Custodians

The concept of custody in traditional finance and tokenized assets can often be confusing due to the differences in how assets are managed and secured.

In traditional finance, custody typically involves the safekeeping of assets, the safekeeping of securities, and the servicing of securities. In the world of tokenized securities, the role of a custodian takes on a different dimension compared to crypto but shares similarities with traditional finance.

Dimensions of Custody

1. Safekeeping of the Asset:

   • Traditional Finance: Custodians are responsible for the physical or digital safekeeping of assets such as stocks, bonds, and other financial instruments.
   • Tokenized Securities: Similar to traditional finance, custodians are responsible for safeguarding the underlying assets that back the tokenized securities.

2. Safekeeping of Tokenized Securities:

   • Traditional Finance: Custodians safeguard securities and ensure they are held securely on behalf of the investor.
   • Tokenized Securities: The safekeeping of tokenized securities is different from TradFi because of the unique properties of blockchain technology. Token holders can use self-hosted wallet if they like without preventing the custodian to control the tokens when needed, thanks to an access via the smart contracts. For example, tokenized securities using the ERC-3643 compliance framework have a recovery function built into the smart contracts. This means the custodian does not need to manage the private keys of investors. Instead, the custodian is authorized to trigger the recovery function to move lost tokens from a lost wallet to a new one, ensuring that securities are never lost. Because the tokens are linked to an onchain identity, moving them from one wallet to another doesn't change the ownership or the cap table of the security. This is a key function missing in many RWA smart contracts.
   • Crypto-currencies: The custodian must secure the wallet's private keys as it is the only way to manage the token.

3. Servicing of the Securities:

   • Traditional Finance: Custodians can perform various servicing functions such as maintaining the register of shareholders, managing dividends, and facilitating corporate actions.
   • Tokenized Securities: In the context of tokenized securities, the custodian can also be responsible for performing these servicing functions. The main difference is that all the operations are made digitally, in a few clicks, in real-time and at very low costs.

While the term "custody" is used in both traditional finance and tokenized securities, the roles and responsibilities differ significantly from those in the crypto world. In traditional finance and tokenized securities, custodians are primarily concerned with the safekeeping and servicing of assets. For tokenized securities, the custodian acts as an agent responsible for safeguarding underlying assets and performing servicing functions, with the added capability of recovering lost tokens through smart contract features.