Commodity Custody, Segregation and Reserve Verification

What makes a commodity custody model credible?

Commodities can be represented by digital tokens, but a token does not protect the physical asset by itself. A credible commodity tokenization model connects identifiable reserves, segregation, independent verification, reconciliation and a documented cash-or-physical redemption process. Requirements depend on the token, jurisdiction and storage location. Other controls may be market practice or project choices.

Where the token qualifies as an asset-referenced token under MiCA, the reserve regime is prescribed rather than chosen. The issuer must maintain and segregate a reserve of assets, hold it with an authorised custodian and meet the associated custody and reporting duties. The market-practice questions below then apply on top of those requirements, not instead of them.

Which custody and storage providers can support commodity-backed tokens?

Provider type depends on the commodity and promised rights. A project may need a custodian plus a vault, bonded warehouse, tank farm, silo or cold store. The warehouse operator records applicable identifiers and locations; an independent practitioner performs defined checks.

Official lists help build a shortlist but do not prove suitability. Before appointment, check:

• contracting entity, status and facility
• ability to store, identify and release the commodity
• title, segregation, claims over the assets, permitted mixing and subcontracted storage
• inspection access, data portability, insurance, liability and business continuity.

How should allocation and segregation work?

For gold tokenization and other tokenized precious metals, the LBMA Loco London bullion model is one example: allocated custody links a holding to identified bars on a weight list. An unallocated balance is a contractual claim and exposes the holder to provider default. Other commodities may use different legal models, so the effect must be confirmed under applicable law and contract. A weight list works for bullion, but it has no equivalent for grain, oil or refrigerated goods. There the physical-asset record should use the applicable lot, receipt, tank, silo or batch identifiers, with quantity, quality, owner, location and status.

The physical-asset record should instead use applicable lot, receipt, tank, silo or batch identifiers, with quantity, quality, owner, location and status.

Reserves should be segregated legally and operationally from the issuer’s and custodian’s own assets, with the controls reflected in agreements and records. Segregation does not automatically create insolvency protection. Check that effect under the governing custody contract and applicable property, storage-location and insolvency laws.

How are reserves verified against token supply?

Reconciliation should match three records at the same cutoff:

1. storage inventory
2. the issuer’s reserve ledger
3. all outstanding tokens

Set a risk-based schedule and repeat checks after minting, burning, redemption or commodity movements. Any unexplained difference should be investigated and escalated; a confirmed deficiency enters the shortfall process.

“Proof of reserves” is only an umbrella label. It does not identify an audit, assurance engagement, agreed-upon procedures, title review or reconciliation. The engagement terms should establish how independence and competence requirements are met under the applicable standard. The report should state its scope, date, tests, exceptions and either an assurance conclusion or agreed-procedure findings, as applicable. ISAE 3000 may support a limited- or reasonable-assurance conclusion. ISRS 4400 reports factual findings, not an assurance opinion. Neither format guarantees future availability.

What must the agreements say about insurance, redemption and shortfalls?

Custody and storage agreements need inspection rights, inventory confirmations, incident reporting, liability terms and replacement triggers. They should require transfer of stock and records to a successor and specify governing law, dispute resolution and a method for settling quantity or quality disagreements.

Review the insurance policy itself. Confirm the insured party, covered risks, geographic and transit scope, limits, deductibles, exclusions, valuation basis and who receives claim proceeds. The limit may be below the reserve value, and some losses may be excluded.

Redemption terms should state who may redeem, physical or cash settlement, notice, processing time, minimum lots and any fees permitted by law. They should separately define delivery arrangements, quality tolerances and narrow suspension events. If a shortfall appears, the plan should freeze further minting, preserve evidence, notify the parties, investigate the cause and trigger correction, insurance and dispute procedures. It should address partial fulfillment without promising full recovery.

Which adviser can review the custody structure and agreements?

Gofaizen & Sherle can review:

• the legal architecture
• custody and warehouse terms
• segregation mechanics
• verification scope
• redemption documents
• replacement triggers
• dispute provisions.

G&S does not store commodities or audit reserves. Appointed external providers perform those functions. Review is most useful before providers are appointed and before the token and redemption terms are finalized.