Custody Architecture in Distributed Financial Systems: Threshold Cryptography and Failure Containment

Abstract In distributed financial systems, custody architecture defines the boundary of asset authority. While ledger systems preserve transactional invariants and ensure conservation of value, custody systems determine which entities are cryptographically capable of producing valid asset transfers. A failure in ledger logic may result in reconciliation complexity; a failure in custody design results in irreversible loss. This article presents a technical and architectural analysis of custody systems built on threshold cryptography and Multi-Party Computation (MPC), focusing on formal security properties, Byzantine adversary assumptions, distributed signing protocols, crash safety, correlated failure domains, and practical implementations using FROST-based threshold signatures. Custody is not key storage. It is adversarial distributed systems engineering. From Centralized Keys to Distributed Authority Let K be a private signing key used to authorize asset transfers in an elliptic curve