The Duality of Private Markets: Custody vs. Control

Introduction

Private-market ownership is often described as though it were a single condition:

An investor acquires an asset and therefore owns it.

Institutionally, however, ownership is supported by several distinct layers. The entity that safeguards the asset may not determine whether it can be transferred. The investor who holds the economic interest may not be able to sell it without issuer approval. The institution maintaining the ownership record may not possess the authority to initiate a transaction.

This reveals an important distinction:

Custody determines how an asset is safeguarded. Control determines what may be done with it.

The two concepts are interconnected, but they are not interchangeable.

As private securities become increasingly digital, tokenized and connected to new trading infrastructure, this distinction will become even more important. The central question will no longer be only whether an institution can hold an asset securely.

It will also be:

Who possesses the authority to transfer, pledge, vote, restrict or otherwise exercise rights over that asset?

Custody Protects the Asset

Custody is fundamentally a safeguarding function.

Depending on the asset and legal structure, a custodian may maintain securities, cash, digital keys or account records on behalf of an investor, fund or adviser. Its responsibilities may include:

• Protecting assets from unauthorized access
• Segregating customer assets
• Maintaining accurate ownership and transaction records
• Supporting reconciliation and reporting
• Processing authorized transfers
• Reducing the risk of loss, misuse or misappropriation

For registered investment advisers subject to the SEC’s custody framework, client funds and securities generally must be maintained with a qualified custodian, subject to specific exceptions and conditions. The SEC’s framework focuses on protecting client assets and separating custody from unrestricted access by the adviser.

Broker-dealers also operate under customer-protection and asset-segregation requirements intended to safeguard fully paid and excess-margin securities from the firm’s proprietary activities.

Custody therefore answers the question:

Who is responsible for safely holding or maintaining the asset?

But custody alone does not necessarily determine whether the asset can be sold, transferred or pledged.

That is the domain of control.

Control Governs the Asset

Control is the legal, contractual and operational authority to direct what happens to an asset.

Depending on the structure, control may include the ability to:

• Authorize a transfer
• Direct a custodian
• Sell or pledge the asset
• Exercise voting rights
• Approve a new shareholder
• Enforce transfer restrictions
• Participate in corporate actions
• Initiate settlement
• Block an unauthorized transaction

Under the Uniform Commercial Code, “control” has specific meanings for certificated securities, uncertificated securities and security entitlements. It can also be relevant when determining whether a lender or other secured party has perfected rights in investment property.

In institutional markets, control is rarely concentrated entirely in one participant.

It may be distributed among:

• The beneficial owner
• The investment manager
• The custodian
• The securities intermediary
• The issuer
• The transfer agent
• A secured lender
• The fund’s general partner
• A broker-dealer
• A smart-contract administrator

This means an investor may economically own an asset without having unilateral control over every action involving that asset.

Private Markets Separate Ownership From Transferability

The distinction between custody and control is particularly visible in private markets.

A private-company shareholder may own shares but still face:

• Rights of first refusal
• Co-sale or tag-along provisions
• Lockup periods
• Board or issuer approval requirements
• Investor-eligibility standards
• Transfer restrictions in shareholder agreements
• Securities-law limitations
• Restrictions on pledging or encumbering shares

The custodian may be capable of holding the position securely. Yet the custodian generally cannot disregard the issuer’s governing documents or independently convert a restricted security into a freely transferable one.

Similarly, an investor may have the economic right to receive proceeds from an asset but may lack the unrestricted power to select the next owner.

This produces a fundamental private-market reality:

Ownership does not automatically create liquidity, and custody does not automatically create transferability.

The asset can be safely held while remaining subject to a network of contractual and regulatory controls.

The Transfer Agent and the Authoritative Record

The transfer agent occupies a distinct position within this architecture.

A custodian may safeguard a security or maintain it within an account. A transfer agent, by contrast, supports the issuer’s ownership records and processes changes to the registered shareholder ledger.

In a direct-registration structure, the investor’s identity and position may be recorded directly on the issuer’s books through its transfer agent. In an intermediated structure, the registered holder and beneficial owner may be represented at different levels of the system. FINRA explains that investors using direct registration hold securities in book-entry form through the issuer or its transfer agent rather than through a physical certificate.

