Definition ∞ Custody segregation is the practice of holding a client’s assets separately from the firm’s own assets. In digital finance, this means client digital assets are stored in distinct wallets or accounts, legally and operationally separated from the custodian’s holdings. This practice provides a crucial layer of protection, ensuring client funds are not subject to the custodian’s creditors in case of insolvency or operational failure. It is a fundamental principle for investor protection and trust in regulated financial services.
Context ∞ The absence of clear custody segregation rules in some digital asset markets has been a significant point of regulatory concern and investor risk. Recent events have highlighted the importance of robust segregation practices for digital asset custodians. Regulatory bodies are increasingly mandating stricter requirements to safeguard client assets and enhance market integrity.
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