Why Multi-Institution Custody Is Winner Take All

Link to the full Research in PDF

Bitcoin has grown into a ~$2T asset class, but over $600B in losses from hacks, frauds, and user error underscore one of the industry’s deepest flaws: poor custody. From Mt. Gox to BlockFi, centralized and self-custody solutions have failed to keep up with the scale and risk profile of modern Bitcoin ownership. Multi-Institution Custody (MIC) changes that.

Introduction: The Custodial Crisis

The fear of loss—whether through theft, technical error, or custodial failure—has prevented many from entering the Bitcoin market altogether. Self-custody is too technical, time consuming, or risky for most, while centralized options have proven to insufficiently manage user funds, either through rehypothecation or inadequate security measures. These structural flaws have limited Bitcoin’s adoption curve.

Why MIC Fixes It

MIC is a custody model built around distributed trust. By using Bitcoin’s native multi-signature (multisig) technology, MIC spreads key management across three or more independent institutions. No one custodian can move funds alone. Keys are created and managed in secure, offline environments, and clients retain final authority over all transactions.

This architecture delivers unprecedented security, eliminating single points of failure, insider threats, and user error—without sacrificing usability. It also introduces new primitives: programmable inheritance, compliant institutional custody, and real-time on-chain verification.

Benefits Across the Stack

For Individuals: MIC removes the burden of key management without compromising on sovereignty or security with verifiable bitcoin holdings. It protects against physical attacks, simplifies inheritance, and enables users to integrate their Bitcoin into financial services (IRAs, loans, etc.) without losing custody.

For Institutions: MIC provides verifiable, high-assurance storage of assets and supports scaling to billions of dollars under custody. It meets regulatory standards while maintaining the ethos of Bitcoin.

For Operators: MIC unlocks a new design space for products that need custody—lending, trading, insurance, payments, and remittances all become safer and more scalable with MIC as the underlying layer.

A Brief History of Money, Bearer Assets, and Custodians

Custodians are not a novel concept. Around 2000 BCE in Mesopotamia, temples doubled as secure vaults for gold, silver, and grain. Guarded by priests and religious aura, they charged fees (often as offerings) to protect wealth from thieves, also lending surplus to boost returns and trade. This model spread and evolved over time. In Medieval Europe, banks and custodians were entrusted to hold gold deposits in exchange for bank notes which could be redeemable in gold.

Customers have historically valued custodians of bearer assets like gold, silver, and grain not only due to the ever-present risk of theft, but because custodians solved a deeper problem: the coordination of economic activity at scale. Maintaining one’s own vault or guards was costly and inconvenient, especially for individuals focused on trade, agriculture, or family affairs. Custodians enabled people to transact, inherit, and store value without taking on the full burden of security and management. They were especially attractive for legacy planning, where the transfer of assets across generations needed trusted third parties.

The costs to contribute and redeem bearer assets over time was significant, while the cost to create and rehypothecate claims on the underlying bearer assets were minimal (especially with government bailouts ensured for large custodians), while also generating substantial revenue for custodians. This dynamic limited the number of bank runs on custodians. When that didn’t work, there were often capital controls imposed. Thus, over time many custodians did not act with accountability and have maintained inadequate reserves, offered poor quality loans, and engaged in outright fraud, often without any knowledge or understanding of customers who believed their assets were secure.

For the last 100 years, the legacy custodian arrangement has been obscured by the fiat experiment, where custodianship became less about managing bearer assets and more about facilitating access to credit and digital ledgers. Fiat currencies removed the direct link to redeemable assets, and with it, the bearer nature of money itself.In recent history data leaks from poor security or employees selling data online means that information around the individual user information, transaction history, home addresses and other personal sensitive information is available, creating targets for theft. The next wave of custodians need to protect against these attacks, mitigate custodial risks, and still allow for fast and low-cost in-kind contribution and redemption.

Unlike previous bearer stores of value over time like gold, silver, and grain, the costs and time associated with contribution and redemption of bitcoin in-kind are minimal. Further, public bitcoin addresses and verification processes for bitcoin can be completed quickly and with minimal cost. This can allow assurances that funds are not being rehypothecated, either from a user’s individual wallet in self-custody, with a third party single custodian, or with collaborative custody models, assuming that the custodian will share the public address of their funds with the user.

This dynamic completely shifts the entire historical custodial opaque custodial model, in which one custodian has ownership of your bearer asset, although there could be more claims to the underlying asset than the asset itself. With a visible public key and mempool, anyone can confirm the history of transactions, and their own bitcoin ownership down to the 1/100,000,000th of one bitcoin, which would be nearly impossible to falsify.

