The Evolution of Crypto Custody: From Asset Safe to Business Growth Engine

Crypto asset custody has transcended the simple act of securing private keys to become a core business infrastructure that dictates an institution’s operational efficiency, risk management capabilities, and competitive edge.

This article provides an in-depth analysis of the three key eras of crypto custody’s evolution, from 1.0 to 3.0. It systematically compares the advantages, disadvantages, and evolutionary logic of core technologies like Multi-signature (Multisig), Hardware Security Modules (HSMs), and Secure Multi-Party Computation (MPC), understanding of how modern custody solutions have evolved from a static “digital safe” into a powerful “engine” driving institutional business growth.

When “Not your keys, not your coins” Meets Institutional Complexity

For any participant in the crypto world, “Not your keys, not your coins” is an undeniable truth. In the early days, the central conflict of custody was straightforward: how to prevent the loss or theft of a single private key. However, as crypto assets have scaled and business models have grown in complexity, this simple truth faces severe challenges, especially for institutions like exchanges, asset management firms, and market makers.

Institutions require far more than a secure “safe.” They need a high-performance system that can support high-frequency trading, multi-user collaboration, complex approval workflows, and cross-chain operations, all while meeting internal control and compliance requirements.

Custody 1.0 – The Era of Foundational Security

Core Technology: Single-key wallets (hot wallets, cold wallets), hardware wallets (e.g., Ledger, Trezor).

Problem Solved: Addressed the fundamental existence and basic security of assets for individuals or small teams. Hardware wallets, through physical isolation, greatly reduced the risk of private keys being stolen via cyberattacks.

Institutional Limitations:

• Single Points of Failure: Whether held by a single person or stored on a single device, or using a single key to transact, a single point of failure always existed. An unforeseen event (employee departure, device damage/loss, key theft) could lead to the permanent loss of assets.
• Zero Collaboration Efficiency: It was impossible to achieve collaborative management across multiple people or departments. All operations depended on a single point of control, leading to low efficiency and a high risk of internal operational errors.
• Inability to Scale: It could not accommodate complex business logic or risk control policies, making it completely inadequate for institutional operations.

Custody 2.0 – From Asset Safe to Transaction Account

To address the single-point-of-failure and collaboration challenges of the 1.0 era, two technologies from different domains were introduced to crypto custody: Multi-signature and Hardware Security Modules.

Core Technology 1: Multi-signature (Multisig)

Mechanism: Based on smart contracts on specific blockchains, it creates an address that requires M-of-N private keys to co-sign a transaction. This achieved a decentralization of power and was a major step forward for institutional management.

Limitations:

• Chain Dependency and Fragmentation: Multisig solutions are tied to specific blockchains (e.g., Safe on Ethereum). If an institution manages multi-chain assets, it must maintain a separate multisig system for each chain, making operations extremely cumbersome and fragmenting assets.
• High Cost and Latency: Every multisig operation requires multiple on-chain interactions, incurring high gas fees. The signing confirmation speed is also subject to on-chain congestion, making it unsuitable for high-frequency scenarios.
• Poor Privacy: All signer addresses and the M-of-N rule are publicly visible on-chain, which can expose an institution’s internal governance structure and operational patterns, creating potential risks.
• Inflexibility: Adding or removing signers or modifying signing rules typically requires redeploying the smart contract, a complex and costly process.

Core Technology 2: Hardware Security Module (HSM)

Mechanism: Originating from traditional finance, HSMs are specialized hardware devices certified with high-level security standards like FIPS 140-2. They are used to generate, store, and use keys in a physically secure environment.

Limitations:

• “Centralization” in the Physical World: Despite their high security, HSMs themselves constitute a new physical single point of failure. They are still vulnerable to physical attacks, insider threats, or device malfunction.
• High Cost and Maintenance: The cost of purchasing, deploying, and continuously maintaining HSMs is prohibitive, posing a significant burden for small and medium-sized institutions.
• Poor Policy Flexibility: HSM policy configurations are relatively rigid and struggle to adapt to the rapidly changing business needs and risk models of the crypto world.

