What is a Crypto Custodian?
A custodian is an individual or entity responsible for maintaining and protecting someone or something valuable. For instance, a traditional bank custodian is responsible for the safekeeping of assets, such as valuable documents, cash, bonds, and securities.
While the private keys to cryptocurrency assets are typically held in digital wallets, whether hardware-based or software-based, individuals and institutions often rely on third parties to maintain and protect their private keys.
A cryptocurrency custodian is an entity that assumes the responsibility of safeguarding and managing digital assets on behalf of individuals, institutions, or organizations. Since cryptocurrencies never leave blockchains, crypto custodians hold the private keys that control access to a user’s cryptocurrency assets.
Besides giving up control of your digital assets, relaying the custody of the private keys to custodians comes with other implications. For instance, crypto custodians are often the target of malicious actors. If they are breached or compromised, it can lead to the loss of your funds. In addition, you also rely on the integrity of the custodian to safeguard your assets.
What are the Responsibilities of Crypto Custodians?
Besides safeguarding private keys on behalf of the users, custodians are also responsible for:
- Insurance: Some custodians may offer insurance coverage in case of losses due to unforeseen events or theft. For instance, should a bad actor access an individual’s funds using the custodian’s devices or due to a security breach in their systems, the custodian would compensate the individual.
- Transaction services: Custodians like centralized exchanges facilitate and process the transaction of digital assets. They allow users to trade, receive and send cryptocurrencies.
- Backup and recovery: Custodians safeguard a user’s secret recovery phrase, which allows them to recover their cryptocurrency wallets or accounts.
- Regulatory compliance: Custodians are also responsible for implementing any regulatory requirements and standards.