DTCC has similarly distinguished between direct and indirect tokenized ownership models. In a direct-registration model, the transfer agent records individual holders for the issuer, giving the issuer visibility into the identities and positions on its register.

This illustrates another institutional distinction:

The system that holds an asset is not always the system that determines the authoritative ownership record.

The custodian protects the position.

The transfer agent updates the issuer’s books.

The issuer’s governing documents determine whether the proposed transfer is permitted.

The beneficial owner possesses the economic interest.

Control is therefore created through coordination among multiple parties rather than through custody alone.

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Custody vs. Control in Tokenized Markets

Custody

• Safeguards assets
• Protects private keys
• Segregates customer property
• Maintains account records
• Supports reconciliation
• Processes authorized instructions

Control

• Approves transfers
• Enforces investor eligibility
• Governs voting rights
• Restricts pledging
• Authorizes settlement
• Executes issuer rules
• Determines who can transact

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Institutional ownership requires both secure safeguarding and enforceable authority.

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Tokenization makes the distinction between custody and control more visible—not less.

A tokenized security may allow ownership information, transfer permissions and compliance conditions to be represented within a digital system. However, the token’s technical mobility must remain connected to the underlying legal and economic rights.

Tokenization can make certain controls programmable, including:

• Investor allowlists
• Jurisdictional restrictions
• Holding periods
• Transfer limits
• Compliance checks
• Corporate-action instructions
• Collateral locks
• Approval workflows

DTCC describes tokenization as the digital representation of ownership rights while emphasizing the importance of maintaining the same underlying legal rights, investor protections and operational safeguards associated with traditional securities. Its developing institutional tokenization model also contemplates embedded compliance and interoperability across approved networks.

But programmability introduces a new set of questions:

• Who controls the smart contract?
• Who can pause or reverse a transfer?
• Who manages the allowlist?
• What record is legally authoritative?
• What happens when the blockchain record conflicts with the transfer agent’s books?
• Who controls upgrades to the protocol?
• Can a custodian move the asset without issuer authorization?
• Can a lender obtain enforceable control over tokenized collateral?

A private key may provide technical access to a token, but technical access does not necessarily provide unrestricted legal authority over the underlying security.

Possession of a digital credential is not always equivalent to legal control of the asset it represents.

Control Can Be Distributed

Unlike a physical object, a security can involve several overlapping forms of authority.

The investor may control:

• The economic decision to hold or sell
• Voting instructions
• Whether to accept a transaction
• Whether to pledge the asset, subject to restrictions

The investment manager may control:

• Portfolio allocation
• Timing of a proposed disposition
• Execution strategy
• Instructions delivered to service providers

The issuer may control:

• Approval of new shareholders
• Enforcement of transfer restrictions
• Rights of first refusal
• Eligibility for participation in the capitalization table

The custodian may control:

• Operational access
• Authentication
• Movement of the asset following valid instructions
• Key-management procedures

The transfer agent may control:

• Updating the registered ownership record
• Validating documentation
• Processing approved transfers
• Reconciling records

A lender may obtain control over:

• Collateral
• Distributions
• Proceeds
• Transfer or enforcement rights following default

Control is therefore better understood as an allocation of rights and permissions than as a single switch held by one institution.

Custody Without Control

An asset can be safely held while the investor remains unable to use it efficiently.

Examples include:

• Shares subject to issuer transfer restrictions
• Assets held in an account that cannot connect to a trading venue
• Tokenized securities that cannot move outside a closed network
• Positions that cannot be pledged to a lender
• Securities that require lengthy manual approvals before settlement
• Assets that lack compatible transfer-agent or custody infrastructure

In these cases, custody may be secure, but control is operationally constrained.

The investor owns the economic exposure but cannot easily mobilize the asset.

This is one reason private-market portfolios can possess substantial value while offering limited capital efficiency.

Control Without Adequate Custody

The opposite condition is equally dangerous.

An institution may possess the authority to move or manage an asset, but without robust custody it may face:

• Theft or loss
• Unauthorized transfers
• Key-person dependency
• Commingling of assets
• Inadequate segregation
• Poor recordkeeping
• Cybersecurity vulnerabilities
• Unclear recovery procedures
• Counterparty insolvency exposure

Control without adequate safeguards can turn authority into risk.

The purpose of institutional custody is not merely to store an asset. It is to establish processes, records, segregation and accountability around the exercise of control.

That is why neither side of the duality is sufficient on its own.

