you are a threshold signer in a Safe or can upgrade logic), you almost certainly have “custody” and must park the assets with a qualified custodian or meet an exception. The 2025 withdrawal did not create a new category for code‑based custodians. (sec.gov)
SEC (broker‑dealers): The Dec 17, 2025 staff statement describes how broker‑dealers can satisfy 15c3‑3 “possession or control” for crypto asset securities—emphasizing incident response for chain events, lawful‑order compliance, and resolvability of key material. That is compatible with smart‑contract vaults so long as the BD’s policies and legal rights let it execute those steps. (sec.gov)
OCC: Banks can directly custody crypto or use sub‑custodians/technologists (MPC, smart‑contract platforms) if third‑party risk programs are robust. This legitimizes hybrid models where bank legal custody sits above on‑chain escrow logic. (occ.gov)
NYDFS: Treats custody as a fiduciary‑like safekeeping function. 2025 guidance requires (i) segregation on‑chain and on ledgers, (ii) FBO titling, (iii) DFS approval for sub‑custody with contractual pass‑through of DFS standards, and (iv) tight disclosure about who holds what and under what terms (no debtor‑creditor confusion). Smart contracts are fine—but only as mechanisms within a DFS‑compliant custodial framework. (dfs.ny.gov)
FinCEN: Hosted wallet providers are money transmitters; unhosted (self‑custody) software is not. If your smart‑contract arrangement constitutes “hosting” (you or a vendor control the keys or can move value for customers), expect MSB obligations in addition to any securities/banking overlay. This often decides whether an ops vendor can even touch keys. (fincen.gov)
EU signal for global programs: Under MiCA Article 75, “custody and administration” is a licensed CASP service with detailed segregation, liability, and statement requirements—again anchored in a legal person, not a contract. If your trading desk operates in the EU, assume a CASP custodian is required even if code holds assets. (judict.eu)

Collateral architecture patterns that work now

Below are three design patterns we implement with clients that align on‑chain collateralization with U.S. regulatory expectations.

Pattern A — Off‑exchange settlement from bank/trust custody

What: Keep assets in qualified custody at a bank/trust; allocate credit to venues via an off‑exchange network; settle periodically while assets remain segregated off‑venue.
Who/How (live today):
- BitGo Go Network OES and Copper ClearLoop integration (e.g., Deribit): clients trade while assets stay off‑exchange in qualified custody; daily or predefined settlement flows. (businesswire.com)
- Fireblocks Off Exchange with Deribit: collateral mirrored from an MPC wallet mutually controlled by client and infrastructure provider, giving the exchange visibility without custody. (fireblocks.com)
Why regulators like it: legal custody = bank/trust company; exchange counterparty risk is minimized; segregation and statements are clear. For NYDFS entities, configure FBO titling and contractually bar liens beyond ordinary fees. (dfs.ny.gov)
Tip: Document operational controls—who can allocate/deallocate, daily reconciliation, and emergency unwinds. Auditors will ask.

Pattern B — Tri‑party smart‑contract vault with custodian co‑control

What: A smart‑contract “vault” (e.g., Safe‑style multi‑sig or programmable escrow) that enforces collateral rules on‑chain while a qualified custodian is a required signer, or holds the controlling key shard in MPC.
How:
- Require custodian cosign for any withdrawal.
- Allow‑list recipient contracts/addresses (venues, protocols).
- Enforce time‑locks on parameter changes; add a “circuit breaker” pausable function that a custodian can trigger on lawful order or incident.
- Keep admin upgradability under a timelocked multisig with outside signers (e.g., custodian + independent director), or avoid upgradability entirely where possible.
Why regulators accept it: You demonstrate that the custodian—not the adviser or trader—ultimately controls movement of client assets. This maps to “possession or control” concepts and NYDFS segregation norms.

Pattern C — Hybrid: On‑chain DeFi + off‑exchange CEX

What: Allocate some collateral to DeFi protocols while keeping the majority in bank/trust custody for CEX trading via off‑exchange rails.
How:
- Cap DeFi exposure by TVL/venue risk scores and formal audits; require oracle‑based health checks before releasing more collateral.
- Encode withdrawal “cool‑downs” and 2‑of‑3 multisig with custodian key.
- Build continuous on‑chain reconciliation with daily attestation to custodian records.
Why: Balances capital efficiency (DeFi borrow/lend, on‑chain perps) with compliance and operational safety for larger centralized venues.

Practical example: RIA derivatives program

Goal: Post BTC/ETH collateral to Deribit and a select DeFi money market, while satisfying the Custody Rule.