Unlike historical bearer assets, Bitcoin introduces a fundamentally new model for ownership and custody. Its native properties—digital scarcity, programmable access, and instant auditability—enable collaborative custody through mechanisms like multi-signature wallets. This means custody no longer needs to be concentrated in a single institution. Instead, it can be distributed across multiple parties, reducing single points of failure and aligning incentives through shared responsibility.

For the first time, individuals and institutions alike can custody a bearer asset that is both verifiable and portable, without intermediaries—or choose custodians who can prove solvency in real time. In contrast to the opaque models of the past, Bitcoin makes trust optional. In doing so, it restores the accountability once expected of custodians, while empowering a new generation to hold, verify, and transmit value on their own terms.

The ability to both verify public address holdings, while distributing ownership of the asset among multiple parties is unique in history. The model protects against direct asset rehypothecation, and mitigates against fraud of single parties.

Given bitcoin is digital and can be distributed across multiple locations, the risks of a thief finding your bitcoin is lower than other bearer assets, but single individuals and multiple individuals in a multi-sig can still become compromised.

Preceding Custodial Options, What is MIC, and Its Benefits

The Custodial Crisis

Unsafe and opaque custody has limited bitcoin’s adoption, as very few investors have felt safe that their bitcoin will be there in 100 years with certainty. Because of this, bitcoin adoption, and, by proxy, its price would be significantly greater if there weren’t a fear that any material allocation would evaporate.

Many existing and potential network participants have felt uncomfortable putting on their full position, or have sold off some of their existing holdings as the value grew due to custodial concerns. Meanwhile, there is a very large population that has never put on a bitcoin position because they were unable to find a counterparty they could trust (including themselves) despite being interested in it as a financial asset because of concerns over being able to safely secure the asset.

The custody crisis in Bitcoin has been a persistent challenge, underscored by high-profile failures that highlight the vulnerabilities of centralized and decentralized storage options. The collapse of Mt. Gox in 2014, once handling 70% of Bitcoin transactions, saw 850,000 BTC (worth over $22 billion today) vanish due to hacks and mismanagement, shaking trust in exchanges. More recently, The Bybit hack in February 2025, where North Korean hackers stole $1.5 billion by exploiting a third-party wallet flaw, further emphasized that even sophisticated exchanges remain prime targets, dwarfing previous heists in scale.BlockFi’s 2022 downfall amid the crypto market crash exposed the risks of custodial platforms that promise high yields but lack transparency, leaving users unable to access funds. Celsius followed a similar trajectory, overleveraged on DeFi collateral and opaque trading strategies while marketing itself as a safe “crypto bank.” When market conditions turned, it halted redemptions and later revealed a multi-billion-dollar balance sheet hole. Voyager, too, fell victim to reckless counterparty exposure—specifically to the now-defunct hedge fund Three Arrows Capital—rendering it insolvent and leaving depositors stranded. FTX, once hailed as the institutional face of crypto, imploded spectacularly in late 2022 after revelations that it had misused customer funds to plug trading losses at its sister firm Alameda Research. The firm’s commingling of assets and absence of corporate controls turned what was seen as a “too-big-to-fail” exchange into one of the largest frauds in financial history.

Genesis, the crypto lender backed by Digital Currency Group, was the next domino, crippled by cascading defaults, exposure to both FTX and 3AC, and a sudden liquidity crunch that forced it to halt withdrawals in early 2023.

Together, these failures illustrate a recurring theme: when custody is managed by a single counterparty in a nontransparent manner—whether through centralized platforms, yield products, or opaque financial structures—the trust model reverts to fallible intermediaries. And time and again, those intermediaries have failed. While all of these instances are due to counterparty mismanagement, media outlets often blame the assets themselves (including bitcoin) rather than the counterparty responsible. Accordingly, many potential investors feel like they cannot participate without learning about self-custody, which is a hurdle preventing many potential participants from getting involved.

These incidents fuel the ongoing debate over custody solutions. Self-custody, where users control their private keys via hardware wallets like Ledger, offers autonomy but isn’t foolproof. Losing keys or seed phrases—a fate suffered by an estimated 3 million BTC—means permanent loss, as seen in cases like Stefan Thomas’s inaccessible 7,000 BTC. It demands technical know-how and diligence, leaving novices vulnerable to user error or theft. Collaborative custody, such as multi-signature (multi-sig) setups, splits keys among parties to reduce single-point risks. However, it introduces complexity, personal responsibility, and dependency on trusted entities, while the individual can still mismanage keys or have their private keys stolen.

