Why it matters
Full-reserve custody keeps the custody promise simple: your bitcoin is held for you, not deployed for someone else's benefit. This eliminates a category of risk that has caused repeated custody failures in bitcoin's history.
When custodians lend, stake, or rehypothecate client bitcoin, withdrawals become dependent on counterparty performance, market liquidity, and the custodian's financial health. What should be a simple operational procedure becomes a liquidity decision. Full-reserve custody avoids this complexity entirely.
The principle is straightforward: custody is custody. If you want yield, that's a separate decision with separate risks. A full-reserve custodian doesn't blur these categories.
What full reserve excludes
A genuine full-reserve custodian does not:
- Lend client bitcoin to borrowers
- Stake client bitcoin in proof-of-stake systems or yield products
- Pledge client bitcoin as collateral for the institution's own obligations
- Rehypothecate client bitcoin for any purpose
These activities may be legitimate financial services, but they are not custody. Mixing them with custody changes the nature of the relationship and introduces risks the client may not understand.
How to verify
Full-reserve claims should be verifiable:
- Proof of reserves: Cryptographic attestations that the custodian controls the bitcoin they claim to hold
- Third-party audits: Independent verification of holdings
- Clear disclosures: Explicit statements about what the custodian does and doesn't do with client assets
If a custodian can't clearly explain their reserve posture and provide evidence, treat that as a warning sign.
Related terms
- Proof of reserves
- Segregated custody
- Exitability
- Counterparty risk
- Fractional reserves
- Bitcoin custody provider
- Withdrawal policy
