What is Crypto Custody?
In the case of traditional financial assets like gold and bonds, your financial institution or bank acts as your custodian. The bank is responsible for holding assets and securities on behalf of the customer to protect them from thefts or losses. The custodian is in control of the assets and is responsible for maintaining ownership record and facilitating settlement and transfer of ownership.
Crypto custody differs from traditional financial asset custody in several ways due to the unique characteristics of cryptocurrencies.
Unlike physical assets such as gold or paper certificates for bonds, cryptocurrencies are digital in nature, existing solely in electronic form on a blockchain. Moreover, digital assets can be accessed and controlled by cryptographic keys such as public and private keys. These keys consist of complicated alphanumeric combinations which are hard to remember. If you lose the private key, you lose access to your wallets, and therefore the access to your digital assets.
Unlike traditional financial institutions, crypto custodians do not store your digital assets themselves. Instead, they protect your private keys to keep your funds safe. It provides independent storage facilities for safeguarding your crypto tokens.
What are Crypto Custodians?
Crypto custodians are responsible for storing and managing digital assets on behalf of their clients. However, the downside of a third-party custodian is that they control your private keys. As individuals and institutions entrust their assets to a third party, exposing themselves to the possibility of compromise, mismanagement, or insolvency of the custodian.
Self-custody allows individuals to have full control over their private keys and the security measures protecting their digital assets. By managing their own keys and using secure offline storage solutions, individuals can minimize the risk of their assets being compromised in a custodian’s infrastructure or through external attacks targeting custodians.