Reconcile control, entitlement and accounting
By the end, explain the diagram in your own words, solve the case and justify the correction.
Prerequisites : Hot, warm and cold wallets · Multisig: policy, backups and recovery · Operational controls for digital assets
Level 3 · Advanced →Reading path · 6 / 17 · Advanced
Custody combines the authority to move assets with obligations to safeguard and account for them.
The essentials
Custody combines the authority to move assets with obligations to safeguard and account for them. A signing arrangement is only one part of the service. Client ownership, contractual rights, asset segregation, insolvency treatment and recovery responsibilities must be understood separately from the technical wallet architecture.
How it works
Distinguish an on-chain address structure from an internal client ledger. An omnibus wallet can hold assets attributed to several clients, while segregated addresses may simplify attribution without establishing legal segregation on their own. Reconcile controlled on-chain balances, the custody subledger and the general ledger, documenting timing differences and exceptions.
What to watch
Consider a withdrawal requiring two approvers and an automated policy check. The control is incomplete if one administrator can change both the destination allowlist and the approval rules. Test role separation, key recovery, emergency access and provider exit. Evidence should establish who approved, what was signed and which ledger entries were updated.
Understand the details
A custodian must know both what it can move and what it owes each client. On-chain balances show assets at addresses, while a client subledger records entitlements. Neither automatically proves the other. Assets can be in transit, staked, lent or restricted, and each status changes availability and reconciliation requirements.
Boundaries and common mistakes
Control design should cover initiation, approval, signing, broadcast, confirmation and accounting. An independent reviewer needs evidence connecting these stages to the same instruction. Provider exit is also part of custody: a recovery process that requires the failed provider’s continued cooperation may not deliver the intended resilience.
The mechanism at a glance
- Controlled on-chain assets
- Client entitlements
- Accounting records
- Investigated reconciliation
Apply the lesson to a case
A firm controls 1,000 units on-chain and records client entitlements of 980. An operator proposes booking the difference as revenue. List possible timing differences, unallocated deposits and missing entries before drawing any conclusion.
Control of an address does not establish beneficial ownership of every unit. Trace transaction evidence and client records, assign an exception owner and resolve the difference under documented policy. A correct reconciliation explains differences; it does not merely force the totals to match.
Prepare a correction note
Describe the passage and the proposed correction. This creates a local note for you to share; it sends nothing. Do not include personal or confidential information.