Accounting structures in the digital asset world, like the traditional finance world, have evolved over time. The two most prominent, are omnibus and segregated accounting structures. While both accounting structures are well known, not all custody solutions enable customers to choose an accounting structure based on institutional preference.
In effect, these custody solutions, require customers to change their policies, accounting preferences and sometimes their existing core database structure to meet the limitations of their technology. The GK8 solution supports both omnibus and segregated accounting structures with all their implications: auto-rebalancing between MPC and Cold vault, automatic collection from deposit addresses, and more.
At GK8 we believe: ‘Your Keys, Your Crypto, Your Choice!’
Accounting structures obviously had their beginnings in the traditional finance world. In the beginning, banks worked with a segregated accounting structure, where every account was separated by ownership. The segregated accounting structure completely separates funds of different accounts, protecting both the accounts and the value of the assets within those accounts.
The omnibus accounting structure was popularized in the 1960’s with the rise of the Central Securities Depositories (CSDs) and the Depository Trust Company (DTC). The giant leap in the number of transactions (which were mostly manually processed) caused what is known until this day as the “Paperwork Crisis”. In fact, even the New York Stock Exchange had to shorten the working hours to process the transactions that built up.
The DTC decided to implement the omnibus accounting model (which, alongside automated bookkeeping) resulted in improved efficiencies, minimized human error, reduced risk of loss and theft, and importantly sped up time to settlement. The omnibus model is also popular in the CTFC (Commodity Futures Trading Commission).
In an omnibus accounting structure funds and assets from different accounts are combined into one ‘omnibus’ account. In this case, the bookkeeping and transfer of funds are conducted “off-chain” rather than “on-chain”. In the TradFi world, the use of omnibus accounts and the balance of power between depository and custodian is very well regulated.
Fast forward to the present day and digital asset management in the blockchain world – the same accounting structures continue to exist. Historically, fully operational segregation has been viewed as a best practice from an asset security perspective, since the compromise of one customer’s digital assets would not affect the assets of another customer. However, with robust internal controls, omnibus storage of digital assets (in both cold and hot environments) can be provided in a manner that mitigates risk.
Omnibus accounting structures – The omnibus account structure, which is usually implemented by large institutions has many benefits, primarily cost efficiency & ease of management. For example, by combining together accounts and transactions, the omnibus account can save on gas fees (by grouping together transactions and conducting settlements ‘off-chain’), which in the past have been cripplingly high on some networks. Importantly omnibus accounts can also aid the liquidity issues the blockchain ecosystem has. Lastly, omnibus has an impact on the clearing side of things. With omnibus accounts, there is a bit of capital efficiency you can gain from clearing and settlement.
Omnibus accounts also have some downsides. For example, omnibus accounts in many ways work against the very transparency blockchain can provide, by requiring the custodian to record off-chain (on their internal ledger) every transaction. Moreover, at least at the beginning, omnibus accounting structures were actually used to retain the anonymity of the asset owners. Perhaps this is the reason that the SEC wrote a staff bulletin issuing a warning of the risks of utilizing omnibus accounts. Particularly they pointed out that omnibus accounts can:
Also in some cases, regulators require ownership records to be maintained on-chain.
The segregated accounting structure – A segregated account structure, normally used by large institutions with a limited number of customers (each of which has large AUMs), provides identifiability of accounts/transactions on the blockchain & and is sometimes more in line with regional regulatory requirements. Importantly, segregated accounting on-chain takes advantage of the inherent ‘transparency’ capabilities of the blockchain. As the sole source of truth, on-chain accounting leaves no question as to who owns assets.
That said, there are downsides. Wallet addresses are long and cumbersome, leaving more room for human error. Paying for each transaction separately can be oppressively expensive, and, of course, it does nothing for the issues of liquidity. Additionally, the fact that finalization across chains is not immediate, could slow down transactions.
In many cases, the digital custodian implements the market norm. For example, in North America, the omnibus is considered the norm whereas, in Europe, the segregated accounting structure is more prevalent. At the end of the day, we believe it should be a choice based on institutional preference and what is best for your business – rather than technology limitations. For example, for those organizations conducting a myriad of high-frequency transactions, the omnibus structure might be the way to go, while for those conducting many low-frequency/high-risk transactions – the segregated accounting structure is much preferred.
GK8 supports both omnibus and segregated accounting structures with all their implications: auto-rebalancing between MPC and Cold vault, automatic collection from deposit addresses, and more. The flexibility and versatility of the GK8 solution enable institutions to drive new revenue streams without technology limitations.
Again: ‘Your Keys, Your Crypto, Your Choice!’
To learn more about the GK8 solutions, click here.