Custody Deep Dive — How RWAs are Secured & Audited

An on-chain token is only a representation; the true security of an RWA investment lies in the integrity of its off-chain custody and audit framework. While blockchain technology provides transparency and efficiency for token transfers, the underlying assets—whether Treasury bills, real estate, or private credit—exist in the physical world and require traditional safeguarding mechanisms.

This critical infrastructure layer often receives less attention than smart contract features or yield rates, yet it determines whether tokenized assets actually exist, remain protected from fraud or insolvency, and can be redeemed when needed. For institutional investors and risk teams evaluating RWA opportunities, understanding the custody stack is not optional—it's fundamental to investment security.

This guide examines how qualified custodians secure off-chain assets, how auditors verify their existence, and what happens when things go wrong. We'll explore the dual custody model that bridges traditional and digital finance, analyze different approaches to asset segregation, and provide frameworks for evaluating custody providers and audit quality.

The Dual Custody Model

RWA security presents a unique challenge: protecting both physical assets and their digital representations. This two-part problem requires distinct but coordinated custody solutions, each with its own regulatory requirements, operational procedures, and risk profiles.

Off-Chain Asset Custody

The foundation of RWA security lies with the qualified custodian—a regulated bank, trust company, or specialized institution that physically or legally holds the underlying assets. These custodians operate under strict regulatory oversight, typically from banking authorities or securities regulators, and must meet stringent capital, operational, and reporting requirements.

For Treasury bills and securities, qualified custodians interface with central securities depositories and clearinghouses, maintaining book-entry records that prove ownership. Physical commodities like gold require secure vaulting facilities with insurance, regular audits, and chain-of-custody documentation. Real estate involves holding deeds through special purpose vehicles (SPVs) or trusts, with the custodian managing legal documentation and ensuring proper title registration.

The custodian's responsibilities extend beyond simple safekeeping. They must verify asset authenticity, manage corporate actions like dividend payments or bond maturities, handle tax reporting, and provide regular statements to token issuers. This operational infrastructure ensures that when an investor holds an RWA token, there's a corresponding real asset secured in the traditional financial system.

On-Chain Token Custody

The digital layer requires equally robust security, though the mechanisms differ fundamentally from traditional custody. On-chain token custody involves managing the cryptographic private keys that control token ownership and transfer. This responsibility can be handled through institutional digital asset custodians, multi-signature wallets, or smart contract-based custody solutions.

Digital asset custodians like Anchorage, BitGo, or Coinbase Custody provide enterprise-grade key management using hardware security modules (HSMs), multi-party computation (MPC), or cold storage solutions. These systems ensure that no single point of failure can compromise token control, while maintaining the operational flexibility needed for redemptions and transfers.

The coordination between off-chain and on-chain custody creates operational complexity but is essential for maintaining the integrity of tokenized assets. When an investor redeems tokens, the digital custodian must coordinate with the traditional custodian to ensure proper asset delivery, creating an audit trail that spans both systems.

Asset Segregation & Control

Asset segregation represents the most critical protection mechanism in RWA custody, determining whether investor assets survive a custodian's bankruptcy or operational failure. The method of segregation directly impacts both security and operational efficiency, creating trade-offs that issuers and investors must carefully evaluate.

Segregated Accounts

Segregated custody provides the highest level of asset protection by maintaining distinct accounts for each client or asset pool. In this model, RWA assets are held in separate accounts clearly designated as belonging to token holders, not the custodian or issuer. This structure is intended to protect client assets from custodian creditors in bankruptcy, subject to applicable law and proper operations.

The benefits of segregation extend beyond bankruptcy protection. Individual account structures enable precise tracking of specific assets backing specific tokens, simplifying audits and providing clear redemption rights. Regulatory compliance becomes more straightforward, as segregated accounts clearly demonstrate that client assets are not being commingled or used for unauthorized purposes.

However, segregated custody comes with higher operational costs and complexity. Each account requires separate setup, maintenance, and reporting, increasing custodian fees that ultimately impact investor returns. Some asset classes or smaller positions may not be economically viable for full segregation, requiring careful structuring decisions.

Omnibus Accounts

Omnibus structures pool multiple clients' assets in a single custodial account, reducing operational complexity and costs. While the custodian's records identify individual beneficial ownership, the assets themselves are commingled at the account level. This approach is common for smaller positions or when dealing with assets that are fungible and easily divisible.

