What Is Crypto Custody?
Cryptocurrency custody is the process of securing assets against theft. The custodians of your money, whether it is held in cash, stocks, gold bars, or digital assets, are custodians, who you can hire to manage your cryptocurrency on your behalf. Custodians have been a part of the conventional banking system since the 1960s and are one of its core components.
Cryptocurrency custody functions very differently. Digital asset custodians don’t hold any of the assets because all data and transactions are stored on a blockchain, a public ledger. Instead, they safeguard users’ private keys, which are crucial for a crypto wallet because they permit access to the money kept there.
For digital assets to be widely used, crypto custodians are necessary. Even now, many institutional investors are hesitant to invest in digital assets due to a lack of security. Organizations that manage sizable sums of money, like hedge funds, pension funds, investment banks, and family offices, are required by law to have a custody partner to safeguard the money of their clients.
How does crypto-custody operate?
All custodians in conventional banking are financial institutions, as required by law. However, owners of cryptocurrencies may serve as their custodians. You have two options for keeping gold bars secure, using them as an example: either you hide them under your bed for your own safety, or you pay a third-party custodian to store them in a vault that is manned by security personnel. You should be aware of the two main types of custody for cryptocurrencies in light of this.
Self-custody
As mentioned earlier, having physical possession of your wallet’s private key is referred to as “self-custody.” Because of this, only you have access to and can prove that you are the rightful owner of your money. However, great power comes with great responsibility. Being your custodian entails having complete control over your finances, but it also means accepting all risks involved. If you lose access to your physical device or forget your private key, your cryptocurrency will likely be lost forever (cold wallet).
Third-party custody
Contacting a third-party custodian may be a good idea for people who want to avoid managing their accounts or find using technology to be too frightening. These are financial institutions that have been legally established and are licensed and/or authorized to serve as state- or federal-level custodians.
By securely storing the private keys to their clients’ wallets, this type of cryptocurrency custodian upholds the security of their clients’ assets. It is comparable to having a bank checking account from the user’s perspective. When you register to open an account, you must provide know-your-customer and anti-money laundering checks.
How much does third-party crypto custody cost?
Providers frequently impose a number of fees to safeguard your funds, just like conventional banks do when you have a checking or savings account. When transferring cryptocurrency into and out of your account, fees might be charged. These costs frequently fall into one of the following three categories:
- Custodial fee: Based on the value of the assets they are in charge of, custodians demand a certain percentage each year. This is typically less than 1%.
- A set-up fee: At the time a custody account is opened, a setup fee is charged. It’s significant to remember that some cryptocurrency custodians don’t charge anything for users to open an account.
- Unlike the third-party crypto study, you will be charged a withdrawal fee each time you withdraw cryptocurrency from your account. Self-custody allows you to avoid paying custody, set-up, and withdrawal fees while remaining partially free. The user must take care of the wallet and purchase a storage item to keep the private key safe.
Pros and cons of crypto custody
Consider your requirements first when deciding on a crypto custody solution. Your investment style, holdings, and level of technological familiarity will all influence your best option.
Self custody
Pros:
- You have sole access to your account.
- There is no counterparty risk.
Cons:
- Your assets are not insured.
- If you lose your key, you can’t get to your coins.
- Self-custody of crypto-assets does not necessarily indicate privacy.
- Censorship Resistance: Governmental organizations frequently decide what transactions are allowed and not allowed.
- Sound Money and Inflation Resistance: Until clients acquire ownership of assets held by custodians, it is nearly impossible to estimate the true supply of those assets.
Third-party custody
Pros:
- Everything is handled by the keeper.
- Access is simpler for beginners.
- The assets managed by the custodians are insured.
- By staking or lending through the third-party custodian, you can earn interest on the cryptocurrency you deposit.
Cons:
- Your coins are in the custody of the custodian. Your wallet might be locked, your assets might be frozen, or withdrawals might be capped.
- A custodian running the risk of being hacked or going bankrupt.
- Fees could accumulate.
Usability, privacy, censorship resistance, and inflation resistance are all negatively impacted by custodians. These qualities are maintained when a person has self-custody.
