THE CUSTODY AND SEGREGATION OF FUNDS AND CRYPTO-ASSETS:
HOW TO IDENTIFY THE RELEVANT RISK PATTERNS
When a client entrusts funds or crypto-assets to an entity that represents itself as operating through trusts, custodial accounts, dedicated wallets, financial intermediaries, or digital platforms, the proper identification of the legal nature of the relationship and of the arrangements governing the custody of the assets assumes fundamental importance.
The experience arising from financial supervisory activities and proceedings concerning unauthorised financial and crypto-asset services demonstrates the importance of carefully verifying who actually receives the funds, in what capacity they are received, where they are held, who retains control over them, and what rights remain vested in the client.
One of the principal matters requiring scrutiny concerns the possible representation of a custodial or asset-segregation arrangement without such structure being adequately documented or capable of independent verification. In a regulated custody service, the European MiCA Regulation establishes specific safeguards: the service provider must maintain records of clients’ positions, adopt a custody policy, and ensure the segregation of clients’ assets from its own assets, including at an operational level and, subject to the conditions laid down by the applicable legislation, on the distributed ledger.
RISK PATTERNS REQUIRING VERIFICATION
The matters that may warrant further investigation include:
1. The use of a fiduciary structure or trust as an element of credibility
The mere existence of a trust does not, in itself, establish that the client’s funds are effectively segregated or protected. It is necessary to verify the trust instrument, the trustee, the beneficiaries, the powers of administration, the contractual relationships, and the applicable law.
2. Commingling of client funds with the manager’s own funds
It is necessary to determine whether there are actual accounts or wallets identifiable as being held for clients and whether the structure permits clients’ assets to be distinguished from the entity’s own assets on an accounting, legal, and operational basis.
3. The use of companies or intermediaries belonging to the same structure
The presence of multiple companies, holding companies, payment institutions, fiduciary companies, trustees, exchanges, or other intermediaries does not, in itself, constitute unlawful conduct. Nevertheless, the chain of relationships must be reconstructed:
who receives the funds → who holds them in custody → who is able to move them → who is their legal owner → where they are transferred.
4. Statements and reports lacking independent corroboration
A balance displayed on a platform or reported in an internal statement does not, in itself, constitute evidence of the actual availability of the assets. Where possible, such information should be cross-checked against banking documentation, accounting records, intermediary data and, in the case of crypto-assets, blockchain evidence.
5. Requests for additional payments as a condition for repayment
Requests for payment of purported commissions, taxes, unlocking fees, KYC verification costs, or other charges prior to the return of funds constitute a risk indicator warranting independent verification.
6. Absence of verifiable authorisations or registrations
Where the existence of a financial activity or a crypto-asset service subject to authorisation is represented, it is essential to verify directly with the competent authority the existence of the relevant authorisation and the scope of the services permitted thereunder. Consob has recently announced several website-blocking measures against sites offering financial services or crypto-asset-related services without the requisite authorisations.
THE CUSTODY OF CRYPTO-ASSETS
The fundamental principle is the traceability of ownership and control over the assets.
For crypto-asset service providers subject to MiCA, Article 75 requires, inter alia, a record of each individual client’s positions, a custody policy, and the segregation of clients’ assets from those of the service provider. The regulatory framework also provides for procedures governing the return of the assets or the corresponding means of access.
Accordingly, where an entity represents that it holds funds or crypto-assets in custody on behalf of its clients, a documentary review should seek to answer certain fundamental questions:
Who owns the assets?
Who holds them in custody?
Who controls the keys or accounts?
Which entity is authorised to move or transfer them?
Are they segregated from the manager’s own assets?
Which document evidences the client’s rights?
Which intermediary actually holds the assets in custody?
Can the corresponding movements be reconstructed?
OUR METHODOLOGY
Our role is neither to characterise a structure as fraudulent in advance nor to attribute liability to individuals or companies.
We proceed through the collection, verification, classification, and correlation of the available information, reconstructing the documentary and financial chain underlying the transaction.
Where blockchain data are available, such data may be analysed in order to reconstruct the movement of assets and the relationships among the addresses involved. In parallel, corporate documents, agreements, communications, statements, information concerning intermediaries, and official sources may be examined.
The outcome is a verifiable documentary and financial map, in which documented facts, technically verifiable elements, statements made by the parties, and matters requiring further investigation are clearly distinguished.
We do not begin with the allegation. We begin with the trail.
Because when money passes through trusts, companies, banks, payment institutions, exchanges, and blockchain networks, the fundamental question is not merely:
“Where did the funds end up?”
but also:
“Who held title to them, who exercised control over them, and what document evidences each step of the chain?”