Precious Ruby
+1 authors
7mins read
Published on: Feb 16, 2024
#Crypto 360
Cryptocurrency custody solutions are secure services for safeguarding cryptocurrencies, NFTs, and any other digital asset you own. These solutions deploy innovative technologies such as advanced encryption and multi-factor authentication (MFA) to protect your digital assets from unauthorised access.
Key Takeaways
• Crypto custody solutions offer a secure, reliable and simple way to protect and manage your digital assets such as cryptocurrencies, NFTs etc.
• These solutions deploy innovative technologies such as advanced encryption and MFA to protect your digital assets from unauthorised access.
• There are hundreds of such solutions available in the market today. Decide what’s best for you and use it to store your virtual funds.
Crypto custody is an essential discussion in the crypto space as it is about safeguarding your crypto holdings. With the frequent occurrence of theft and fraud frequently occurring in the crypto ecosystem, it is important to be well informed about the various types of crypto custody solutions available.
Crypto custody solutions offer a secure way to protect and manage your digital assets. Today, we have hundreds of cryptocurrency custody providers, and this can be quite complex to choose which custody solution is the best for you. This article covers all you need to know about crypto custody solutions.
Cryptocurrency custody solutions are secure services for safeguarding cryptocurrencies, NFTs, and any other digital asset you own. These solutions deploy innovative technologies such as advanced encryption and multi-factor authentication (MFA) to protect your digital assets from unauthorised access.
Additionally, reputable custodians often offer insurance coverage to provide an extra layer of security for their clients' holdings.
Image: Types of crypto custody solutions
Crypto custody solutions are of various types, each with unique strengths and weaknesses. Below, we list these solutions:
Self-custody crypto solution lets you have complete control over your funds as you, not the service provider, have access to the private keys to your funds. It's you who are responsible for the management and security of your assets.
Self-custody solutions are increasingly being adopted by users as an instrument of autonomy in the crypto ecosystem. They offer a sense of control and freedom. A self-custody wallet is also called a non-custodial wallet because it doesn’t give the custody of your funds to a third party.
Third-party crypto custody solutions involve entrusting the management and security of your digital assets to an external party like a cryptocurrency exchange, custodian service, or bank. This crypto custody solution offers convenience and regulatory compliance, but users must trust the third party with their digital assets. Note that users of this crypto custody solution have limited control of their digital assets and will be required to pay some fees whenever they make a transaction.
This arrangement can be beneficial for institutional investors who seek professional asset management and compliance adherence. Users should carefully evaluate the reputation and security of third-party crypto custody providers before deciding. It is also called a custodial wallet since you give custody of your funds to a third-party.
Partial custody combines self-custody and third-party assistance. Partial custody solutions offer added security features like two-factor authentication or multi-signature protection where the third party co-signs each transaction conducted by the user.
Users gain flexibility and accessibility but need to cooperate and trust the third party. Users retain control over their funds while benefiting from the expertise and additional security layers the third-party custodian provides. This strikes a balance between convenience and asset protection. It is particularly useful for those seeking an extra layer of assurance in managing their cryptocurrency holdings.
These are digital asset storage connected to the internet, allowing quick access to digital transactions. They are convenient but quite low on security. Hot wallets are sometimes susceptible to hacking and phishing. This is why they are good for smaller amounts of funds or frequent trading than long-term storage.
Cold wallets are offline crypto custody storage providing high security but less convenience. With cold wallets, your private keys are generated and stored offline. By doing this, it reduces the risk of hacking or phishing. Cold wallets offer enhanced protection, making them ideal for long-term storage of significant cryptocurrency holdings.
As is self-explanatory, the multi-signature feature in crypto custody requires multiple private keys to sign a transaction. Suppose there are 10 participants for a multi-signature custody solution, it is mandatory for a minimum number of participants, let’s say 7, to sign the transaction. Since there is no centralised control of the assets, they are safe and secure even if a few private keys get threatened.
The multi-party computation (MPC) feature of crypto custody is similar to the above solution as it also negates a single, centralised control of the funds. But the similarity ends here as an MPC solution has only one private key which is further divided into different parts, also called “shares.”
A transaction is authorised to be executed once a required threshold of shares in achieved. Neither all nor none of the shares are required to validate a transaction. Since no single party possesses the wallet, it makes it secure and impenetrable. It leads to near impossibility of a single point of failure, making an MPC wallet quite secure.
Crypto custody solutions are innovative solutions for investors and traders in the cryptocurrency ecosystem. Here are a few benefits of these solutions:
Crypto custody solutions keep your private keys safe from any form of loss. Your private keys are crucial for accessing and transferring cryptocurrency assets. Private keys serve as digital signatures and provide ownership of the assets. If lost or compromised, it can lead to irretrievable loss of funds.
Institutional investors are required to comply with regulatory standards. Crypto custody services ensure adherence to these regulations, providing a compliant and trusted environment for investors to operate in.