Both options reflect Bitcoin’s ethos of decentralization but fall short of perfection. Self-custody risks human error; collaborative custody trades some sovereignty for convenience, yet still hinges on trust. As Bitcoin’s value soars, the custody crisis persists, with no one-size-fits-all solution, pushing users to weigh security against usability in an imperfect landscape.

While both of these options have resulted in significant user losses due to errors and key mismanagement, these have generally worked okay thus far. However, it is mostly an anomaly as the asset has been extremely small relative to other asset classes. As it grows, the $5 wrench attacks will get much more sophisticated as the honeypot and return on violence rises, even in personal and collaborative multi-sig models across jurisdictions. Further, sim swaps, key loggers, and supply chain attacks on hardware wallets will deliver significantly larger ROI as the price of bitcoin grows.

Multi-Institution Custody (MIC) Explained

Multi-Institution Custody (MIC) leverages Bitcoin’s native multi-signature (multisig) technology to distribute trust across multiple independent institutions. This approach eliminates single points of failure, enhances security, and simplifies custody for stakeholders. The robust yet simple solution allows bitcoin to scale to more individuals, corporates, and sovereign wealth funds who want the best security possible.How MIC Works

MIC employs a m-of-n construct, with examples of 2-of-3 or 3-of-5 multisig structure, where three, or five independent institutions each hold a private key, and at least two must authorize any transaction. This setup ensures that no single entity can unilaterally move funds, providing robust protection against compromise or malfeasance. However, the number of keys and different signers involved in a multi-signature quorum will scale proportionately to risks, i.e. the amount of assets. This was not possible with any asset prior to bitcoin, and custodians have not caught up to the way bitcoin can be held in custody as many still operate with the existing status quo.

The process is meticulously designed for security:

Key Generation: Private keys are created in air-gapped environments, isolated from internet threats, using high-entropy cryptographic processes to ensure randomness and resilience. Unlike traditional seed phrases, each key is split into cryptographic shards, distributed across multiple secure locations, preventing any single party from reconstructing it independently.

Key Management: MIC’s “quorum of quorums” system adds layered security. Each institution’s key is sharded among multiple individuals (e.g., an “m-of-n” setup), requiring internal coordination to reconstruct it. These shards are stored in geographically dispersed facilities, enhancing redundancy and resilience against localized threats.

Transaction Approval: Moving Bitcoin involves a multi-step process: Client Authorization (the client initiates the request), Client Verification (at least two institutions independently verify the request via video or in person verification, ensuring legitimacy), Shard Reconstruction (each institution reconstructs its key from shards in an offline environment, avoiding network exposure), and Quorum Signing (two of the three institutions sign the transaction using tools like Partially Signed Bitcoin Transactions (PSBT), which is then broadcast to the network).

Advantages of MIC

For individuals and corporations, Multi-Institution Custody (MIC) delivers a suite of benefits that address the pain points of traditional custody models, providing security, simplicity, and flexibility. Here’s why MIC stands out as the best choice for users securing their Bitcoin:

Peace of Mind – No Key Management Burden: Consumers are relieved from managing private keys or seed phrases, eliminating worries about loss, theft, or technical errors. MIC handles security while ensuring clients retain control. Robust Protection: The distributed model safeguards against hacks, insider threats, and physical attacks, offering reassurance that assets are secure.

Enhanced Security – Distributed Trust: With keys spread across independent institutions, no single breach compromises funds. The 2-of-3 quorum and sharding make unauthorized access nearly impossible. Reduced Physical Risk: Since consumers don’t hold keys, they’re less vulnerable to “wrench attacks” or coercion. Time delays for large withdrawals further deter attackers.

Scalability – Growth Without Anxiety: MIC supports holdings from modest amounts to billions, allowing consumers to scale their Bitcoin wealth confidently as its value rises. Future-Proof: The institutional-grade infrastructure adapts to increasing complexity, ensuring long-term security.

Simplified Inheritance – Seamless Transfers: MIC provides clear protocols for passing Bitcoin to heirs, avoiding complex “treasure maps” and ensuring generational wealth is preserved. Beneficiaries receive assets securely with a step-up in cost basis. Institutional Support: Custodians manage the process, reducing the burden on families.

Access to Financial Services – Leveraging Wealth: MIC integrates with lending, structured products, and tax-advantaged accounts (e.g., IRAs), enabling consumers to unlock Bitcoin’s value without compromising security. Capital Efficiency: It supports financial opportunities while maintaining robust custody.

Transparency and Control – On-Chain Verification: Users can audit their holdings in real-time on the blockchain, ensuring accuracy and trust. Retained Authority: Institutions can’t move funds without client approval, preserving ownership.

