Why it matters
Segregation provides protection if the custodian faces financial difficulty. When assets are commingled, they may be treated as the custodian's property in bankruptcy or insolvency proceedings. Segregated assets are more clearly identifiable as belonging to specific clients.
Beyond legal protection, segregation reflects a custody-first mindset. It treats client bitcoin as something held in trust, not as fungible inventory the custodian happens to owe.
How it works
In segregated custody:
- Client bitcoin is held in addresses or accounts attributable to specific clients
- The custodian maintains clear records of which bitcoin belongs to whom
- Client assets are not mixed with the custodian's operational funds
- Withdrawals come from bitcoin actually held for that client
This contrasts with commingled custody, where client deposits go into a common pool and withdrawals are fulfilled from whatever bitcoin the custodian has available.
Segregation and reserves
Segregation and full reserves are complementary but distinct:
- Full reserves means the custodian holds enough bitcoin to cover all client obligations
- Segregation means that bitcoin is attributed to specific clients rather than pooled
A custodian could theoretically be fully reserved but commingled (holding enough total, but not separated), or segregated but fractional (separated accounts, but some with less than owed). The strongest custody combines both.
What to ask
When evaluating a custodian's segregation practices:
- Are client assets held separately from the custodian's own assets?
- Can you see evidence that your specific bitcoin exists?
- How does the custodian's structure protect client assets in insolvency?
- Is segregation a legal requirement or a voluntary practice?
Related terms
- Full-reserve custody
- Proof of reserves
- Counterparty risk
- Bitcoin custody provider
- Omnibus custody
- Exitability
