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What is a custodial wallet?

Banxe Team
3 min min read 08.11.2022
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What is a custodial wallet? 

 

Introduction

 

Every person who has purchased bitcoin or any other cryptocurrency, at least once, knows the importance of choosing a crypto wallet for their safety and convenience. With the wallet, you can perform basic cryptocurrency transactions, such as trade cryptocurrency on an exchange and use crypto related applications.

Today, we will analyse what a custodial crypto wallet is, all its advantages and disadvantages, and how it differs from others.

 

What is a custodial wallet?

 

Crypto exchanges acquired the prominent popularity of custodial wallets. A custodial wallet is just one of the types of a crypto wallet;  it is an application with which you can perform various storage and transfer functions.uCustodial means that the private keys are stored by a third party.  This means that users do not have complete access to their funds and cannot sign transactions. Remember that one of the main conditions of use is passing the KYC procedure to verify your identity. 

 

A huge issue with access to crypto wallets appeared from the very beginning of the existence of bitcoin. Initially, users themselves created wallets and managed them. But some faced problems with gaining access to the wallet in cases of loss of seed phrases and private keys. This issue was solved by giving access of the users keys to the custodian, i.e. an exchange platform.

 

If you lose access by forgetting your password or being locked out of your account on a crypto exchange, everything can be solved with the help of internal support, contrary to accessing your funds in anon-custodial type of a wallet. Choosing a trustworthy  crypto exchange shouldn’t be taken lightly. Consider its popularity, security measures, regulation, and services.

 

What is the difference between custodial and non-custodial wallets?

 

Now, we will analyse the main difference between the two wallets. As previously mentioned, one of the most important differences between a custodial wallet and a non-custodial wallet is the ownership of private keys.  When it comes to a custodial wallet, a third party (custodian) acts as the key holder, unlike a non-custodial wallet, where the user has sole control of the keys. Using a custodial wallet significantly decreases the chances of losing access to assets since it’s possible to easily restore the keys.. With a custodial wallet, more complex cryptocurrency operations and transactions are possible. The main prerequisites for a custodial wallet include access to the internet and successful identity verification such as KYC. A non-custodial wallet requires none-to-little identity verification. The custodial wallet is also undoubtedly simpler and more user friendly than a non-custodial wallet. 

Pros of using a custodial crypto wallet.

 

  • The requirement to use a login and password to gain access to assets. Also known as standard authorization mechanism. 

  • User-friendly and intuitive interface. The ability to easily restore access to the wallet.

  • Additional features such as free transactions that are offered by certain custodial services. 

 

Cons of owning a custodial wallet.

 

  • Access to the wallet is not under the user's control.

  • The requirement to pass identity or account verification, or KYC. 

  • The possibility of being hacked and becoming a victim of data theft. 

  • Users' data is stored in a single centralised storage.




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