Regulatory Assurance – Compliance: MIC providers often meet strict standards (e.g., Qualified Custodians, SOC 2), offering legal protections critical for high-net-worth individuals. Global Resilience: Multi-jurisdictional setups mitigate risks from localized regulatory or political changes.

Fiduciary Duty to Shareholders – Quality Key Management: Utilizing MIC allows for distributed risk with verifiable holdings, allowing management to offer the best security for their bitcoin on behalf of shareholders.

MIC eliminates the operational burdens of self-custody and the risks of centralized models, delivering a secure, scalable, and consumer-friendly solution. As Bitcoin matures, MIC ensures users can protect and grow their wealth with confidence.Why MIC Wins Today

As the price of bitcoin rises, the necessary next steps will be to offer better custodial solutions which can match the needs of the users. MIC ultimately benefits users, companies interacting directly or indirectly with bitcoin, and the network.

MIC eliminates custody fears that have been around for decades, including rehypothecation fears (your funds are verifiable on-chain), reduces counterparty risk (key managers are spread across three different custodians), and regulatory uncertainty (key holders are across different jurisdictions).

~70% of all bitcoin is held non-custodially, while the remaining 30% is held on exchanges, or with custodians. As the number of bitcoin users grows, its demographics will change as well. There will naturally be more people that come into the industry who are interested in bitcoin as an investment, but are unable, unwilling, or uninterested in managing their own keys. Accordingly, the growth of users interacting with custodial bitcoin will only increase. Additionally, as the value of non-custodial bitcoin grows and the $5 wrench attacks and sophisticated attacks to take users private keys will only grow. Some will opt for custodial bitcoin if better solutions exist. Savings will increasingly be held by custodians to ensure the assets can last over a long timeframe.

20 years from now, the price of bitcoin will be 10x where it is today, and the percentage of users interacting with custodial bitcoin will only grow. Every company who interacts with financial services, including all of the biggest banks and financial institutions in the world, will either be keyholders, or will exclusively interact with bitcoin in a scenario where bitcoin is held in Multi-Institution Custody, or they will become obsolete.

Advantages to MIC Partners

~70% of all bitcoin sits with individuals. This cohort is the part of the market that is currently demanding Multi-Institution Custody.

Companies that don’t currently offer Bitcoin services or rely solely on single-exchange custody face a pressing need to adopt Multi-Institution Custody (MIC). The reason is simple: customers will flock to where their Bitcoin is safest, and MIC offers unparalleled security. As Bitcoin adoption grows, failing to integrate this solution could mean losing customers to competitors who prioritize safety.

~70% of all bitcoin is held by individuals in self custody or collaborative custody, mostly because they cannot trust any single counterparty to hold their wealth. This cohort has a material (non-speculative) allocation, and are the most sophisticated parties in the network. This cohort has and will continue to lead the market in adopting the future standard requirements for custody solutions.

Why Custodians Will Want MIC

Custodians are under increasing pressure to provide top-tier security as Bitcoin’s value climbs and hacking attempts grow more sophisticated.

Enhanced Security: MIC’s distributed key system makes it exponentially harder for hackers to steal assets. Even if one custodian is compromised, the funds remain safe because multiple keys—held by separate institutions—are required to access them. This is a massive draw for high-net-worth individuals and institutions who can’t afford to take risks.

Competitive Differentiation: In a crowded market, custodians offering MIC stand out. Traditional single-exchange or solo custody models can’t match MIC’s security, giving adopters a way to attract clients who prioritize safety above all else. If custodians do not enable MIC, assets and customers will all leave their platform and shift to those custodians with MIC. It is not economically viable to not have redundancy and fault tolerance with the custody of material wealth, and customers will act accordingly.

New Revenue Streams: With MIC, custodians can charge premium fees for the heightened security it provides. They might also offer tiered services, positioning MIC as a high-security, higher-margin product—especially valuable as Bitcoin holdings grow in worth.Why Lenders Will Want to Lend on Top of MIC

Lenders offering Bitcoin-backed loans or other financial products depend on secure collateral to manage risk. MIC provides a robust foundation that makes lending safer and more efficient.

Reduced Collateral Risk: MIC ensures that Bitcoin used as collateral is stored securely across multiple custodians. This slashes the odds of theft or loss, lowering the lender’s exposure to default risk if something goes wrong.

Better Loan Terms: With safer collateral, lenders can offer more attractive terms—think lower interest rates or higher loan-to-value ratios. This makes their products more competitive and appealing to borrowers.