Custody 3.0 – The New Paradigm of Security, Efficiency & Compliance

The market demanded a solution that could achieve decentralized multi-party approval while breaking free from blockchain constraints, offering high performance, privacy, and flexibility. Secure Multi-Party Computation (MPC) emerged as the cornerstone of the Custody 3.0 era.

Core Technology: MPC + TEE (Trusted Execution Environment)

• The Revolutionary Practice of MPC: The core idea of MPC is to allow multiple parties to jointly compute a function without a trusted third party, while keeping each party’s input data private. When applied to key management, it uses a “Distributed Key Generation (DKG)” algorithm to generate multiple independent “key shards” instead of a single key, and they are held separately by different participants (people or devices). Thus, institutions are entitled to truly 100% control their assets.
  • The Crucial Point: Throughout the entire lifecycle of a signature, the complete private key never exists on any single device at any time. A signature is generated through a secure, off-chain, collaborative computation among the key shards.
• Security Enhancement with TEE: TEE technology (like Intel SGX) creates an isolated execution zone at the CPU hardware level. This ensures that even if the server’s operating system is compromised, the MPC signing computation process running inside the TEE cannot be stolen or tampered with, providing a “hardware-level sterile chamber” for the MPC algorithm.

MPC vs. Multisig: A Paradigm Shift

Feature	Secure Multi-Party Computation (MPC)	Multi-signature (Multisig)
Blockchain Agnostic	Yes. The algorithm is off-chain, producing a standard single signature that is natively compatible with all blockchains (including Bitcoin, EVM, Solana, etc.).	No. Different chains require different smart contract implementations; not universally compatible.
Cost & Speed	Low cost, high speed. On-chain, it appears as a standard single-signature transaction with low gas fees and no extra on-chain interactions. Signing speed is at the millisecond level.	High cost, slow speed.  Requires initiating and confirming multiple signatures on-chain, leading to high gas fees and susceptibility to network congestion.
Privacy	High privacy.  The on-chain address is a standard single-signature address, making it impossible to reverse-engineer the underlying multi-party governance structure.	Low privacy.  Signer addresses and the M-of-N rule are publicly visible on-chain.
Flexibility	Extremely high.  Complex approval policies based on roles, amounts, and time can be set.	Poor. Modifying signing rules typically requires redeploying a smart contract, which is costly and complex.

Custody 3.0: The Trust Layer and Empowerment Engine of the Stablecoin Value Chain

Among all crypto assets, the value of a stablecoin is rooted in the word “stable.” This stability stems not only from its peg to a fiat currency but, more critically, from the absolute robustness of the entire financial system behind it. From issuance and reserve management to circulation, market making, and final redemption, every step is built on the premise that assets can be managed securely, efficiently, and compliantly.

Therefore, custody solutions, especially the MPC-TEE-based Custody 3.0, are no longer just a component in the value chain; they are the pervasive Trust Layer. They provide the foundational security, efficiency, and compliance for the entire hundred-billion-dollar stablecoin ecosystem, deeply empowering its upstream, midstream, and downstream industries.

Empowering the Upstream: Absolute Security and a Compliance Lifeline

The upstream of the stablecoin value chain consists of issuers, whose core businesses are minting and reserve management. This is the source of trust and the focal point of risk.

