What Is Crypto Custody? How does it work?


Over the last few years, the cryptocurrency world has been hit with a major trend: digital assets have been stolen from exchanges and wallets left and right. It seems like every time you turn on the news, another cryptocurrency exchange is hacked or a wallet is attacked.

In this article, you will get to know about the term ” Crypto Custody/Assets Custody “. It is important to understand before you start investing in crypto.

What is Crypto Custody? 

Crypto custody refers to the process of securing digital assets from theft. Custodians work as a safeguard of your money, whether it’s cash, securities, gold bars or virtual assets. Custodians have been around since the 1960’s and are one of the pillars of the traditional banking system. In fact, anyone who owns a brokerage account works with a custodian every day when they put their money in a bank.

When it comes to crypto custody or you can say digital assets custody, things work a little differently. Digital asset custodians do not technically store tokens or coins due to the nature of blockchain technology. Instead, they store private keys and digital signatures.

The function of a crypto custodian is to safeguard private keys and digital signatures of your wallet. Private keys are used by the owner to access their digital assets stored on the blockchain. Whoever has access to these private keys can withdraw or transfer cryptocurrencies from that particular wallet address.

How does crypto custody work?

Like I said before, crypto custodians do not store cryptocurrencies like a traditional bank or brokerages, they store private keys on behalf of the user. The general process of using a crypto custodian is as follows:

Step 1: You create an account with the custodian and deposit cash or other digital assets that you wish to secure. The custodian will issue you with a private key (on your behalf) which allows you to access your holdings at any time.

Step 2: The custodian will take care of transferring your holdings to your desired wallet or address. Other service providers like Coinbase or Gemini do not store the private key for you, this is the role of crypto custodians.

Step 3: You will have the option to send and receive cryptocurrency through various digital asset deposit addresses that you have generated. Once you are ready to transfer money into an exchange account, they can provide you with a private key (again) which allows them to access your funds.

Step 4: Once again, you will be required to generate a deposit address for the exchange and submit this to the crypto custodian who will then communicate your transaction data to the selected exchange. The crypto custodian can also generate addresses for other purposes like payment and sending crypto assets.

Pros of Crypto Custody:

– Safeguard of your digital assets

– Helps in the reduction of risk involved with managing your digital assets on your own. This is because you don’t need to face the issue of securing and safeguarding your private keys.

– Better access to customer support channels because custodians provide customer support services 24/7.

– Access to professional security audits, custodians offer independent security audits for every user, which helps in conducting an audit of the entire infrastructure as well as improving overall system security.

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