Transparency and Security: MIC’s transparency lets lenders verify the collateral’s security in real-time on the blockchain. No more relying on manual audits or blind trust in a single custodian—this speeds up the lending process and cuts costs. When the price of bitcoin declines and risk enters the system, all educated capital partners will flee any non-transparent products to reduce counterparty uncertainty.

Access to New Markets: By easing security worries, MIC opens the door to Bitcoin holders who were hesitant to use their assets as collateral. Lenders can expand their customer base and boost loan volumes as a result.

Why Trading Partners Will Want to Trade on Top of MIC

Trading platforms and their partners—exchanges, market makers, OTC desks, and traders—thrive in a secure and liquid market. MIC delivers benefits that enhance the trading ecosystem, making it a must-have.

Increased Market Security: If MIC becomes widespread, it reduces the risk of hacks and thefts that disrupt trading and shake confidence. A safer ecosystem draws in more retail and institutional participants, benefiting all trading partners.

New Trading Products: Platforms can offer MIC-based custody as a premium service, letting traders keep assets secure while retaining quick access for trades. This is a big win for high-frequency traders or those handling large volumes who need both safety and speed.

Boosted Liquidity: Enhanced security brings more players into the market, increasing liquidity. Trading partners enjoy a more efficient and stable environment, with tighter spreads and better execution.

Institutional Appeal: Big players like hedge funds and banks often demand robust custody solutions before jumping in. MIC makes trading platforms more attractive to these institutional traders, driving higher volumes and bigger capital inflows.

Why MIC Will Be Used For Global Trade Escrow

As the Federal debt across all developed countries becomes unsustainable due to persistent ballooning deficits, and trade becomes more politicized, trade partners will opt for a politically neutral finite asset. What was once gold will become bitcoin.

Counterparty Trust: Institutional trade partners will hold keys across jurisdictions to ensure escrow in bitcoin for trade settlement.

Why Other Bitcoin Service Providers Will Want MIC

Beyond custodians, lenders, and trading partners, other players in the Bitcoin space—like wallet developers, payment processors, and financial advisors—stand to gain from MIC integration.

Enhanced Client Trust: Offering MIC-backed services reassures clients that their Bitcoin is stored with the highest security available. This builds credibility and strengthens relationships, especially with cautious users.

Regulatory Alignment: MIC’s transparency and decentralized setup align with emerging best practices for asset protection. This can simplify compliance with regulations, a growing concern as governments tighten oversight.

The Competitive Imperative

As Bitcoin adoption surges, security is becoming a make-or-break factor. Companies that don’t embrace MIC risk losing ground to those that do.

Customer Demand: Bitcoin holders, especially institutions and wealthy individuals, are increasingly security-focused. They’ll flock to platforms offering MIC’s superior protection, leaving others behind.

Market Standard: If MIC catches on widely, it could become the industry benchmark for custody. Companies that don’t offer it might struggle to attract or keep clients in a market that expects top-tier security.

Network Effects: The more companies adopt MIC, the safer and more trusted the ecosystem becomes. Early adopters will grab market share and shape industry standards, while laggards play catch-up.

For companies who offer bitcoin products and services, offering MIC is a strategic necessity to maintain market share.

Where We Are Headed

In addition to being the best way for individuals and companies, and B2B2C partners to interact with their wealth, MIC will be used in other ways not yet available to the market at scale.

Mints: MIC will underpin the issuance of tokenized anonymous Bitcoin, ensuring that these digital instruments are fully backed by securely custodied Bitcoin. This transparency and security will allow for seamless fast payments across financial institutions globally, fostering trust and adoption.

Collateral for Insurance: As Bitcoin increasingly serves as collateral for insurance policies MIC’s distributed trust model will minimize counterparty risk. This reliability could enable insurers to offer more competitive products, confident in the integrity of the underlying assets without counterparty risk.

Escrow for Large Cross-Border Flows: MIC’s neutrality and security make it an ideal escrow solution for international trade and large-scale transactions. By holding assets until conditions are met, MIC will streamline cross-border flows, where trust and speed are paramount.

Remittances: For individuals and underserved populations, MIC offers a low-cost, secure way to transfer value across borders. By simplifying and safeguarding remittances, MIC could empower the unbanked and enhance global financial inclusion.

MIC is the foundational infrastructure for Bitcoin’s next chapter. As bitcoin matures, MIC will ensure that security, trust, and accessibility scale along with it. By solving the custodial challenges of the past, MIC empowers Bitcoin to transcend its role as a speculative asset, transforming it into a safer way to interact with the best savings technology ever created in its ascent to becoming the global reserve asset.

Author: Early Riders