• Absolute Security Guarantee: For an issuer, the security of its reserve accounts is the primary lifeline. MPC technology eliminates single points of failure by decentralizing multiple shards. This provides institutional-grade decentralized security for reserves worth billions, ensuring they are protected from hackers and insider threats.
• Forced Compliance Workflows: Safeheron’s Policy Engine enables issuers to establish compliant transaction policies based on their operational needs. For example, a policy can mandate that “a mint request exceeding $1 million requires joint approval from the heads of Finance, Compliance, and Risk Management.” High-value issuances and redemptions must adhere to strict internal approval workflows. Meanwhile, by integrating an API co-signer, low-value fund transfers can be automated, enhancing the efficiency of the approval process, ensuring mandatory policy enforcement, and preventing both human error and unauthorized operations.
• Granular Reserve Management: For example, to preserve and grow the value of their reserve funds, issuers need to engage in investment activities. The MPC custody solution allows teams to establish granular permissions and whitelisting mechanisms, such as “permitting transfers only to audited, whitelisted protocols like Aave and Compound” or ensuring that “finance personnel can only view transactions but not initiate them.” This approach enables the pursuit of returns while keeping risks firmly within manageable limits.

Empowering the Midstream: Ultimate Efficiency and Risk Control

The midstream of the value chain includes exchanges, market makers, and payment gateways, whose core function is to ensure the stablecoin’s high liquidity and wide circulation. The key demand here is a balance between efficiency and risk control.

• Ultimate Transaction Efficiency: Market making and arbitrage require millisecond-level response times. The nature of MPC signing—chain-agnostic & off-chain computation resulting in a standard on-chain signature—delivers extreme signing speed and low transaction costs. This perfectly matches the needs of high-frequency trading and breaks the efficiency bottlenecks of Multisig solutions.
• Proactive Risk Defense: When stablecoins circulate in DeFi, they face significant smart contract risks. An MPC custody platform can proactively defend against phishing attacks and malicious contract calls by implementing whitelists for smart contracts and function-level permissions, ensuring funds only move on pre-approved, secure pathways.
• Automated Business Flows: Institutions can deeply integrate an MPC custody solution into their trading and settlement systems via APIs. For example, they can set a policy like, “When an exchange hot wallet balance falls below \$1 million, automatically replenish it to \$5 million from the cold wallet,” enabling 24/7, automated, and unmanned business operations.

Empowering the Downstream: Secure and User-Friendly Integration

The downstream of the value chain comprises various applications and the end-user redemption process. The goal here is to make stablecoins as easy to use and redeem as the US dollar.

• Empowering Application Platforms: Whether it’s a crypto payment platform, a Web3 game, or a wealth management dApp, all need to securely manage their operational funds and user assets. An MPC custody solution can be easily integrated as a “security kernel,” allowing developers to provide institutional-grade security for their platforms without needing to be cryptography experts.
• Ensuring Smooth Redemption Channels: A stablecoin’s reputation ultimately rests on the unimpeded flow of its redemption channels. Customizable policies apply equally to the redemption process, ensuring every request is verified for compliance. Meanwhile, its efficient automated processing capabilities can handle large-scale redemption requests with ease, maintaining market confidence.

At this point, custody has evolved into a crucial middleware layer that instills trust at every stage of the stablecoin value chain. It is not only a “shield” that protects assets but also an “engine” that drives business processes, optimizes capital efficiency, and connects ecosystem partners. Together, these functions build a secure, transparent, and efficient closed-loop value system.

Beyond Security

The evolutionary trajectory of crypto custody is fundamentally a narrative of institutional demand precipitating technological revolution. From the foundational security and the exploratory optimizations, we have arrived at the third era: a mature paradigm with MPC at its core. Consequently, custody has been elevated from a simple cost center to a strategic imperative, critical for survival and dominance in a fiercely competitive arena.

In this new landscape, selecting a custody solution goes far beyond choosing a “wallet.” It concerns the very architecture of a “crypto account system” capable of sustaining secure, compliant, and exponential business growth.

Self-custody platforms like Safeheron, powered by MPC-TEE, restore ultimate asset control to the institution. By harmonizing security, efficiency, and compliance, they empower organizations to navigate the crypto world without reservation and realize their full innovative capacity.
To experience this best-in-class “crypto account system” firsthand, we extend a warm invitation to join us at TOKEN2049 in Singapore from October 1-2, 2025. We look forward to speaking with you at our booths, PB4-41 and PB4-40.