By using custody solutions, institutional investors gain access to the crypto market, unlocking new investment opportunities like stablecoins, security tokens, and NFTs. This diversification allows them to explore a broader range of assets and potentially increase their portfolio's performance.
Custodians typically offer detailed reporting and auditing features, providing transparent insights into the status and movement of assets. Transparency is crucial for institutional investors, as these investors often need to comply with their internal auditing processes and demonstrate accountability to stakeholders.
In case of accidental loss or technical issues, custodians may provide asset recovery support. It is beneficial in situations where individuals or organizations may struggle to retrieve lost or inaccessible funds on their own.
Though beneficial, crypto custody solutions have their drawbacks:
If a third-party crypto custody solution provider holds your funds, you are not in control of your funds. For those seeking full control of their assets, they should opt for self-custody solutions.
If you use a self-custody crypto solution, you, instead of a third-party, are in complete control of your funds. But it should also make you more vigil against potential security threats such as cyber-attacks and hacks.
If you lose access to the keys to your funds, you cannot blame the service provider for this loss as you yourself are responsible for the safety of your funds.
Now, you might be thinking that you should opt for a third-party provider. But it has a few more drawbacks. It can even freeze your account even though it is erroneous.
In case the third-party gets hacked, you can forget your funds as they are mostly not insured. Unless the company itself can recover those funds, you cannot recover them again. What happens if a third-party goes bankrupt? You can keep suing for years but the success rate of recovery in such cases is extremely low.
Crypto custody solutions are subject to the same legal norms as any other crypto-related activities or solutions.
In the U.S., the Securities and Exchange Commission (SEC) stipulates that a crypto custody provider must be qualified as per the Investment Advisers Act of 1940 before it can begin to assist customers in securing their assets. This rule is common to all the custodians of financial assets regardless of whether it’s a digital asset or any other kind. Since the country doesn’t have crypto-specific rules and regulations, crypto is subject to the existing financial laws.
The United Arab Emirates, Singapore, Hong Kong and other hubs of crypto innovation regulate crypto custody solutions as per existing financial laws or newly legislated crypto-specific laws as per their jurisdictions. These solutions are supposed to comply with Know Your Customer (KYC) and anti-money laundering (AML) rules, failing which they can be suspended from operating.
Licensing, auditing and reporting are crucial for a crypto custody solution to meet transparency standards and earn the trust of their users.
BitDelta is a highly secure platform that makes sure that Investors and traders on its exchange have their funds fully protected and insured. BitDelta is in partnership with Fireblocks to ensure users on its platform have all-round custody security through its unique MPC wallet technology.
BitDelta's wallet security has also been tried and tested by Hacken, and it has been totally audited and certified by Cer.live. BitDelta also maintains 24/7 SOC monitoring practices. If you are trying to find the best crypto custody solution to safeguard your digital assets against theft and malicious attacks, look no further.
Sign up to BitDelta today. BitDelta is a cross-asset exchange that allows you to trade traditional assets as well as digital assets in the same space with ease. It also provides you with a highly secure hot wallet, which you can access easily and trade with on the go. As an investor or trader on the BitDelta exchange, your digital assets are highly secure and can be easily transferred to anyone of your choice in the case of an unforeseen event.
Crypto custody is an essential element of the Web3 economy which is concerned with safeguarding a user’s crypto holdings.
There are several types of crypto custody solutions:
• Hot wallets
• Cold wallets
• Partial custody wallets
• Third party custody wallets
• Multi-signature wallets
• MPC wallets
The main benefits offered by crypto custody solutions are:
• Securing private keys
• Regulatory compliance
• Market participation and diversification
• Comprehensive reporting and auditing
• Asset recovery support
Both third-party and self-custody crypto custody solutions have their drawbacks.
• The major drawback of a third-party crypto custody solution is the loss of control of your funds.
• But if you own a self-custody solution, you run the risk of losing your funds forever if you forget your keys.
The chief differences between a custodial and a non-custodial wallet are:
• In a custodial wallet, a third party is responsible for the custody of your wallet’s private key. In a non-custodial wallet, you hold your wallet’s private key, giving you complete control over your funds.
• While a custodial wallet can assist you recover your funds in the case of a lost key, you yourself are responsible for the safety of your funds if you hold them in a non-custodial wallet.
Self-custody is the cornerstone of DeFi as it gives you complete ownership of your assets. No centralised institutions such as a bank or an exchange have any control over your funds.
Crypto custody solutions are subject to the same legal norms as any other crypto-related activities or solutions. These solutions are supposed to comply with KYC and AML rules, failing which they can be suspended from operating.
A. In the U.S., the SEC stipulates that a crypto custody provider must be qualified as per the Investment Advisers Act of 1940 so that it can operate.
A. In 2023, the crypto custody market was estimated to be $1.77 billion.
A. Learn about the different crypto custody wallets available to you and then choose what fits your bill.
• Keep the following factors in mind while choosing the wallet:
• Private key control
• Encryption
• Security mechanisms
• Recovery
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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