Custody without control can immobilize value. Control without custody can endanger it.

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Financing Reveals the Difference

NAV financing, securities-backed credit and other forms of private-market leverage reveal the practical significance of control.

A lender does not evaluate only whether the borrower owns an asset. It must also determine:

• Where the asset is held
• Whether it can be pledged
• Whether the pledge is permitted by governing agreements
• Whether issuer consent is required
• Whether the lender can obtain a perfected security interest
• Whether distributions can be directed to a controlled account
• Whether the collateral can be sold or transferred following default
• Whether the ownership and valuation records can be independently verified

A private-market asset may have substantial stated value but limited collateral value when the lender cannot obtain enforceable rights over it.

Conversely, institutional custody, clear documentation and effective collateral-control arrangements can improve the asset’s financing utility.

The question is therefore not simply:

“What is the asset worth?”

It is also:

“What rights can a lender actually exercise over that asset?”

This is where custody becomes connected to capital efficiency.

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Programmable Control Is Becoming Market Infrastructure

The next generation of private-market infrastructure may embed control functions directly into transaction architecture.

This could allow institutions to automate:

• Investor verification
• Transfer approvals
• Jurisdictional restrictions
• Custody instructions
• Collateral management
• Distribution waterfalls
• Corporate actions
• Settlement conditions
• Regulatory reporting
• Issuer governance rules

This does not mean eliminating intermediaries or legal agreements.

It means translating portions of those agreements into systems capable of enforcing approved rules more consistently and efficiently.

However, programmable controls must remain connected to recognized legal rights, authoritative records and accountable institutions. Technology can execute a rule, but the legitimacy of that rule still depends on the governing documents, applicable law and authority of the parties administering it.

The future is therefore unlikely to be purely custodial or purely decentralized.

It is more likely to be a coordinated model in which:

• Custodians secure assets
• Transfer agents maintain authoritative records
• Issuers preserve governance rights
• Investors retain beneficial interests
• Trading venues support execution
• Smart contracts automate approved restrictions
• Regulators establish applicable safeguards

That is the architecture of programmable market infrastructure.

Institutional Perspective

Custody and control should not be viewed as competing concepts.

They solve different institutional problems.

Custody answers:

How is the asset safeguarded?

Control answers:

Who is authorized to act upon it—and under what conditions?

In private markets, the distinction matters because ownership rights are frequently divided across investors, issuers, managers, custodians, transfer agents and intermediaries.

Tokenization does not eliminate this structure. It may make the structure more transparent and programmable, but it also requires the market to define which records, permissions and legal rights prevail.

The institutions that shape the next generation of private markets will not succeed merely by safeguarding assets.

They will need to build infrastructure that securely coordinates:

• Ownership
• Permissions
• Compliance
• Transferability
• Collateral rights
• Governance
• Settlement
• Legal finality

The objective is not to choose between custody and control.

It is to create a market architecture in which both operate together.

Key Takeaways

Custody                                                                                Control

Safeguards the asset                                             Governs permissible actions

Protects records or private keys                          Authorizes transfers and instructions

Segregates customer property                            Enforces contractual restrictions

Maintains operational security                             Determines who may exercise rights

Processes authorized movement                        Establishes when movement is permitted

Reduces risk of loss                                             Allocates legal and operational authority

Answers “Who holds it?”                                      Answers “Who can act on it?”

Final Thoughts

Private markets have traditionally treated custody as back-office infrastructure.

That view is becoming outdated.

As private securities become more connected, tokenized and financeable, custody will increasingly operate alongside programmable controls, transfer-agent records, issuer permissions and collateral arrangements.

Secure custody makes institutional ownership defensible.

Effective control makes institutional ownership functional.

Custody protects value. Control determines whether that value can be exercised.

Private markets need both.

About the Author

Jonathan S. is the Founder, President, Chief Executive Officer and Chief Investment Officer of Apex Tech Growth Partners. His work focuses on private-market investing, institutional market structure and the infrastructure supporting capital formation, ownership, liquidity and settlement.

Through The Duality of Private Markets series, he examines the complementary forces shaping the evolution of private capital—including Access and Selection, Price and Value, Scale and Stewardship, Alternative Trading Systems and Smart Order Routing, Liquidity and Capital Efficiency, Capital and Ownership, and now Custody and Control.

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