The primary risk of omnibus accounts is the potential for commingling issues during custodian insolvency. While regulations typically protect client assets from custodian creditors, the process of identifying and segregating specific assets can be complex and time-consuming. This uncertainty can delay asset recovery and create additional risks for token holders.

Operational errors pose another concern with omnibus structures. Reconciliation mistakes, unauthorized transfers, or record-keeping failures can be harder to detect and resolve when assets are pooled. Regular audits and robust operational controls become even more critical in omnibus environments to ensure accurate tracking of beneficial ownership.

Many RWA platforms adopt a hybrid approach, using segregated accounts for large positions or high-value assets while employing omnibus structures for smaller holdings. This balance attempts to optimize both security and efficiency, though it requires careful documentation and clear disclosure to investors about which approach applies to their specific tokens.

The Audit & Attestation Cadence

Independent verification forms the backbone of RWA security, providing assurance that off-chain assets actually exist and match on-chain representations. The frequency, scope, and methodology of audits vary significantly based on asset type, regulatory requirements, and market expectations.

Modern RWA platforms increasingly leverage technology to provide near-real-time attestations. API integrations with custodians can provide daily or even continuous verification of Treasury holdings. Oracle networks can aggregate and verify data from multiple sources, creating on-chain proof of reserves that update automatically. These technological solutions reduce the trust assumptions inherent in periodic manual audits.

APIs and oracle feeds introduce SLA, data-quality, and trust-assumption risks; any on-chain halts should have clearly documented triggers, review procedures, and manual overrides.

The translation of audit findings into on-chain attestations represents a critical bridge between traditional and blockchain systems. Smart contracts can be programmed to halt redemptions if attestations fail to update, creating automatic circuit breakers that protect investors. Some platforms publish audit reports to IPFS or other decentralized storage, ensuring permanent accessibility of verification data.

The quality of auditors matters as much as frequency. Big Four accounting firms bring credibility and standardized procedures but may lack specific blockchain expertise. Specialized crypto-native auditors understand smart contract risks but may have less experience with traditional asset verification. The best approach often involves multiple auditors with complementary expertise.

Investors should scrutinize not just the existence of audits but their scope and limitations. Some audits verify only asset existence, not valuation or legal ownership. Others may rely on management representations without independent verification. Understanding these nuances is essential for accurate risk assessment.

Key Failure Scenarios

Understanding potential failure modes and their mitigation strategies is crucial for risk management in RWA investments. While blockchain technology adds new dimensions to these risks, many fundamental concerns mirror those in traditional finance.

Custodian Failure or Insolvency

Custodian bankruptcy represents one of the most serious risks to RWA investments. When a custodian fails, the immediate concern is whether client assets are properly segregated and can be recovered quickly. Even with legal protections, the practical process of recovering assets from a failed custodian can take months or years, during which tokens may be unable to process redemptions.

Asset segregation provides the primary defense against custodian insolvency. Properly segregated assets should be legally protected from custodian creditors and returnable to beneficial owners. However, the quality of segregation varies, and operational commingling can complicate recovery even when legal segregation exists.

Insurance offers additional protection, though coverage limits and exclusions require careful review. Many custodians carry insurance against operational failures, theft, and certain types of loss, but these policies may not cover all scenarios or may have caps below the value of assets held. Token issuers sometimes purchase additional insurance to supplement custodian coverage.

Issuer/Sponsor Fraud

Fraudulent behavior by token issuers or sponsors can take many forms: claiming to hold assets that don't exist, diverting assets for unauthorized uses, or manipulating valuations to hide losses. The decentralized nature of blockchain can make it harder to pursue legal remedies, especially when issuers operate across multiple jurisdictions.

Independent third-party audits provide the primary defense against issuer fraud. Regular verification by reputable auditors makes it difficult for issuers to maintain fraudulent schemes over time. However, audits are not foolproof—sophisticated frauds can deceive even experienced auditors, particularly when management actively conceals information.

Regulatory oversight adds another layer of protection. Registered securities offerings must comply with disclosure requirements and face potential enforcement actions for violations. However, many RWA tokens operate in regulatory gray areas or jurisdictions with limited enforcement capabilities, reducing this protection.

Smart Contract Exploit or Key Loss

Technical failures specific to blockchain systems create unique risks for RWA tokens. Smart contract bugs can allow unauthorized minting or burning of tokens, disrupting the link between tokens and underlying assets. Private key compromises can result in theft of tokens or loss of control over smart contracts.

Code audits by specialized security firms help identify vulnerabilities before deployment, but cannot guarantee absence of all bugs. The immutable nature of blockchain means that some vulnerabilities cannot be patched after discovery, requiring migration to new contracts and potential disruption for token holders.