Legal custodian: National trust bank or NYDFS limited‑purpose trust (e.g., custodians used by 2024 spot BTC ETFs show market‑validated operators such as Coinbase Custody, Fidelity, Gemini; BlackRock later added Anchorage as an additional custodian). (techcrunch.com)
Trading connectivity:
- CEX: Off‑exchange settlement (BitGo Go Network OES + Copper ClearLoop) so funds never sit on exchange. (businesswire.com)
- DeFi: Smart‑contract vault where custodian holds a co‑sign/MPC shard; allow‑listed to the specific DeFi pool contracts.
Controls to paper and implement:
- NYDFS‑style FBO titling, segregation disclosures, no rehypothecation by sub‑custodians without approval. (dfs.ny.gov)
- Adviser authority limited to allocation requests; custodian executes or co‑signs actual movements.
- Surprise exam scope includes on‑chain vaults with read‑only address inventory; daily reconciliation of ledger balances to custodian statements under your accountant’s SOC workflow. (law.cornell.edu)
- OFAC screening of all allow‑listed contract addresses and counterparties; document screening of inbound/outbound addresses and country IP blocking per OFAC virtual currency guidance. (ofac.treasury.gov)

Result: The program uses smart contracts for enforcement but preserves a recognized qualified custodian as the legal holder—reducing regulatory ambiguity and audit friction.

Practical example: Public company trading desk after SAB 121 revocation

Problem: Before 2025, acting as custodian or sub‑custodian could force on‑balance‑sheet recognition of customer crypto (SAB 121).

Now: With SAB 121 revoked, partnering with a bank/trust for custody no longer drags a liability onto your balance sheet solely for safeguarding customer crypto. That makes tri‑party collateral networks and omnibus arrangements more feasible for public companies, subject to your auditor’s GAAP analysis. Pair this with OCC’s 2025 letters to enable a bank‑led custodial stack and keep your DeFi legs strictly non‑custodial (no unilateral key control). (reuters.com)

Where smart contracts shine—and where they don’t—in a regulator’s eyes

What they like:

Deterministic segregation: separate on‑chain addresses, per‑customer vaults, and FBO‑style titling in agreements echo SEC/NYDFS requirements. (dfs.ny.gov)
Programmable policy: time‑locks, allow‑lists, kill‑switches, and auditable event logs that map to “possession or control” and incident response.
Off‑exchange risk reduction: leaving assets at a custodian mitigates CEX insolvency/cyber risk, an explicit staff and examination concern. (finra.org)

What they scrutinize:

Upgradability risks: Proxy mistakes or compromised admin keys have caused real exploits; prefer immutability unless justified, and if you must upgrade, use standard proxies, storage‑layout checks, timelocks, and multisigs—never EOAs. (openzeppelin.com)
“Proof of reserves” as audit substitutes: U.S. audit oversight warns PoR is not an audit or reliable assurance—don’t rely on PoR to satisfy custody/audit obligations. (pcaobus.org)
Who can move funds: If your adviser ops team can alone execute a vault withdrawal, you likely have custody (and examination risk), regardless of what the UI label says. (law.cornell.edu)

Emerging best practices we implement for multi‑custodian, on‑chain collateral

Governance and controls

Make the legal custodian a required signer or policy approver in any vault that can move client assets.
Encode a “lawful‑order path”: custodian can freeze or route assets per court/agency order, aligning to SEC/BD staff expectations. (sec.gov)
Use timelocked upgrades with published hashes; require off‑chain board approval and on‑chain delay for any logic change.

Technical hardening

Prefer immutability for core vault logic; if not, use UUPS/Transparent proxies with CI storage‑layout diffing and explicit __gap slots. (docs.openzeppelin.com)
Adopt CCSS (v9.0) for key management and SOC 2 Type II for org‑level controls; your custodian and any MPC vendor should be aligned here. (cryptoconsortium.org)
Instrument continuous on‑chain reconciliation against custodian statements; export signed reports for your auditor’s surprise exam.

Regulatory touchpoints

NYDFS programs: pre‑clear any sub‑custody, flow FBO titling and lien language down into third‑party agreements, and keep disclosures public on your site. (dfs.ny.gov)
OFAC: implement address screening, IP geo‑controls, and blocked‑property procedures for virtual currency; document this in your sanctions program. (ofac.treasury.gov)
CFTC retail “actual delivery” rule of thumb: if you extend leverage to U.S. retail, you must deliver full control within 28 days without retaining a lien; structure collateral and liens accordingly. (cftc.gov)

Commercial structure

Use off‑exchange settlement to access CEX liquidity without custodial exposure to the venue (BitGo/Copper; Fireblocks/Deribit). Verify your custodian’s legal status (bank/trust), insurance, and DFS/charter where applicable. (businesswire.com)
Diversify custodians to reduce single‑point concentration risk—a lesson visible in the ETF world where multiple issuers rely on a small set of custodians, with some adding additional federally chartered trust banks in 2025. (forbes.com)

