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What Is Custody in Crypto?
New digital asset custody solutions are available every day, making it easier and safer to invest in crypto.
Updated June 28, 2022 • 2 min read
Summary
The crypto landscape has reached a meaningful inflection point. Buying, selling, and trading digital currencies was once considered a highly risky, fringe practice, but the industry has become much more mainstream. New offerings are coming to market every day, regulators are taking greater notice and interest in the space, and retail and institutional investors alike are increasingly becoming more educated about and interested in crypto. When investing in crypto, one of the most important factors to consider is digital asset custody. Custody is a broad term that refers to the ability to hold, move, and protect digital assets securely.
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Crypto Self-Custody: Hot and Cold Wallets
Different types of investors require different types of crypto custody solutions. A retail investor, for example, might want a simple, relatively hands-off option, whereas an institutional investor could require more customization. Fortunately, there are a variety of options available, from self-custody options like a hardware or software wallet to third-party offline storage in a cold wallet.
For those seeking complete control over their digital assets, a self-custody solution might be the best choice. This option affords you complete control of your cryptocurrency via a personal private key — a well-formed and unguessable number that grants you access to your assets. Within self-custody, there are software wallets, which come in the form of desktop wallets, mobile wallets, and online wallets, and hardware wallets, which store your private key in a secure hardware device. While controlling your own storage might sound appealing, there are inherent risks to this option, as there is no third party like a bank or cryptocurrency exchange that can intervene if you lose your private key.
Crypto Partial Custody
Partial custody refers to a self-managed wallet that offers a degree of third-party assistance in securing assets. This infrastructure can be as simple as two-step authentication or basic multi-signature protections, where the third party possesses a key for co-signing the customer’s transactions.
Third-Party Digital Asset Custody
Third-party custody provides some of the highest levels of digital asset security. This solution could work well for individual investors, as well as institutions, such as asset managers, hedge funds, and high-net-worth individuals (HNWIs). Within third-party custody, there are different types of security options to consider. For example, online or hot wallets are connected to the internet and therefore generally more easily accessible. Cold storage, by contrast, is offline, which means signing keys are kept in physically isolated hardware devices with no connection to the internet, and thus, no potential for remote control. For this reason, cold storage boasts heightened security but can cause longer transaction times than its online counterpart in some cases. In other cases, an exchange may allow you to instantly access an equivalent value of the funds you have in cold storage at that exchange.
It is no secret that third-party crypto custodians need to be technical experts in cryptography, finance, and security, with air-tight regulatory and compliance safeguards in place. Here’s the good news: Whether you’re just beginning your crypto journey or are a seasoned investor in digital assets, the rapidly changing landscape means that new offerings are coming to market every day; digital asset custody solutions are making it easier and safer to invest.
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