When temporary holding becomes custody: MiCA’s red line for client crypto-assets

For crypto-asset service providers (hereinafter – “CASPs”) operating in the EU, temporary control over clients’ crypto-assets has become a material regulatory risk under Markets in Crypto-Assets Regulation (hereinafter – “MiCA”).

Many business models still assume that briefly holding client assets to execute an exchange or route an order does not constitute custody under regulatory rules. The European Securities and Markets Authority (“ESMA”) MiCA Q&A clarifies that the legal distinction depends on whether client assets are controlled prior to execution (pre-funding) or are transferred only after execution for settlement. The key distinction is between pre-funding, in which the service provider controls client assets before the transaction, and settlement, in which assets move only after execution.

This article explains when temporary holding qualifies as custody or sub-custody, and when it does not, by reference to ESMA’s MiCA Q&A.

The typical model: where the regulatory risk starts

A common operational setup looks as follows:

The CASP facilitates crypto-asset exchanges for clients.
execution is performed via a licensed third-party trading platform.
client crypto-assets are transferred to the CASP (or to an account controlled by it);
The CASP forwards the assets to the trading venue for execution of the transaction.
After execution, the exchanged assets are delivered to the client.

From a business perspective, this is often framed as pure execution support or technical pre-funding, not custody.

From a MiCA perspective, this model raises a fundamental question: Does temporary, operational holding of client crypto-assets constitute “custody and administration on behalf of clients”?

ESMA’s MiCA Q&A shows that using client crypto-assets to pre-fund transactions (assets transferred before execution) counts as sub-custody, triggering specific MiCA custody safeguards.

ESMA Q&A 2608: pre-funding is sub-custody

ESMA addressed this issue directly in MiCA Q&A 2608, dealing with pre-funding of client orders.

ESMA’s position is clear:

using client crypto-assets to pre-fund transactions qualifies as sub-custody of client crypto-assets;
This applies even where holding is temporary and strictly linked to execution.
As a result, Articles 70 and 75 MiCA apply in full.

The decisive factor is whether client crypto-assets are transferred or controlled before the order is executed (pre-funding).

ESMA also clarifies that the analysis focuses on the pre-execution stage (pre-funding) rather than the operational label applied to the transfer.

Sub-custody implications

Where client assets are forwarded to a third party (e.g., a trading platform), Article 75(9) MiCA applies:

The third party must be authorised to provide custody services under MiCA;
clients must be clearly informed that their assets may be held by that third party;
The CASP remains fully responsible vis-à-vis the client.

In other words, where a third party holds the client crypto-assets in a pre-funding setup, ESMA links permissibility to the third party being a MiCA-authorised CASP and to appropriate client disclosure (Article 75(9)).

ESMA Q&A 2578: why “Operational” custody still triggers full safeguards?

ESMA’s Q&A 2578, although focused on commingling and conflicts of interest, reinforces the same regulatory logic.

ESMA emphasises that:

CASPs providing custody must ensure segregation of clients’ crypto-assets from their own crypto-assets in line with Article 75(7) MiCA (in practice, by using different wallet addresses);
while crypto-assets of other entities within the CASP’s group are not “own crypto-assets” for the purpose of Article 75(7), commingling client assets with those group entities’ assets can create conflicts of interest; and
Those conflicts must be addressed under Article 72 MiCA and the RTS on conflicts of interest, and where the risk cannot be prevented or adequately mitigated, ESMA indicates that the CASP should refrain from providing custody services to those group entities.

The MiCA legal test: sub-custody vs post-execution settlement transfers (ESMA lens)

Under ESMA’s MiCA Q&A, the critical distinction is timing and purpose: if client assets are transferred pre-execution to pre-fund an order, this is considered sub-custody (Q&A 2608); if transferred post-execution purely for settlement, it is not considered sub-custody.

transfers that occur only after an order is executed, and serve solely to settle that already executed order, are not treated as sub-custody (as clarified by ESMA in the same context).

Therefore, determining whether pre-funding (control before execution) or post-execution settlement (movement after execution) occurs is key to the regulatory treatment.

Applying the ESMA distinction to temporary holding models

Applied to typical execution via third-party models, the outcome is usually clear:

If the CASP receives or controls client assets before execution as part of pre-funding, sub-custody is triggered.
If client assets are held by a third party in that pre-funding chain, Article 75(9) conditions apply (MiCA authorisation of the third party and client disclosure);
If assets are only moved after execution and solely to settle an already executed transaction, sub-custody is not triggered under ESMA’s clarification – but this requires careful structural design.

Practical takeaways for CASPs

Focus on the distinction between pre-funding and settlement: the ESMA defines sub-custody as pre-execution control, not as post-execution settlement transfer.
Pre-funding triggers custody safeguards. Where client crypto-assets are used to pre-fund execution, ESMA treats this as sub-custody and points to the application of Articles 70 and 75 MiCA.
Third parties must be MiCA-authorised, and clients must be informed. Where a third party holds client assets in a pre-funding chain, ESMA links permissibility to Article 75(9) conditions.
Segregation and conflicts matter in custody structures. ESMA highlights segregation obligations and conflict-of-interest risks, including in group-entity commingling scenarios (Q&A 2578).

As conclusion

MiCA deliberately follows a substance-over-form approach to the protection of client crypto-assets. ESMA’s MiCA Q&A draws a practical red line: pre-funding using client crypto-assets is treated as sub-custody, while post-execution settlement transfers for an already executed order are not treated as sub-custody.

CASPs should therefore map their asset flows against that pre-funding/settlement distinction and align disclosures and third-party arrangements with Article 75(9) where relevant.

At Manimama Law Firm

At Manimama Law Firm, we help businesses adapt to new regulations. We handle documentation, manage applications, and build long-term compliance strategies for crypto companies.