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.
Due to these unique challenges, custody of cryptocurrencies differs from custody of conventional financial assets. So, let's explore crypto custody and why it's important for the security of your digital assets.
What is crypto custody?
Crypto custody refers to the act of securing your cryptocurrency funds. Even though cryptocurrencies are stored on a blockchain, it is essential to protect the unique private key of your crypto wallet.
So, What is a cryptographic private key?? Your private key is an alphanumeric string that allows access to your cryptography. If someone gets access to your private key, they can steal your crypto, which makes the importance of crypto custody immense.
In recent years, the growing number of cryptocurrency users has given rise to numerous cryptocurrency custody solutions. Today, several service providers offer crypto asset custody, allowing you to store your private keys securely. With these solutions, you can be sure 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 protect your digital assets.
Cryptocurrencies are highly vulnerable to cyberattacks, which can remove cryptocurrencies from users' wallets in seconds. In addition, your funds may be at risk of a liquidity crisis, such as the one that experienced by FTX exchange. Therefore, it is critical to have a mechanism in place to secure your digital assets and insurance to protect them.
Safeguarding your private keys is essential to ensure the security 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 great need for custody solutions in the cryptocurrency market to ensure the safety and protection of digital assets.
How does crypto custody work?
Crypto escrow solutions are service providers that act as custodians of your digital assets. Your task is to maintain the security of your wallet's private key. Additionally, they offer off-chain storage where you can store your private keys and keep your cryptocurrencies safe from theft.
The government authorizes crypto custody service providers and strictly follows cryptocurrency compliance rulesincluding key elements such as know-your-customer (KYC) procedures for registration and compliance with anti-money laundering (AML) laws.
Crypto custodians also offer insurance for your funds to cover your losses in case of any mishap. Additionally, they can validate ownership of digital assets. Since 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 that cryptocurrency users can protect their assets. For example, you can use self-keeping wallets to keep the private keys for you.
Types of Crypto Custody
There are mainly 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 for yourself. You can think of it like storing cash in a safe at home instead of keeping it in a bank account. However, the self-custody crypto storage process is more complex than cash.
To maintain control of your digital assets, you need to use a hot or cold crypto wallet. This can include self-custody wallets such as a mobile, desktop, hardware or paper wallet. Using these options allows you to gain complete control of your crypto funds and does not involve any third party.
However, it is 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 can't approach a third party to give you access to your funds.
2. Custody of third parties
Third-party custody is the most popular option for storing your digital funds. It's an easy way to manage your wallets and secure your crypto. With this type of custody, you can use cryptocurrency exchanges, cryptocurrency custodian banks, or other digital asset management companies.
One of the most significant advantages of third-party crypto custody is that the custodian manages everything, so you don't have to worry about safeguarding your private keys. Furthermore, these institutions are regulated, which ensures good security for your assets. In addition, they offer insurance programs and crypto-earnings.
However, relinquishing control of your assets to a third party presents some risks. For example, custodians can freeze your account or face insolvency at any time. Also, you may need to pay crypto custody fees for these services.
3. Partial custody
Partial custody is a type of custody in which the third-party custodian has limited control over your assets. These custodians use different access methods, such as multi-signature protections (MSPs) and two-factor authentication, to allow you to control your assets while taking advantage of the security of third-party custodians.
What is the fee for crypto custody platforms?
When using a crypto escrow platform, some service providers charge fees in exchange for providing security for your crypto funds. Also, you may have to pay to send and receive cryptocurrency through your account. These fees may include escrow fees, account setup fees, and withdrawal fees.
- Third-party custodians typically charge an annual fee to manage their crypto assets. The cost varies between platforms, but most custodians charge less than 1% of the total value of your assets.
- You may need to pay a fee to set up your account with a custodian. While most platforms have a set flat fee, not all of them charge an account setup fee.
- Withdrawals may also incur a fee based on percentages. For example, third-party crypto escrow solutions like Coinbase charge up to 1% of the withdrawal amount.
By comparing the rates of third-party custody and self-custody, you may find the latter a more cost-effective option. With self-custody, you can avoid all three of these 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 depending on your needs. Self-custody is ideal for users seeking more authority over their assets, typically achieved through a cold wallet.
Alternatively, you can opt for third-party custodians if you are a beginner or don't want to get involved in the intricacies of wallet management. Although this option may cost you a percentage, it allows for easy management.
If you're not comfortable with third parties having too much control over your assets, partial custody is a great option, giving you control while maintaining high security.
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