Multi-signature requirements and time-locks on administrative functions reduce the risk of key compromise or insider attacks. Some platforms implement emergency pause functions that can halt operations if anomalies are detected, though these centralized controls create their own risks and trust assumptions.

Digital asset insurance is emerging as a solution, with providers offering coverage against smart contract failures and key management issues. However, this market remains immature, with limited capacity, high premiums, and numerous exclusions that may leave significant gaps in coverage.

A Framework for Selecting Providers

Evaluating custody and audit providers requires a systematic approach that considers regulatory compliance, operational capability, financial strength, and technological sophistication. The following framework provides key criteria for assessment.

Evaluating the Custodian

Regulatory licensing forms the foundation of custodian evaluation. Look for institutions with appropriate licenses for the assets they custody and the jurisdictions they operate in. In the United States, this might include NYDFS Trust Charter for digital assets, OCC banking licenses for traditional assets, or institutions that meet the applicable 'qualified custodian' definition/requirements for the assets and jurisdictions involved. Each license type comes with specific requirements for capital, operations, and oversight.

Insurance coverage requires detailed examination beyond headline numbers. Understand what types of losses are covered, what exclusions apply, and whether coverage extends to both off-chain and on-chain assets. Crime insurance, errors and omissions coverage, and specific digital asset policies should all be considered. Pay attention to whether insurance covers loss of assets or merely loss of keys, as this distinction can be crucial.

Asset segregation policies should be clearly documented and legally enforceable. Request written confirmation of how assets are segregated, what legal structures protect them, and what happens in various failure scenarios. Strong custodians may provide legal opinions on asset segregation and bankruptcy-remoteness where applicable.

SOC 2 Type II compliance represents a minimum standard for operational controls, but additional certifications like ISO 27001 or specific blockchain security standards provide extra assurance. These reports should be recent and cover all relevant operational areas, not just subsets of the custodian's activities.

Evaluating the Auditor

Firm reputation and expertise should align with the specific assets and risks involved. Big Four firms bring credibility for traditional asset verification, while specialized blockchain auditors better understand smart contract risks. The ideal scenario often involves multiple auditors with complementary strengths.

The scope of attestation reports requires careful review. Some auditors merely confirm that management's representations appear reasonable, while others perform independent verification. Understand what procedures the auditor performs, what evidence they examine, and what limitations they place on their opinions.

Digital asset expertise becomes crucial for platforms bridging traditional and blockchain systems. Auditors should understand both sides of the equation: how to verify traditional assets and how to confirm on-chain representations match off-chain reality. This might involve reviewing smart contract code, verifying oracle data feeds, or testing cryptographic proofs.

Independence and potential conflicts of interest deserve scrutiny. Auditors who provide consulting services to the same clients they audit may face independence challenges. Long-term relationships can create familiarity threats. The best practice involves rotation of audit partners and clear separation between audit and advisory services.

Understanding how these custody and security considerations integrate with the broader RWA lifecycle helps investors appreciate the full complexity of tokenized assets. Similarly, the regulatory framework discussed in our compliance guide directly impacts custody requirements and audit standards.

For RWAs, robust security is not a single product but a system of legal structures, operational controls, and independent verification. Investors must diligence the entire stack, from the vault to the wallet, as the strength of the chain is only as good as its weakest link. The most successful RWA platforms recognize this reality and invest heavily in custody infrastructure, understanding that trust in the underlying security model ultimately determines market adoption and long-term success.

References (as of August 2025)

• SEC Custody Rule Updates - Safeguarding Advisory Client Assets - Regulatory requirements for qualified custodians and asset segregation (as of 2025-08-24)
• Coinbase Custody Institutional Platform - Example of institutional-grade digital asset custody infrastructure (as of 2025-08-24)
• PwC Crypto Assurance and Attestation Services - Big Four perspective on auditing digital assets and RWAs (as of 2025-08-24)
• DTCC Digital Securities Management - Traditional infrastructure provider's approach to tokenized securities (as of 2025-08-24)
• BIS Report on Tokenization in Finance - Central bank perspective on custody and operational risks (as of 2025-08-24)
• Digital Asset Custody and Insurance Guide - Overview of insurance options for digital asset custody (as of 2025-08-24)
• Understanding SOC Reports for Service Organizations - Framework for evaluating custodian operational controls (as of 2025-08-24)

This content is for educational purposes only and does not constitute financial, legal, or tax advice.