What Is a Custodial Wallet?

custodial wallets

With the development of technology and interest in the cryptosphere, more and more attackers begin to hunt for another’s coins, and crypto-wallets become one of their favorite goals. Beginners are often misled by the name of this tool. Users can assume that their funds are safe in any crypto wallet, and prefer to store coins directly on the crypto exchange. However, it is not safe.

If you have something to lose, you should separate the coins into those that are needed for quick operations (they can be left in custodian crypto-wallets) and those that you will store for a long time (it is better to save them in non-custodian crypto-wallets). 

In this article, we will discuss what are the different types of wallets and explain why it is important to store your assets in various wallets. 

Custodial Wallet Meaning

Custody wallets resemble banking instruments. Their distinguishing feature is the user’s lack of full control over his means since the operator (custodian) has access to the private key. This has its advantages. For example, if you lose your passwords or keys, you will be able to get access to your funds again.

Custodial Wallet Benefits

There are some drawbacks to custodial crypto-wallets. Access to user funds can be lost. There are also some risks of their loss as a result of the hacking, fork, or due to decision of the authorities or the court. An unpleasant experience may turn out to be the lack of access to own funds during technical work.

For example, in the summer of 2016, hackers withdrew almost 120 thousand bitcoins from crypto-wallets of users of the Bitfinex exchange, which stored funds in a hot wallet. Neither two-factor authentication nor multi-signature prevented the theft of funds.

A vivid example of the shortcomings of custodian wallets was the closure of the cryptocurrency exchange BTC-e. In the summer of 2017, the FBI arrested its servers and U.S.-based assets. Later, the site restarted under the new name WEX and again stopped working, its customers lost access to funds.

Best Custodial Wallets

Many crypto exchanges (Coinbase, Kraken, Bitfinex, Binance, Poloniex, Bittrex, Coinex, Bitstamp, etc.), trading platforms and brokerage services have custody wallets. Such integration simplifies the work with other tools of these sites. Such wallets are beneficial in transactions (for example, due to the absence of commissions within the ecosystem) and effective. However, you should keep in mind that in fact, the control over funds belongs to a third party. 

You can also use custodial crypto wallets such as Freewallet, Xapo, Crypto.com, and others. Let’s review some of them. 

#1. Freewallet

The Freewallet company released the first version of its Android application in January 2016, and now the app has turned into a multi-currency wallet for both iOS and Android. The program supports 30+ coins and over 250 tokens. The number of active users has reached 3 mln. Among the most popular coins in terms of the number of transactions are Ethereum (20% of total transfers), XMR (17%), Dogecoin (17%), Bitcoin (14%) and Bytecoin (11%).

#2. Coinbase

Coinbase is not only one of the top-ranked multi-purpose cryptocurrency wallets of 2019, but also a trading service that many retailers use to receive payments made in digital currencies. Coinbase successfully operates in 24 countries, including the United States. 

#3. Binance Chain Wallet

binance wallet

This is the official wallet of BNB coins after launching the mainnet. It allows storing your assets literally on Binance DEX. To create a wallet, you need to make up a password and keystore file that unlocks your wallet. The 24-words mnemonic phrase and the private key is a secondary method of your privacy. 

Custodial vs Non-custodial Wallet

A cryptocurrency wallet can be considered non-custodial if it retains the ability for the user to fully control the keys and their funds. This category includes hardware, mobile, paper, desktop and web wallets.

Non-custodial crypto-wallets have their drawbacks. For example, if you lose the private key and the seed phrase, the funds will be irretrievably lost. Therefore, you should be especially careful with the brainwallet. These wallets store data in their own memory. In a paper crypto wallet, the data is stored on paper. In mid-2013, there was the story of a British miner who mistakenly threw out a hard drive with 7,500 bitcoins mined in 4 years.

In addition, non-custodian crypto wallets are also of interest to intruders. In the spring of 2018, the popular non-custodial Ethereum wallet MyEtherWallet lost 216 clients’ ethers due to an attack on the DNS server. Hackers redirected users to a phishing site and gained access to their private keys.

Best Non-Custodial Wallets

The most popular non-custodian wallets are Abra, MyEtherWallet, Electrum, MyCrypto, BitGo, Wirex, Button Wallet, Exodus, ZenGo, Paytomat, Bitcoin.com, BRD, Blockchain, BTC.com, Electron Cash, Copay, Jaxx, Coinomi, Wasabi Wallet, Edge.

Hardware crypto-wallets (Ledger, TREZOR, KeepKey, Cool Wallet) are considered one of the most effective and safe, although they may have vulnerabilities in the code, be physically hacked, or be lost.

Bottom Line

As you already know, it is very important to store your assets in an appropriate wallet. However, there are a few more advice to keep your cryptocurrency coins safe:

  • Save keys with password managers (LastPass, 1Password). Passwords for non-custodian wallets should be kept in different ways in several reliable places.
  • To protect against phishing in web wallets, click on the links you saved in your bookmarks. If you enter addresses manually, it is better to do this in a new browser tab and with careful double-checking of all characters.
  • Decide what is your aim for your asset: trading or hodling. In order to minimize risks, divide your coins into several reliable crypto wallets.