Decision matrix: smart‑contract vs traditional custodian for your use case

You are an SEC‑registered investment adviser managing client crypto:
- Use a qualified custodian for all funds/securities; integrate smart contracts only as policy enforcement. Ensure statements, segregation, and surprise exam coverage. (law.cornell.edu)
You are a broker‑dealer touching crypto asset securities:
- Align custody operations to the Dec 17, 2025 staff statement (key safeguarding, lawful‑order compliance, resolvability). Smart contracts must not impede those capabilities. (sec.gov)
You are a NYDFS BitLicensee or NY trust:
- Follow the 2025 DFS custody letter: prior approval for sub‑custody, FBO titling, no liens beyond fees, and clear customer disclosure. (dfs.ny.gov)
You are a national bank/federal thrift:
- You may custody crypto and outsource elements without prior non‑objection; embed third‑party risk controls and board‑level oversight. (occ.gov)
You operate in the EU:
- Use a licensed CASP for custody (MiCA Art. 75) with legal segregation and liability; smart contracts complement but do not replace the CASP. (judict.eu)

Checklist: launching a multi‑custodian, on‑chain collateral program in 60–90 days

Legal and governance

Select primary custodian(s) with bank/trust charters; confirm DFS status if NY‑facing.
Paper tri‑party control: adviser cannot unilaterally move collateral; custodian co‑signs or holds MPC shard.
Update ADV, customer agreements, DFS disclosures, and BD procedures as applicable. (dfs.ny.gov)

Smart‑contract controls

Immutable core where possible; else, UUPS/Transparent proxy with timelock; custodian and independent signer on governance multisig. (openzeppelin.com)
Encode allow‑lists for venues/protocols; add emergency pause callable by custodian on lawful order. (sec.gov)

Ops and assurance

Daily on‑chain reconciliation to custodian statements; monthly board reporting; auditor‑ready exports for surprise exams. (law.cornell.edu)
Key management and ops aligned to CCSS v9.0 and SOC 2 Type II; vendor attestations on file. (cryptoconsortium.org)
OFAC program tuned for virtual currency (address screening, blocking, reporting). (ofac.treasury.gov)

Venue connectivity

For CEX liquidity, prefer off‑exchange settlement networks over on‑exchange wallets.
For DeFi, cap exposure by protocol audit/formal‑verification status and implement oracle‑guarded health checks. (certora.com)

A note on UCC Article 12 (Controllable Electronic Records) for secured lending

As more states adopt the 2022 UCC amendments (Article 12), lenders can perfect security interests by “control” of a controllable electronic record. For corporate treasury and credit programs, this clarifies perfection and priority when crypto collateral is held in structured wallets or smart‑contract vaults—useful when your trading desk borrows against posted collateral. Check your state’s adoption status and ensure your vault design supports legal “control.” (uniformlaws.org)

What to watch in 2026

Broker‑dealer operationalization of the Dec 2025 staff statement through SRO exams and rule interpretations. (sec.gov)
Banks scaling custody programs under OCC 1183/1184 and the expansion of multi‑custodian networks for off‑exchange settlement. (occ.gov)
Continued NYDFS scrutiny of sub‑custody chains and disclosures—expect more prescriptive exam findings. (dfs.ny.gov)
EU MiCA custody enforcement, which may influence U.S. best practices for segregation and liability. (judict.eu)

How 7Block Labs can help

Custody architecture and code: We design and implement vaults that put a bank/trust in technical control without compromising speed, including allow‑lists, timelocks, circuit breakers, and immutable cores where feasible.
Document stack: We draft custodian, sub‑custodian, and tri‑party operational playbooks that track NYDFS, SEC custody, OCC outsourcing, OFAC, and auditor expectations.
Assurance pipeline: CCSS‑aligned key ceremonies, SOC‑ready evidence collection, and on‑chain reconciliation dashboards your auditors and board can actually use.

If your trading desk needs to move now, start with Pattern A (off‑exchange settlement from qualified custody), then layer in Pattern B (tri‑party smart‑contract vaults) as you harden controls. This sequence delivers immediate capital efficiency while staying inside today’s regulatory fence line.

References and key sources:

SEC withdrawal of 2023 “Safeguarding” proposal (June 12, 2025). (sec.gov)
OCC IL 1183/1184 clarifications on bank crypto custody and outsourcing (Mar 7 and May 7, 2025). (occ.gov)
SEC staff statement on broker‑dealer custody of crypto asset securities (Dec 17, 2025). (sec.gov)
NYDFS updated custody guidance (Sept 30, 2025) and 2023 letter. (dfs.ny.gov)
SAB 121 revocation (Jan 24, 2025). (reuters.com)
SEC custody rule text (who is a “qualified custodian”). (law.cornell.edu)
MiCA Article 75 (EU custody obligations). (judict.eu)
FINRA crypto communications sweep (Jan 23, 2024). (finra.org)
Off‑exchange settlement examples (BitGo/Copper; Fireblocks/Deribit). (businesswire.com)
PCAOB advisory on PoR limitations. (pcaobus.org)
OFAC virtual currency sanctions guidance. (ofac.treasury.gov)
UCC Article 12 adoption resources. (uniformlaws.org)

Need an implementation blueprint tailored to your regulators, custodians, and venues? We’ll map your target venues, risk appetite, and audit posture to a concrete, shippable architecture in two weeks.