What is crypto custody and why is it important?

Crypto escrow refers to the concept of securely storing your digital assets. While traditional assets require protection against theft, cryptocurrencies face even greater risks, such as cyber attacks and liquidity crises.

Because of these unique challenges, crypto custody differs from the custody of conventional financial assets. So let’s explore crypto custody and why it is important for the security of your digital assets.

What is crypto custody?

Crypto Custody refers to the act of securing your cryptocurrency funds. Despite the fact that cryptocurrencies are stored on a blockchain, it is important to protect the unique private key of your crypto wallet.

So, what is a private crypto key? Your private key is an alphanumeric string that gives access to your crypto. If someone gets access to your private key, they can steal your crypto, making the importance of crypto safekeeping huge.

In recent years, the growing number of crypto users has led to the emergence of a number of crypto custody solutions. Today, various service providers offer crypto asset storage, allowing you to store your private keys safely. With these solutions, you can be sure that you will not lose your private keys, and your digital assets will be protected from criminals.

Why is crypto custody important?

Custody services have long been an important component of the traditional financial system, serving as protectors of your money, gold and other assets. Likewise, in the crypto space, custodians protect your digital assets.

Cryptocurrencies are highly vulnerable to cyber attacks, which can wipe out cryptocurrency from users’ wallets in seconds. In addition, your funds may be exposed to liquidity crises, such as the one experienced by the FTX exchange. Therefore, having a mechanism to secure your digital assets and insurance to protect them is critical.

Protecting your private keys is important to ensure the security of your assets, which requires you to store your complex alphanumeric code securely. If you lose your private keys, you may permanently lose access to your funds. This highlights the significant need for custody solutions in the crypto market to ensure the safety and protection of digital assets.

How does crypto custody work?

Crypto custody solutions are service providers that act as custodians of your digital assets. Their task is to maintain the security of the wallet’s private key. Additionally, they offer off-chain storage where you can store your private keys and keep your crypto holdings safe from theft.

The government authorizes crypto custody service providers and follows strict cryptocurrency compliance rules, including key elements such as know-your-customer (KYC) registration procedures and enforcement of anti-money laundering (AML) laws.

Crypto custodians also offer insurance for your money to cover your losses in the event of an accident. In addition, they can validate the ownership of digital assets. Since these service providers store your private keys, they have proof that you own the digital assets in the wallet.

However, service providers are not the only way to maintain crypto custody. There are several other ways cryptocurrency users can secure their assets. For example, you can use self-custodial wallets to keep the private keys to yourself.

Types of crypto storage

There are primarily three types of crypto custody solutions that you can choose from.

1. Self-storage

Self-custody is the act of keeping control of your assets to yourself. You can think of it as keeping cash in a safe at home instead of keeping it in a bank account. However, the process of self-storage of crypto storage is more complex than cash.

To keep control of your digital assets, you need to use a hot or cold crypto wallet. This can include self-storage wallets such as a mobile, desktop, hardware or paper wallet. By using these options, you can get full control over your crypto assets and no third party is involved.

However, it is important to be aware of the risks associated with self-storage. For example, if you lose or forget your private key, there is no backup and you cannot turn to a third party to give you access to your funds.

2. Third-party custody

Third-party custody is the most popular option for storing your digital funds. It’s an easy way to manage your wallets and secure your crypto. With this type of custody, you can use cryptocurrency exchanges, crypto custodian banks, or other digital asset management firms.

One of the main advantages of third-party crypto custodians is that the custodian manages everything, so you don’t have to worry about protecting your private keys. Furthermore, these institutions are regulated, which ensures good security for your assets. In addition, they offer insurance and crypto-earning programs.

However, giving control of your assets to a third party poses some risk. For example, custodians can freeze your account or face insolvency at any time. In addition, you may be required to pay crypto custody fees for these services.

3. Partial custody

Partial custody is a type of custody where the third-party custodian has limited control over your assets. These custodians use different access methods, such as multi-signature protection (MSP) and two-factor authentication, to allow you to control your assets while still benefiting from third-party custodian security.

What is the fee for crypto custodial platforms?

When you use a crypto custody platform, some service providers charge fees in exchange for providing security for your crypto funds. In addition, you may have to pay to send and receive crypto through your account. These fees may include custody fees, account setup fees and withdrawal fees.

• Third-party custodians typically charge an annual fee to manage crypto assets. The cost varies between platforms, but most custodians charge less than 1% of the total value of your assets.
• You may have to pay a fee to set up your account with a custodian. While most platforms have a fixed price, not all charge an account setup fee.
• Withdrawals may also incur a percentage-based cost. For example, third-party crypto custody solutions such as Coinbase charge up to 1% of the withdrawal amount.

If you compare the fees for third-party custody and self-storage, you may find the latter to be a more cost-effective option. With self-storage you can avoid these three types of fees.

Choosing the right option for crypto storage

Kryptodepot is essential for the secure management of digital assets. However, it is important to choose the right crypto depository based on your needs. Self-storage is ideal for users seeking more authority over their assets, usually achieved through a cold wallet.

Alternatively, you can choose third-party managers if you are a beginner or don’t want to be involved in the intricacies of wallet management. Although this option may cost you a percentage, it allows for easy administration.

If you are uncomfortable with third parties having too much control over your assets, partial custody is an excellent option, giving you control while maintaining high security.