In crypto circles, electronic incidents stolen, hacked from wallets, or not remembering passwords are no strangers. From these incidents, Crypto Custody was born and is widely adopted.
What is Crypto Custody?
Crypto custody is a form of digital asset protection through a third party. Your property is authorized by a reputable party to look after and hold. This form has been around since the 1960s, and is one of the cores of the traditional banking industry.
With crypto assets, this form is a little different. Third parties do not technically store any assets, all data and transactions are publicly recorded on the Blockchain system. Instead, they use the e-wallet’s Private Key to grant access to the stored funds.
Cryptocurrency custody is essential for digital assets to be well received and widely used. As of today, many investors are still rejecting cryptocurrencies due to security concerns. And the form of asset depository has long been applied to organizations that manage large amounts of money to ensure safety.
As more investors entered the cryptocurrency market, and large companies like MicroStrategy took their place in crypto in their balance sheets, demand for digital currency custody services began to skyrocket. According to Blockdata, the size of digital assets deposited increased sevenfold in a year from January 2019 (from $32 billion to $223 billion).
How Crypto Custody Works?
Basically, custody means private key security, which is used to prove your ownership of the money in your wallet to the network. In the traditional banking industry, all supervisors are government-licensed financial institutions.
However, in the cryptocurrency industry, the owners themselves can also supervise their assets. For example, when storing gold, you can bury it yourself in the cellar for care, or you can also store it through another party warehouse and pay a service fee (storage or withdrawal fee).
Accordingly, cryptocurrency custody comes in two main categories: Third-party custody and Self-custody.
Self-custody provides autonomy when only you personally hold the private key of your wallet. This means that only you have the right to own and access the cryptocurrency in your wallet. However, with that comes a heavy responsibility.
You are the only one in control of the wallet who will also be the only one responsible. When you lose your wallet or forget your personal key, these assets can be lost forever.
Third-party custody is suitable for those who are not in charge of asset management on their own and will turn to third parties for supervision. These organizations all have operating licenses issued by the authorities.
When registering to open an account, you must meet the customer inspection process and anti-money laundering regulations.
This form has three different types that are distinguished based on financial institutions:
- Exchanges: All centralized cryptocurrency exchanges have asset-holding services for clients. In some cases, the brokers hire external units or platforms to perform custody services. When you set up a custody account on a centralized exchange, you will not hold a personal key for the trading wallet under any circumstances. The accompanying risk will occur when the exchange suddenly disappears with the same number of assets or is hacked online.
- Manager: When cryptocurrencies are recognized as a valuable asset class, managers appear and act like traditional banks. Similar to banks, these institutions are managed and licensed to provide cryptocurrency custody services. Some of the most notable crypto custody managers include: Anchorage, NYDIG and Paxos.
- Supervisory Banking: From July 2020, every supervisory bank in the United States will be able to deposit cryptocurrencies. Thanks to the Office of the Comptroller of the Currency (OCC) clearing the way, all national privileged banks are offered cryptocurrency custody services. Create opportunities for industry giants such as BNY Mellon, Citibank and Fidelity to have a more open market. However, some third-party custody providers (Fidelity, BitGo, Bakkt) only offer services to institutional investors or individual clients with extremely large deposits. For example, coinbase trust (Coinbase’s e-wallet, which requires a balance of up to $500,000) to join their service. Some other custodians have also translated for retail customers such as Blockchain.com, Casa, Gemini, Nuri (formerly Bitwalla)…
As with conventional services, providers often require some fees to keep your money safe. It’s like banks when they make savings and checks,… Withdrawals or transfers can also be charged as usual. Common types of expenses include:
- Depository fee: Calculated by the unit in a certain percentage based on the value of the assets monitored annually. This number is usually less than 1%.
- Setup fee: The fee payable to open a custody account. However, some units allow users to open accounts for free.
- Withdrawal fee: You can pay a fee each time you make a withdrawal out of your account. This can be a fixed rate or a percentage of the value you withdraw.
Crypto custody is a formal and reputable form aimed at protecting the digital assets of traders. Depending on the customer, there will be different types of suitable depository. Accordingly, the limitations and benefits will also change, the article has fully analyzed the information and pros and cons of Crypto Custody, hoping to contribute to help you consider and make appropriate choices.