What is Crypto Custody and Why is it Important

The concept of financial custody is deep-rooted in the financial world. In traditional finance, banks and other financial stations are custodians who keep gold, cash, and other valuable assets safe on behalf of their clients. Crypto custody defines how digital assets are stored.

There is quite a wide range of risks associated with holding crypto. For instance, you can lose your funds through theft or hacks. Good custodial tools make it possible to minimize these risks.

Digital asset custody solutions safeguard crypto assets with private key encryption. This makes it possible for investors to use these storage and security systems to safely transfer and trade cryptocurrencies. Let’s go through more on what you need to know about digital asset custody:

What Is a Crypto Wallet?

A crypto wallet is a physical device, medium, or software program which lets you hold and secure your digital assets. Security and access to your holdings are protected by private keys. Besides storage, wallets allow you to send and receive tokens. There are two main types of crypto wallets, cold and hot wallets.

Cold wallets allow you to hold your crypto offline. They are also referred to as hardware wallets. On the other hand, hot wallets allow you to store your digital assets online.

Are Cryptocurrency Wallets and Custody Services the Same Thing?

They are not. Crypto custody systems are storage services offered by third parties, usually preferred by institutions investing in crypto. The third party holds private keys and secures funds on behalf of the investor as opposed to a wallet where you keep your keys.

Cryptocurrency custody has increased in popularity as cryptocurrency miners and investors seek safe solutions to safeguard their private crypto keys, which are alphanumeric and act as passwords. Investors cannot access cryptocurrency holdings or operate transactions without them. That's why secure custody is critical for crypto investors.

Why Is Crypto Custody Important?

The lack of secure key storage, addresses, and crypto assets has been a significant barrier for institutional investors to participate in crypto markets.

As a result, institutions have found it difficult to manage digital assets due to their technicalities and extensive operational processes. However, crypto custody helps to solve this problem. Custodial services have been a primary driver of institutional participation in recent times.

How Does Crypto Custody Work?

With traditional banking, all custodians are financial institutions, as mandated by law. On the other hand, the custodianship of crypto allows holders to safeguard the private key that verifies their ownership of their funds.

You can keep your crypto assets in your wallet to protect your private keys or pay a custodian to hold your digital assets on your behalf. Therefore, there are different types of crypto custody, each with different principles.

Types of Crypto Custody

The available types of crypto custody are mainly determined by who owns the private key.

  • Self-custody
  • Self-custody lets you maintain the personal key to your crypto wallet funds. This is ideal if you want complete control over your crypto assets using an individual private key. Simply put, you are the sole custodian of your holdings in self-custody schemes.

    Using software across devices or hardware wallets is better for security and control over your private keys and assets. You can't seek outside help if you lose or forget your physical wallet or private keys.

  • Third-party crypto custody
  • There are two digital asset management service types: managed solutions and Third-party custody. Third-party custodians smoothen asset management with custom features and controls. Institutional-grade security, standardization laws, and insurance are just a few of the benefits provided by these custodians.

    They are suitable for institutions and investors such as hedge funds, high net-worth individuals (HNWIs), and asset managers. Third-party custodians are regulated, licensed financial institutions operating on a provincial or national level. Examples include BitGo and Gemini.

  • Partial-custody
  • Institutions often provide security for self-managed cryptocurrency wallets, also known as split or partial custody. Such custody services give the investors control over their holdings while letting them manage them.

    Companies frequently rely on two-factor authentication (2FA) or multi-signature with public key aggregation technology to safeguard their assets. For instance, a partial custody system may require a co-signature from a Third-party to authorize a transaction.

    Crypto Custody Cost

    Crypto custody fees may vary depending on the value of assets and custodial features. Digital asset custodians charge approximately 1% of the total crypto holding as custody fees. Remember that you will incur extra costs when holding with a custodian.

    Custodians may charge you for setup and withdrawal fees. Setup fees are usually flat; you must pay this amount while opening an account. Withdrawal fees are charged when you withdraw your digital assets from a crypto custody account. Please note that crypto custody fees may differ depending on the custodian and services offered.

    Buy and Sell Bitcoin and Ether with Ease

    Are you looking for a quick and easy place to buy or sell your crypto holdings? MyBTC.ca is the fastest way to buy or sell Bitcoin and Ether in Canada. With speedy one-time online verification, you can get started purchasing Bitcoin or Ether and instantly send it directly to your wallet from MyBTC.ca.

    Unlike many other Canadian crypto exchanges, MyBTC.ca is non-custodial. They never hold onto your crypto for you so you can be your own Bitcoin bank. Therefore, you will need to enter the destination receiving wallet address to which you are sending your purchased BTC or ETH when you create and complete your order. MyBTC.ca encourages self-custody as there’s a saying out there in cryptoland — “Not your keys, not your coins”.

    Conclusion

    Ensure you keep your crypto asset as secure as possible. We hope this article has provided some helpful insights on crypto custody and that you are now in a position to keep your digital assets safe.

    Published: 2022-11-15

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