What is customer asset segregation?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Segregation means an exchange keeps customer assets apart from its own, and in Japan it is a legal obligation. It makes customer property easier to identify if the operator fails, but it does not by itself guarantee that everything comes back.
Key points
- A duty to hold customer assets apart from the firm's own
- Makes customer property identifiable if the firm fails
- Does not guarantee full return of assets
- Not the same as public deposit insurance
Definition
The requirement that a crypto exchange service provider keep customer money and crypto assets clearly separate from its own property, both in its books and in where they are actually held.
Segregation is not only a bookkeeping matter. Cash is typically placed externally, for example in trust, and crypto is held at addresses distinct from the firm's own holdings. Periodic checks that the separation holds are built into the regime.
The value of this shows up when an operator gets into trouble. If customer assets were never mixed with company assets, it is far easier to establish what belongs to whom, and harder for those assets to be treated as available to the firm's creditors. That is a materially stronger position than commingling.
It is not, however, a guarantee of return. If the obligation was not actually honoured, if records and real balances do not reconcile, or if the assets were lost in a breach, the fact that segregation was required does not bring them back. Recovery proceedings also take time.
Watch out for
- · Segregation does not guarantee that everything is returned
- · Crypto is not covered by deposit insurance; there is no public payout scheme
- · Users have limited means to verify that the duty is actually honoured