Institutional crypto investors are overhauling how they vet their partners. Instead of a one-time check at onboarding, they're moving to continuous monitoring — tracking signer controls, incident readiness, and operational health on an ongoing basis. The shift comes as operational failures, from hacks to outages to mismanagement, hit a record high in 2024, according to a new report.
Why the model is changing
The old approach — a thorough due diligence review when a fund first picks a custodian or exchange — isn't cutting it anymore. The report, which analyzed operational incidents across the crypto ecosystem, found that most losses in the sector now stem from operational breakdowns rather than market volatility or smart contract bugs. That's forcing institutional allocators to treat risk as something that can change overnight.
The report argues that static due diligence is insufficient in a fast-moving environment. A custodian that passes a review in January could suffer a breach by March, and the fund would have no warning.
Operational failures in focus
2024 set a record for operational failures in crypto, the report found. These include exchange outages, wallet compromises, and internal mismanagement that led to frozen funds or lost assets. The cumulative effect has been a loss of trust among institutional players, who are now demanding more transparency from their service providers.
The report doesn't name specific incidents, but the pattern is clear: the industry's infrastructure is still maturing, and the cost of failure is borne by the end investor.
What firms are doing differently
Some funds have started requiring real-time access to their custodian's signer logs and incident response playbooks. Others are conducting surprise drills to test how quickly a provider can recover from a simulated outage. The report notes that these practices are still rare but growing fast.
For custodians and exchanges, the message is blunt: if you can't demonstrate continuous operational health, you'll lose institutional business. The report recommends that firms invest in automated monitoring tools and establish clear escalation protocols before a crisis hits.
The next step, according to the report, is for the industry to develop shared standards for continuous due diligence — something that doesn't exist today. Without that, each fund is left to reinvent the wheel.
