What Is Crypto Custody?

There is no shortage of horror stories about stolen funds, hacks, and lost passwords in the cryptocurrency industry.

Crypto custody is a term used to describe the process of protecting assets from theft. Custodians (third parties who can be hired to look after your crypto for you) act as a safeguard for your money, be it cash, securities, bullion, or virtual assets. 

Crypto custody works a little differently. Digital asset custodians don’t technically store any of the assets, as all data and transactions exist on a public ledger called the blockchain. Instead,  they protect users’ private keys, the vital part of a crypto wallet that grants access to the funds within.

How does crypto custody work?

Simply put, crypto custody means securing the personal key that verifies you own the funds held within your crypto wallet. In traditional banking, all custodians are financial institutions, as needed by law. With cryptocurrencies, however, holders have the chance to become their own custodians. Utilizing gold bars as an analogy, you can either reserve them under your bed to keep them secure yourself or pay a third-party custodian to lock them in a locker protected by security guards.

There are main two types of crypto custody for you to know.

Self-custody

As mentioned, self-custody is when you personally hold the private key of your own wallet. This means you are the only one who can verify ownership of your funds and access your holdings. But with great power comes great responsibility. Being your own custodian means being in full control of your wallet, but it also means you bear all the risks too. If you lose access to your physical device (cold wallet) or forget the private key, your crypto is most likely lost forever.

Third-party custody

Those who don’t want to take on the responsibility of managing their own accounts, or who find the technology too intimidating, should consider using a third-party provider. These are registered and regulated financial institutions that have obtained a state or national license to operate. as supervisor.

This type of crypto custodian securely stores customers’ private keys in their wallets, ensuring the security of their holdings. From a user perspective, it is comparable to a checking account at a bank. register to open an account, you must undergo know-your-client and anti-money laundering checks. If you store cryptocurrency with a third-party custodian, you are expected to perform the same type of verification to ensure your cryptocurrency was not obtained illegally.

How much does third-party crypto custody cost?

As with any type of service, providers often charge a variety of fees to protect your money, just like regular banks do if you have a checking or savings account. Depositing and withdrawing cryptocurrencies into your account can also incur fees. These costs usually fall into one of the following three types

  • Custody fee: Custodians ask for a certain percentage point based on the value of the investments under custody every year. This is usually less than 1%.
  • Setup fee: A flat rate for opening a custodial account. It’s worth noting some cryptocurrency custodians waive the fee and let users open an account for free.
  • Withdrawal fee: You might pay a fee every time you take cryptocurrencies out of your account.