Segregation means separating customer property from the custodian’s property. In custody, records of customer shares, wallet arrangements and legal protection work together. A separate address is only part of the picture; it cannot by itself guarantee how quickly or fully assets can be recovered in insolvency.
Imagine sending BTC to a custodian. The point is for the provider to safeguard them for you, not treat them as its operating inventory. How separation must be implemented also depends on the legal regime. One concrete example is guidance from New York’s financial regulator NYDFS of 30 September 2025, replacing the 2023 version. It covers specified providers with New York authorization, not every exchange worldwide. It expects customer assets to be separate from the custodian’s and its affiliates’ property in internal records and on-chain, meaning on the blockchain. An exception needs NYDFS’s prior written approval; the custodian cannot grant itself one. [1]
Not every customer needs a separate wallet. Under that regime, a custodian may use an omnibus wallet, pooling several customers, if it contains only customer assets and current records clearly show their shares. Imagine customer A with 6 BTC and customer B with 4 BTC. Their pooled balance is 10 BTC. The custodian’s own 2 BTC do not belong in that total and should be separate. Omnibus therefore does not mean the same thing as mixing customer and corporate property. What matters is who owns the contents and whether this can be substantiated. [1]
Continue the example, leaving fees aside for simplicity. Customer A withdraws 2 BTC. A has 4 BTC left, B also has 4 BTC, and together they have 8 BTC. But if records wrongly allocate A 5 BTC and B 3 BTC, they still show a total of 8 BTC. Comparing only the aggregate balance with the blockchain will not detect that error. Reconciliation means checking not just the total, but individual customer interests and the movements changing them. The records and on-chain state must relate to the same point in time; otherwise, a transfer recorded on only one side may also explain a difference. [1]
A separate address helps distinguish funds but says little about the entire protection system. The July 2025 banking statement therefore distinguishes omnibus and separate accounts and calls for assessing both models’ risks. If, for example, the same compromised key-management system serves both customer addresses, an attacker may affect both. Private keys are secret information needed to sign transfers. Separate addresses alone therefore do not establish independent key access, backups or operational controls. This does not claim that all separate addresses share one key; it highlights a possible common weakness. [2]
When a provider entrusts some safekeeping to another firm, this is subcustody. Under the cited NYDFS guidance, a new arrangement needs prior supervisory approval and appropriate due diligence. Accounts and wallets should be titled F/B/O, for the benefit of the customers. Assets must be separate from both the original custodian’s and subcustodian’s own property. They must not collateralize the provider’s proprietary debts. A subcustodian’s set-off or lien is likewise limited to what is customary for ordinary fees and expenses. Set-off here means using a counterclaim to reduce the amount to be returned. The guidance therefore does not ban every fee payment; it limits how customer assets may be encumbered. The subcustodian must be chartered or licensed by NYDFS, or subject to a home-jurisdiction custody regime NYDFS determines is substantially similar. [1]
Imagine a provider presenting a validly signed verification message associated with an address. That evidence may help establish technical control, but does not reveal another party’s lien, a creditor’s claim securing a debt. Equally, an account name does not establish who actually controls the keys. The banking statement stresses both contractual duties and access controls. These complement each other: technical evidence does not replace legal documents, and a legal label does not replace secure keys. In insolvency, when an institution cannot meet its obligations, the particular entities, contracts and applicable law matter. [2]
Alongside ordinary safekeeping, a customer may be offered interest or another return. In its retail investor bulletin, staff of the US Securities and Exchange Commission (SEC) highlights whether a provider lends customer crypto-assets, uses them as collateral or pools them. If you move 1 BTC from your balance into a lending programme, you need to read the terms again. Your rights in the asset, the identity of the debtor and the risk of non-return may change. Segregation on the main account does not guarantee identical treatment in another product. This explains the difference between services; the SEC staff educational bulletin is not itself a new legal rule. [3]
To assess a service, bring together several records: the exact legal entity, customer statements, reconciliation of shares, key-access policies and contracts with subcustodians. Other parties’ claims over the assets matter too. A check at a particular moment, call it T, describes the state at that time. It does not by itself prove the correctness of every movement after T. Current records and the way changes are checked therefore matter as well. Segregation aims to protect customer interests, but alone promises neither immediate withdrawal, insurance nor full recovery in insolvency. [1] [2] [3]
For the clearest picture, read this entry together with Institutional custody, Qualified custodian, Rehypothecation, Counterparty risk. The reverse links also lead from Custodial Exchange, Qualified custodian.