What is Crypto Custody And How Does It Work?
Have you ever heard of the term “custodial storage”? For some users, it’s synonymous with comfort, while for others it’s an unreasonable risk. But what is it and how do you know if third-party crypto storage is right for you? Let’s take a closer look in this article.
What Is Custody in Crypto?
Custodial storage is a service provided by third parties who take responsibility for the safe storage of your cryptocurrency assets. The name “custodial storage” comes from the Latin word custodia, which translates to “guard” or “guardian”. This principle formed the basis of the term “crypto custody”, which is used to refer to custody crypto services. Accordingly, a custodian is the person or organization responsible for the custody of digital assets.
How Does Crypto Custody Work?
When an address is created, the wallet generates cryptographic keys – unique identifiers that act as a sort of “digital passport”. The cryptocurrency associated with this address can only be accessed by using a private key that provides full control over the funds. These keys allow you to access the funds associated with your address on the blockchain.
Each address on the blockchain is usually associated with a pair of keys – a public key and a private key. These keys work in conjunction and relate to a specific address.
The blockchain is the basis for the functioning of addresses and keys, providing transparency and security for transactions. The address itself is a shortened version of the public key, which is available for all blockchain users to view. The private key, on the other hand, remains strictly confidential and is used to create digital signatures and validate transactions. It serves as the key to accessing funds and should only be known to the owner.
For example, if you store 1 Bitcoin (BTC) on the cryptocurrency exchange WhiteBIT, your assets are stored in a wallet that is accessed via private keys controlled by the exchange itself. This method of storage is called custodial, as key management and responsibility for the security of your funds is assumed by the exchange.
It is important to note that keys are not used to enter the platform where your cryptocurrencies are stored—this is provided by the login and password set during registration.
Types of Crypto Custody Solutions
Two primary custody solutions can be identified. Let’s consider each of them.
Self-Custody
The first crypto custody solution is Self-Custody—a method in which the user manages his cryptocurrency assets on his own, without the involvement of third-party services.A crypto wallet is the main tool of this approach, providing the possibility of full control over the funds. All rights and responsibility for the safety of private keys belong exclusively to the owner.
Main features:
- Control: Full access to funds is provided by private keys that are stored only by the user.
- Anonymity: No need to go through KYC procedure.
- Privacy: Absence of intermediaries eliminates transmission of transaction and ownership data.
- Risks: Loss of private keys or cid-phrase makes it impossible to regain access.
Self-storage is ideal for users who value independence, privacy and are experienced in securing their assets. Users typically store their funds using hardware wallets (Ledger, Trezor) and software wallets (MetaMask, Trust Wallet). Essentially, any crypto wallet that provides you with full access to your private keys can be classified as a self custody crypto wallet.
Third-Party Custodians
As we’ve already mentioned, custodial storage involves handing over the management of private keys to a crypto custody provider that takes responsibility for the security of the assets. Such services often integrate AML (Anti-Money Laundering) verification, ensuring compliance with anti-money laundering regulations and protection against illegal transactions. It is a popular choice among those who prefer convenience and professional service.
Key Features:
- Trust: Keys and funds are managed by a custodian.
- Anonymity: Need to go through KYC procedure.
- Accessibility: Convenient access through login and password, without the need for key management. Can recover password if lost.
- Risks: Dependent on the reliability of the custodial service.
Suitable for cryptocurrency beginners who find it difficult to ensure security on their own, as well as investors and traders who make frequent transactions.
There are also multisignature custody services (Multisignature Custody). This is a way of storing cryptocurrency where access to the assets requires confirmation of the transaction with multiple keys. Multisignature (multisig) provides distributed responsibility: transactions require the consent of two or more parties, which significantly increases the level of security.
Such services are often used by institutional investors or corporate clients where crypto asset custody management requires high reliability and fraud protection. For example, one key may be held by the client, another by the custodial service, and a third by a trusted party. Even if one key is compromised, assets remain protected. Examples of such solutions include BitGo, Fireblocks and Copper, which offer flexible access settings and integration with enterprise systems.
Crypto Asset Management for Institutional Investors: Emergence of Institutional Crypto Custody Services
Read the articleInstitutional Crypto Custody Service from WhiteBIT
WhiteBIT provides crypto custody services for corporate clients that fully meet the requirements and expectations of the institutional segment. The platform serves more than 1,000 institutional partners, and its average daily trading volume reaches $500 million. In addition to exchange operations, WhiteBIT is developing a full ecosystem of innovative products specifically tailored to the needs of institutional investors and large projects.
Benefits and Challenges of Digital Asset Custody
Third-party custody provides users with convenience and professional protection, as custodians take responsibility for the safety of assets using cold storage, multi-signature and encryption technologies. This solution suits those who value ease of asset management and support in the event of technical issues, but comes with risks such as the need to trust a third party, the likelihood of the platform being hacked or reliance on its stable operation.
At the same time, crypto custodians themselves face challenges including cyberattacks, data breaches, regulatory pressure, operational failures and insider threats. Any security incident or loss of assets can undermine a custodian’s reputation, cause client churn and result in financial losses. These risks require custodial services to be highly reliable, strictly compliant with regulations and constantly improving protection technologies.
Self-custody gives the user full control over the assets and eliminates the need to entrust them to third parties. Only the owner has access to private keys, which provides a high level of privacy and independence. But as Uncle Ben used to say, “With great power comes great responsibility.”
Loss of access or errors in management can result in loss of assets with no possibility of recovery, making crypto self-custody the choice for experienced and tech-savvy users.
Conclusions
Custodial storage is an excellent choice for those who value simplicity and reliability in managing digital assets. However, any choice requires care: trust your funds only to trusted platforms that guarantee a high level of protection and transparency.
FAQ
It is a service or company that provides secure cryptocurrency storage services on behalf of users.
To protect assets from theft, loss or technical failures, which is especially important in the world ofDeFi.
Loss of access due to loss of keys, vulnerability to hacker attacks, lack of technical knowledge to ensure security.
Yes, cryptocurrencies are subject to regulation in some countries, enforcing security standards and protecting users.
When it comes to cryptocurrency exchanges, there are usually no fees charged to users for storing cryptocurrency.
