Crypto custody refers to the concept of securely storing your digital assets. While traditional assets require protection against theft, cryptocurrencies face even greater risks, such as cyberattacks and liquidity crises.
Because of these unique challenges, crypto custody differs from the custody of conventional financial assets. So, let's explore crypto custody and why it is important for the safety of your digital assets.
What Is Crypto Custody?
Crypto custody refers to the act of securing your cryptocurrency funds. Despite cryptocurrencies being stored on a blockchain, protecting the unique private key to your crypto wallet is essential.
So, what is a crypto private key? Your private key is an alphanumeric string that enables access to your crypto. If someone gains access to your private key, they can steal your crypto, making the importance of crypto custody immense.
In recent years, the growing number of crypto users has led to the emergence of numerous crypto custody solutions. Today, various service providers offer crypto asset custody, allowing you to store your private keys safely. With these solutions, you can be assured that you won't lose your private keys, and your digital assets will be protected from criminals.
Why Is Crypto Custody Important?
Custody services have long been a vital component of the traditional financial system, serving as protectors of your money, gold, and other assets. Similarly, in the crypto space, custodians safeguard your digital assets.
Cryptocurrencies are highly vulnerable to cyberattacks, which can wipe out cryptocurrency from users' wallets in seconds. In addition, your funds can be at risk of liquidity crunches, such as the one experienced by the FTX exchange. Therefore, it's crucial to have a mechanism to secure your digital assets and insurance to protect them.
It's essential to safeguard your private keys to ensure the safety of your assets, which requires you to store your complex alphanumeric code securely. If you lose your private keys, you may permanently lose access to your funds. This highlights the significant need for custodian solutions in the crypto market to ensure the security and protection of digital assets.
How Does Crypto Custody Work?
Crypto custody solutions are service providers that act as guardians of your digital assets. Their task is to maintain the security of your wallet's private key. In addition, they offer off-chain storage where you can store your private keys and keep your crypto holdings safe from theft.
The government authorizes crypto custody service providers and follow strict cryptocurrency compliance rules, including key elements like know-your-customer (KYC) procedures for registration and enforcing anti-money laundering laws (AML).
Crypto custodians also offer insurance for your funds to cover your losses in case of any mishap. Additionally, they can validate the ownership of digital assets. As these service providers store your private keys, they have proof that you own the digital assets in the wallet.
However, service providers are not the only way to maintain crypto custody. There are several other ways cryptocurrency users can secure their assets. For example, you can use self-custody wallets to keep the private keys to yourself.
Types of Crypto Custody
There are primarily three types of crypto custody solutions that one can opt for.
1. Self-Custody
Self-custody is the act of keeping control of your assets to yourself. You can think of it as storing cash in a safe at home rather than keeping it in a bank account. However, the process of self-custody crypto storage is more complex than cash.
To keep control of your digital assets, you need to use a hot or cold crypto wallet. This may include self-custody wallets like a mobile, desktop, hardware, or paper wallet. Using these options lets you gain complete control of your crypto funds, and no third party is involved.
However, it's essential to take note of the risks involved in self-custody. For example, if you lose or forget your private key, there is no backup, and you cannot approach a third party to provide you access to your funds.
2. Third-Party Custody
Third-party custody is the most popular option for storing your digital funds. It is an easy way to manage your wallets and secure your crypto. With this type of custody, you can use cryptocurrency exchanges, crypto custodian banks, or other digital asset management firms.
One of the most significant advantages of third-party crypto custody is that the custodian manages everything, so you do not have to worry about safeguarding your private keys. Furthermore, these institutions are regulated, ensuring good security for your assets. Additionally, they offer insurance and crypto-earning programs.
However, giving control of your assets to a third party poses some risks. For instance, custodians may freeze your account or face insolvency at any point. Additionally, you may have to pay crypto custody fees for these services.
3. Partial Custody
Partial custody is a type of custody where the third-party custodian has limited control over your assets. These custodians use different access methods, such as multi-signature protections (MSP) and two-factor authentication, to allow you to control your assets while still benefiting from third-party custodian security.
What Is the Fee for Crypto Custody Platforms?
When using a crypto custody platform, some service providers charge fees in exchange for providing security to your crypto funds. Additionally, you may have to pay for sending and receiving crypto through your account. These fees can include custody fees, account setup fees, and withdrawal fees.
- Third-party custodians typically charge a yearly fee for managing your crypto assets. The cost varies between platforms, but most custodians charge less than 1% of the total value of your assets.
- You may have to pay a fee to set up your account with a custodian. While most platforms have a set flat rate, not all charge a fee for account setup.
- Withdrawals can also incur a percentage-based cost. For example, third-party crypto custody solutions like Coinbase charge up to 1% of the withdrawal amount.
Comparing the fees of third-party custody and self-custody, you may find the latter a more cost-effective option. With self-custody, you can avoid these three types of fees.
Choosing the Right Crypto Custody Option
Crypto custody is crucial for the secure management of digital assets. However, choosing the right crypto custody option is essential based on your needs. Self-custody is ideal for users seeking more authority over their assets, usually achieved through a cold wallet.
Alternatively, you can opt for third-party custodians if you're a beginner or don't want to be involved in the intricacies of wallet management. Although this option may cost you a percentage, it allows for ease of management.
If you're uncomfortable with third parties having too much control over your assets, partial custody is an excellent option, providing you with control while maintaining high security.
