Bank Grade Custody for Onchain Assets – Between MPC, HSMs, and Account Abstraction

Custody has become one of the defining control points for institutional onchain activity. As tokenized assets, stable settlement rails, and onchain treasury operations expand inside regulated environments, custody frameworks are being examined not just as technical systems, but as governance mechanisms. For banks, custodians, and infrastructure providers, wallet architecture now sits at the intersection of security engineering, internal controls, and regulatory scrutiny.

Rather than adopting a single custody model, institutions are assembling layered wallet stacks designed to mirror familiar operational principles: segregation of duties, approval hierarchies, documented controls, and auditable processes.

Hardware security modules, multi-party computation, and policy engines each play distinct roles within these designs, while account abstraction introduces new questions around how control logic is enforced at the protocol level.

Why Custody Is Now A Governance Conversation Beyond Key Storage

In institutional settings, custody is rarely framed as a question of where private keys live. Internal audit and risk teams approach custody as a continuous operational process—one that governs how transactions are initiated, approved, executed, and recorded.

What matters most is not the cryptographic method alone, but whether custody systems can demonstrate:

• Consistent enforcement of internal policies
• Clear accountability for every onchain action
• Reliable alignment between onchain activity and internal records

This shift in perspective has reshaped wallet design. Custody platforms are expected to behave less like standalone security tools and more like integrated control layers within treasury and settlement operations.

The Role of Hardware Security Modules

Hardware security modules remain a familiar anchor for institutions transitioning onchain. Long used in traditional payment systems, HSMs provide physically and logically isolated environments for cryptographic operations, supporting strong assurances around key generation and use.

In custody stacks for onchain assets, HSMs are commonly positioned as:

• Trust anchors for master keys or signing authorities
• Enforcement points for physical access restrictions
• Components aligned with established security certification frameworks

At the same time, HSMs introduce operational constraints. Their rigidity can limit flexibility in approval workflows or geographic distribution, which is why many institutions pair them with additional control layers rather than relying on them exclusively.

Why MPC Became Central to Institutional Wallets

Multi-party computation addresses a different operational concern: concentration of control. By splitting key material across multiple participants or environments, MPC reduces dependence on any single system or individual.

From an internal control standpoint, MPC supports:

• Distributed authorization across teams or jurisdictions
• Resilience against insider risk and system failure
• Flexible transaction approval workflows

Audit teams evaluating MPC implementations typically focus on governance rather than mathematics. They review how key shares are assigned, how access is revoked, and how recovery procedures are documented. The strength of MPC lies not only in cryptography, but in how well its operational rules are defined and enforced.

Policy Engines as the Control Brain

If MPC and HSMs handle cryptographic security, policy engines govern behavior. These systems sit above signing infrastructure, determining which transactions are allowed and under what conditions.

Policy engines commonly enforce:

• Transaction limits and thresholds
• Whitelisted counterparties
• Multi-step approval requirements
• Time-based or event-based restrictions

For compliance and internal audit teams, policy engines provide something critical: explicit, reviewable logic. Instead of relying on manual checks, institutions can demonstrate that controls are embedded directly into transaction workflows, producing consistent outcomes and detailed audit logs.

Layering Controls Instead of Choosing Sides

Institutional custody architectures rarely present a binary choice between MPC and HSMs. In practice, most designs blend both approaches, supported by policy engines and monitoring systems.

A typical layered model might involve:

• HSMs securing foundational cryptographic operations
• MPC distributing signing authority across environments
• Policy engines enforcing governance and approval logic

This structure resembles traditional financial control models, where multiple independent checks reduce operational risk. The emphasis is on redundancy, documentation, and traceability rather than reliance on any single technology.

Where Account Abstraction Fits In

Account abstraction introduces programmable logic directly at the account level, allowing wallets to define custom authorization rules onchain. For institutions, this raises practical questions rather than theoretical excitement.

Internal teams assess account abstraction by asking:

• How does onchain logic interact with existing policy engines?
• What new dependencies are introduced at the protocol layer?
• How are changes to account logic governed and documented?

Rather than replacing custody infrastructure, account abstraction is often viewed as an extension—moving certain controls closer to execution while still relying on offchain governance, monitoring, and approval frameworks.

What Internal Audit Wants To See

1. Architecture documentation — clear diagrams showing HSMs, MPC nodes, policy engines, and data flows.
2. Access matrices — role definitions, segregation of duties, and provisioning/deprovisioning procedures.
3. Approval workflows — how transactions are proposed, who approves, and how approvals are logged.
4. Key-share lifecycle — generation, distribution, rotation, revocation, and recovery documented end-to-end.
5. Incident playbooks — tested runbooks for compromise, lost shares, or vendor failure.
6. Vendor contracts & SLAs — security attestations, reporting cadence, and fallback commitments.
7. Audit trails & monitoring — immutable logs, alerting thresholds, and reconciliation reports.
8. Integration maps — how custody connects to treasury, settlement, and accounting systems.

Presenting these items up front shortens due diligence and shows operational discipline.

Controls That Make A Difference

• Deterministic approval logs: policy engines that write immutable records when a rule is evaluated; auditors can trace why a transaction was permitted or blocked.
• Separation of duties across layers: e.g., one team proposes a transfer, another approves in the policy engine, and a third participates in an MPC signing.
• Tested recovery workflows: documented procedures for reconstituting access if an MPC node or an HSM fails.
• Time-bounded authorizations: approvals expire if not used within defined windows to reduce exposure.

These controls are operational — they show how custody enforces organizational policy during normal and exceptional events.

Learn More About Institutional Custody Design With Kenson Investments

Kenson Investments offers educational resources and general market insights on institutional custody design and governance. Our digital asset consultants provide guidance on how to map custody architecture to audit evidence, structure vendor oversight, and align wallet controls with treasury and settlement processes, alongside Cryptocurrency investment consultant insights and practical bitcoin investment advice.
Register now – Make us your strategic digital asset consulting partners to learn more about operational control considerations for custody stacks and how to prepare documentation for internal audit and counterparty diligence.

 About the Author

Michael J. Harrow is a financial infrastructure researcher and technical writer specializing in digital asset custody, institutional risk controls, and onchain settlement operations. His work focuses on how governance, audit requirements, and operational frameworks adapt as financial institutions integrate blockchain-based systems. Michael writes with an emphasis on clarity, evidence-based analysis, and regulatory alignment across evolving market infrastructures.

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