Custodial Exchange: A New Paradigm for Secure Storage and Efficient Trading of Crypto Assets

That morning, when a traditional asset management firm decided to allocate 1% of its balance sheet assets to Bitcoin, the first question they faced was not “which one to buy,” but “where to store it.” They didn’t trust hot wallets on a single exchange, nor could they afford offline storage completely disconnected from market liquidity. This contradiction gave rise to Custody Exchange—it’s no longer just about storage or trading options but a solution that integrates institutional-grade secure custody with seamless trade execution.

Changing Times: From Trading Dominance to Custody as the Foundation

The crypto market is undergoing a profound paradigm shift. The early growth driven by retail trading is gradually giving way to large-scale, systematic inflows of institutional funds. As market structures evolve, “custody” has risen from a technical backend issue to a strategic core of industry competition. Industry analysts point out that when traditional financial funds go on-chain, they often do not directly enter public blockchains or exchanges but instead transfer through professional custody providers to ensure fund safety. Behind this shift is the deep impact of the scale effect: whoever controls the most funds can dominate the market.

By observing the movements of leading industry players, it becomes clear that the core business model of exchanges is undergoing a fundamental change. Future growth points are no longer limited to trading fees but are shifting toward non-trading revenue streams such as membership subscriptions, custody services, payment services, and yield products. Notably, this transformation is supported by data. Over the past five years, some leading exchanges have seen non-trading income grow approximately 13-fold, increasing their share of total revenue from 3% in 2021 to 39% in Q3 2025. As overall CEX trading volume growth slows, expanding into non-trading businesses like custody, staking, and yield has become a focus for traditional financial institutions (TradFi).

Model Analysis: Dual Tracks of Exchange Custody and Third-Party Custody

The choice of crypto asset storage fundamentally involves balancing two core values: “convenience” and “security.” Currently, there are two main mainstream custody models: exchange custody and third-party professional custody, which are especially important for institutional investors.

Exchange custody typically means storing assets in the exchange’s own wallet system. The biggest advantage of this model is a seamless trading experience and high operational convenience, allowing users to participate in the market without frequently transferring assets. However, this convenience comes with potential risks. Since users do not control private keys directly, they essentially rely on the exchange’s solvency and security. Additionally, because customer assets are often mixed with exchange assets, there is a counterparty risk involved.

In contrast, third-party professional custody offers an independent, regulated asset protection solution. These services usually employ isolated account structures, cold storage, multi-signature, or Multi-Party Computation (MPC) protocols, along with institutional-level controls, audits, and compliance measures. Market data shows that the value of Bitcoin ETFs held by professional investors has reached $27.4 billion, a 114% increase from the previous quarter, indicating accelerated institutional adoption. Most of these institutions tend to prefer third-party custody solutions.

Institutional Demands: Balancing Compliance, Security, and Operational Efficiency

For institutions such as pension funds, hedge funds, family offices, and corporate treasuries, choosing a crypto custody solution involves a more complex demand matrix than retail investors. They need to balance across three key dimensions.

Regulatory compliance is a threshold for institutional participation. Regulatory bodies like the Hong Kong Securities and Futures Commission (SFC) have issued clear guidelines for virtual asset custody, emphasizing the need for senior management to be responsible for custody matters and for establishing effective policies, procedures, and internal controls.

Security concerns have shifted from technical challenges to systemic risks. Regulators recommend using cold wallet infrastructure and hardware security modules (HSM) to protect private keys, along with strict vetting of third-party service providers. In 2024, losses from hacking attacks in the crypto space reached $2.2 billion, highlighting the necessity of robust security measures.

Operational efficiency directly impacts capital costs and strategy execution. An efficient institutional custody solution should integrate functions such as trade execution, staking, lending, and settlement without requiring assets to be transferred across multiple platforms.

Custody market data indicates that the crypto custody service market is expected to grow at a compound annual growth rate (CAGR) of 20.7% from 2023 to 2028. Much of this growth is driven by institutional demand for secure storage solutions.

Market Trends: The ETF Wave and Challenges of Custody Centralization

After the SEC approved general listing standards for cryptocurrency exchange-traded products (ETPs) in 2025, industry forecasts suggest that over 100 crypto-related ETFs will launch in 2026. This trend is profoundly changing the landscape and challenges of the custody industry. Bitcoin ETFs have become a key channel for institutional adoption. By Q3 2025, Coinbase’s custody assets reached $300 billion, demonstrating the enormous scale of institutional custody demand. This growth also introduces concentration risk. Currently, Coinbase holds the majority of assets in most crypto ETFs, accounting for up to 85% of the global Bitcoin ETF market share. This high concentration raises concerns about “single points of failure.”

Traditional financial institutions are rapidly entering the competition. U.S. bank U.S. Bank has restarted its institutional Bitcoin custody program, while Citigroup and State Street are exploring crypto ETF custody collaborations. These new entrants often promote “asset diversification” and “reducing counterparty risk” as market selling points. Emerging products like Solana staking ETFs exemplify the evolution of custody services. These products not only require basic asset safekeeping but also offer professional staking services, creating new revenue streams for custodians.

Future Outlook: Gate’s Integrated Custody Exchange Vision

In response to the industry’s transition from “trading venues” to “financial infrastructure,” leading trading platforms are redefining their roles. The future successful custody exchange solutions will deeply integrate secure custody, flexible trading, and value-added financial services, forming a complete ecosystem. Institutional clients’ demand for security and compliance is growing. They seek not only safe asset storage but also custody solutions that meet international regulatory standards to adapt to the evolving global regulatory environment. Especially for institutions managing external capital, third-party regulated custody is often preferred to meet compliance, governance, and audit requirements.

In light of the rise of digital asset management companies (DATs) and other new institutions, advanced custody exchange platforms are developing specialized solutions. These institutions are shifting from passive holding to active on-chain banking, leveraging staking and re-staking to generate excess yields. Given market volatility, flexibility in custody exchange becomes critical. For example, Bitcoin’s price, as of February 4, 2026, touched $114,000 before falling back to $76,465.1, with a 24-hour change of -2.96%, and a market cap of $1.56 trillion. Such high volatility environments demand flexible asset allocation capabilities.

With the tokenization of real-world assets (RWA), the market size is expected to exceed $500 billion by 2026. This will further diversify the types of assets handled by custody exchange platforms, requiring comprehensive custody capabilities across asset classes.

When professional investors evaluate the crypto market, their focus extends beyond daily price fluctuations to the underlying market infrastructure. From Hong Kong’s financial district to Wall Street trading floors, discussions about crypto asset custody are quietly transforming. Coinbase’s $300 billion in custody assets highlights the enormous potential of professional custody and also reveals the risks of a single central point. As traditional banks restart their custody plans, the vault doors of the crypto world are opening wider to more institutional investors.