What Is Crypto Custody & Why Is It Important?

How to secure your Crypto Custody?


Crypto custody is the idea of securing the storage of your digital assets. Traditional assets need to be protected from theft, but cryptocurrencies are even more vulnerable to threats like cyberattacks and liquidity problems.

Cryptocurrency custody is different from the custody of traditional financial assets as a result of these particular difficulties. The importance of crypto custody for the security of your digital assets will now be discussed.

What Is Crypto Custody?

The process of protecting your cryptocurrency funds is referred to as “crypto custody.” Despite the fact that cryptocurrencies are stored on a blockchain, safeguarding your private key is crucial.

What then is a cryptographic private key? An alphanumeric string known as your private key provides access to your crypto. Crypto custody is extremely important because if someone gets their hands on your private key, they can steal your cryptocurrency.

Numerous crypto custody solutions have emerged in recent years as a result of the increase in cryptocurrency users. Today, a number of service providers offer custody of cryptographic assets, enabling you to securely store your private keys. You can be certain that these solutions will prevent you from losing your private keys and protect your digital assets from thieves.

Why Is Crypto Custody Important?

In the traditional financial system, custody services have long been essential, acting as guardians for your cash, gold, and other assets. In the crypto world, custodians protect your digital assets similarly.

Cyberattacks are very likely to target cryptocurrencies, and they can quickly remove them from users’ wallets. Additionally, liquidity problems like the one the FTX exchange recently experienced can put your money at risk. Therefore, having a system to protect your digital assets and insurance is essential.

Your complex alphanumeric code must be kept in a secure location if you want to protect your private keys and your assets. Your ability to access your money could be permanently lost if you misplace your private keys. This emphasises how crucially important custodian solutions are in the crypto market for ensuring the safety and security of digital assets.

How Does Crypto Custody Work?

Solutions for crypto custody are businesses that look after your digital assets. Their responsibility is to keep the private key to your wallet secure. They also provide off-chain storage, where you can keep your private keys and protect your cryptocurrency investments from theft.

The government approves cryptocurrency custody service providers and enforces stringent cryptocurrency compliance guidelines, which include crucial components like know-your-customer (KYC) registration processes and anti-money laundering laws. (AML).

Additionally, cryptocurrency custodians offer insurance for your money to cover your losses in the event of an accident. They can also verify the ownership of digital assets. These service providers have evidence that you are the owner of the digital assets stored in the wallet because they store your private keys.

Service providers aren’t the only way to keep custody of cryptocurrency, though. Users of cryptocurrencies can protect their assets in a number of other ways. For instance, self-custody wallets can be used to keep the private keys private.

Types of Crypto Custody

There are primarily three types of crypto custody solutions that one can opt for.

1. Self-Custody

The practise of maintaining sole control over your assets is known as self-custody. It is comparable to keeping cash in a home safe as opposed to a bank account. Self-custody crypto storage is more difficult than cash, though.

You must use a hot or cold crypto wallet to maintain control over your digital assets. Self-custody wallets like a mobile, desktop, hardware, or paper wallet may fall under this category. You can take full control of your cryptocurrency funds by using these options because no outside party is involved.

But it’s important to be aware of the dangers of self-custody. For instance, there is no backup and you cannot ask a third party to give you access to your funds if you misplace or forget your private key.

2. Third-Party Custody

The most popular method for keeping your digital money safe is third-party custody. It is a simple way to secure your cryptocurrency and manage your wallets. You can use cryptocurrency exchanges, crypto custodian banks, or other digital asset management companies with this type of custody.

One of the biggest benefits of third-party crypto custody is that everything is handled by the custodian, so you don’t have to worry about protecting your private keys. Additionally, these organisations are governed, providing good security for your assets. They also provide insurance and crypto-earning opportunities.

Giving another person authority over your assets, however, carries some dangers. For instance, custodians could become insolvent at any time or freeze your account. You might also be required to pay cryptocurrency custody fees for these services.

3. Partial Custody

A type of custody arrangement known as partial custody gives the third party custodian only limited authority over your assets. These custodians give you control over your assets while still providing third-party custodian security through the use of various access techniques like multi-signature protections (MSP) and two-factor authentication.

What Is the Fee for Crypto Custody Platforms?

Some service providers of a crypto custody platform charge fees in return for securing your crypto assets. You might also be charged for sending and receiving cryptocurrency through your account. Custody fees, account setup fees, and withdrawal fees are a few examples of these charges.

Typically, third-party custodians charge a yearly fee for looking after your cryptocurrency assets. Platform-specific pricing varies, but most custodians charge less than 1% of your assets’ total value.

It might cost money to open an account with a custodian. Not all platforms charge a fee for account setup, even though the majority do so at a fixed flat rate.

Also possible is a percentage-based fee for withdrawals. For instance, Coinbase and other third-party cryptocurrency custody services charge up to 1% of the withdrawal amount.

When you compare the costs of third-party custody and self-custody, you might discover the latter to be the more affordable choice. You can steer clear of these three costs by choosing self-custody.

Choosing the Right Crypto Custody Option

Cryptocurrency custody is essential for the safe administration of digital assets. However, based on your requirements, selecting the best cryptocurrency custody option is crucial. Users who want more control over their assets should consider self-custody, which is typically possible through a cold wallet.

Alternatively, if you’re a novice or don’t want to deal with the complexities of managing a wallet, you can choose third-party custodians. You might pay a percentage for this option, but it makes management simpler.

Partial custody is a great option if you don’t want outside parties to have complete control over your assets because it gives you control while maintaining high security.

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