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December 9, 2024
Following FTX’s recent collapse and other crypto scandals in the past, the term “Crypto Custodian” is probably the most talked-about term in crypto. We think now is an excellent opportunity to clarify a vital aspect of the crypto realm so that you can understand crypto better.
The term “Custody” was usually reserved for how banks and other financial institutions held securities like stocks and bonds. These financial institutions were not the owners of the securities but kept them in trust for their owners in the form of custody.
But securities custody is not the same as crypto custodian. The thing about bank ledgers is that there is no point in breaking into them. For instance, if someone succeeds in changing the bank’s records, someone will eventually catch it and retro-fix it. But in crypto, things are a bit different: the ledgers are not just evidence of ownership (like in banks) but the ownership itself. So we first must understand that Bitcoin and other blockchain currencies are always “located” on the blockchain itself, and since Blockchain ledgers are highly safe and considered pretty much full-proof, they alone indicate ownership. However, the question is how do we access these tokens that are stored on the blockchain: we can think of the blockchain as a safe, and our crypto wallet is the unique and individual key to that safe, and if we lose it, the contents of that safe will be lost forever.
So crypto wallet is our access to the blockchain. Now we need to understand that there are two kinds of wallets: Custodial Vs. Non-custodial. A custodial wallet is a wallet that is usually an online wallet that is provided by a crypto service provider, such as Binance, Coinbase, Crypto.com, or the recently-deceased FTX. At this point, note that the aforementioned crypto exchanges are not crypto wallets: Crypto exchanges are places where you can buy crypto online. However, these exchanges also provide a wallet (a custodial wallet) as an ancillary service. It is also worth mentioning that not only crypto exchanges offer crypto custody services, but also other institutions, even big financial institutions such as “The Bank of New York Mellon” and “State Street.”
As opposed to a custodial wallet, we choose a non-custodial wallet. This means the wallet holder has complete control of the private key to their tokens held on the blockchain. Some are online software wallets (“Hot wallets”) such as Metamask, and some are hardware wallets that are stored offline (“Cold Wallets”). The thing is, this kind of wallet is a bit more complicated to handle as opposed to custodial wallets. And if we somehow lose or forget the wallet’s password, there is no way to recover it. EVER! That is why most people favor custodial wallets: they prefer it simple. However, with crypto being such a cesspool of thieves and scammers, we strongly recommend making an extra effort and choosing Non-custodial wallets.
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