Crypto custody securely stores digital assets to protect them from loss or theft. It is a critical component of the cryptocurrency ecosystem and has become increasingly important as more businesses embrace digital assets.
Crypto custody solutions can give investors peace of mind when protecting their investments in volatile cryptocurrency markets.
How crypto custody works
Crypto custodians do not store the assets but guard users’ private keys, which control access to their wallet funds. In assuming this responsibility, these custodians stand as the protectors of investors looking to join the new era of finance with its wide range of emerging digital assets.
Firms such as hedge funds, pension funds, investment banks, and family offices require a custodian partner to ensure regulatory compliance.
Crypto custodians play an integral role in promoting the broader adoption of digital assets in the financial world. However, institutional investors need proper security and assurance for funds to purchase digital assets.
Types of crypto custody
Self custody
Self-custody is an attractive option for those passionate about taking control of their own cryptocurrencies. With self-custody, the investor is solely responsible for holding and protecting their private key. Self-custody puts them in complete control of their funds but also means that all responsibility lies with them; if something goes wrong, no one else can step in to help recover it.
Those choosing self-custody should carefully evaluate their security measures, as a lost device or forgotten key can permanently lose funds. Self-custody isn’t a light decision – it requires being proactive with security mechanisms and always keeping sight of the risks involved.
Third-party custody
A crypto custodian is a specialized service provider allowing users to store their digital holdings securely. Like the bank accounts we are used to, users must go through a series of checks- such as know-your-customer and anti-money laundering – before accessing their wallets.
This process ensures that all assets are acquired legally and remain secure under the watchful eye of the custodian.
Clients may benefit from added features specific to these services, such as allowing their assets to be easily accessible and traded while ensuring they do not accidentally lose valuable funds due to human error.
These custodians provide users with peace of mind knowing that their assets are safely stored away so they can focus on enjoying the wide range of opportunities the cryptocurrency market can offer them confidently.
Partial custody
Recent innovations in the crypto custody industry have led to the development of partial custody services. These solutions offer more flexibility than traditional custodial services by allowing users to keep control of their private keys while providing additional features such as multi-signature authentication, secure storage, and trading tools.
Partial custody allows users to control their assets while gaining access to sophisticated security and trading tools that would otherwise be unavailable. As a result, it is an attractive option for those seeking more control over their funds but still requiring the added security of a custodian service.
Examples of third-party custodians include:
1. Exchanges – Many exchanges offer custodial services for their clients. Coinbase, for example, provides a secure and regulated environment where customers can store their digital assets.
2. Brokerages – Brokerages such as Fidelity Digital Assets provide an array of solutions when it comes to crypto custody, from cold storage vaults to qualified custodians.
3. Digital asset managers – Digital asset managers such as BitGo and Ledger offer various services, from wallet management to smart contract security.
Crypto custody fees
There are four types of fees related to crypto custody.
1. Custody fee – Crypto custody providers typically charge an annual fee for their services. They can range from a percentage of the total assets stored to a flat rate.
2. Withdrawal fee – some custodians charge a withdrawal fee when withdrawing funds from custody.
3. Transaction fees – Some crypto custodians will also charge a transaction fee for each transaction.
4. Set up fees – Sometimes, custodians charge a one-time fee for the initial setup.
Reasons why crypto custody is important
There are many benefits to using crypto custodianship services, including:
1. A reputable crypto custodian service will use sophisticated security measures such as multi-signature wallets and hardware wallet storage to ensure your funds remain secure. Data encryption technology ensures that your private keys are safe from hackers.
2. Insurance: Crypto custodians may offer insurance against losing or stealing your digital assets, providing added peace of mind when storing large amounts of cryptocurrency.
3. Regulatory Compliance: reputable crypto custody services must comply with applicable laws and regulations. Many countries have put in place legislation that requires crypto custodians to register with their respective financial authorities and comply with anti-money laundering (AML) and know-your-customer (KYC) requirements. Compliance helps ensure the service provider’s legitimacy and protects investors from fraud.
4. Low Fees: Unlike traditional banks, many crypto custodians charge minimal service fees. Les fees make them a more cost-effective choice for investors looking to store their digital assets securely.
5. Convenience: Crypto custody services offer users the convenience of securely storing and accessing their funds from anywhere in the world with minimal effort. It is easier for investors to manage their investments without worrying about security or regulatory compliance.
Risks of crypto custody
Although crypto custody services provide many benefits, they come with risks that investors should be aware of. These include:
1. Hacking Risk: Despite the sophisticated security measures employed by reputable crypto custodians, there is still a risk that hackers could gain access to your funds. It’s essential to ensure you only store your digital assets with providers with robust security protocols insured against loss or theft.
2. Regulatory Risk: Authorities have highly regulated the cryptocurrency industry in many jurisdictions worldwide, and it’s essential to ensure that any third-party service provider you use is compliant with applicable laws and regulations. If a provider fails to do so, your funds may be at risk.
3. Counterparty Risk: CxThere is a risk that the provider may disappear with your funds or become insolvent. It’s essential to do your research and only use providers with a good track record of reliability and security.
4. Liquidity Risk: Some crypto custodians need to offer access to certain digital assets or exchanges, which could limit the liquidity of your investments. Make sure you understand the limitations of any service before you store your digital assets with them.
Despite these risks, crypto custody services can be an invaluable tool for investors looking to store their digital assets in a regulated environment securely. By doing your research
Factors to consider while choosing a crypto custodian
By carefully researching and considering all the following factors, you can ensure that you’re choosing the proper crypto custodian:
1. Credentials – Ensure that the relevant financial authorities have registered the crypto custodian and are compliant with local laws and regulations. Check to see if they have any insurance policies to protect your funds from loss or theft.
2. Security – Look for providers that employ sophisticated security measures such as multi-signature wallets and cold storage. Auditors should regularly audit reputable crypto custody services to ensure that all customer funds are appropriately secured.
3. Technical expertise – A good crypto custodian should have experienced technical personnel to help with any inquiries you may have. Ensure that the provider knows the digital assets you’re looking to store.
4. Customer service – Look for providers that offer 24/7 customer support and have a good track record of responding to inquiries promptly. Most reputable crypto custodians will provide detailed documentation about their services to help you understand how they work.
5. Costs – Ensure you understand any fees associated with the crypto custody service before signing up. Some providers may charge a one-time fee for setup, while others may charge a recurring fee for storing your assets over time.
Conclusion
Crypto custody is integral to any cryptocurrency investor’s portfolio management strategy and offers many benefits, including security, insurance, regulatory compliance, low fees, and convenience. To ensure that you choose the best crypto custodian for your needs, research each service carefully before deciding. With proper due diligence and research, you can rest assured that your digital assets are secure and well-protected.
