Custodial vs. Non-Custodial Wallets: What's the Difference?

Custodial vs. Non-Custodial Wallets: What's the Difference?

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TL;DR

Ever wondered how and where your crypto is stored? There are many different types ofย crypto walletsย that token holders can use to store crypto. But, they can generally be split into two broad categories: custodial andย non-custodial wallets.ย 

A custodial wallet, likeย Ceffu (formerly Binance Custody), is a service that owns theย private keyย to your wallet and holds your assets in custody. Your regularย Binanceย account is also a custodial wallet. In contrast, if you use aย non-custodial wallet, you alone haveย complete controlย over your assets.ย MetaMaskย andย Binanceย Chain Wallet are examples ofย non-custodial wallets.

Both custodial andย non-custodial walletsย have their pros and cons. Let's explore their differences so you can learn when to use one type or the other.

ย 

Introduction

If you've ever usedย Bitcoinย or otherย cryptocurrencies, you know that having aย digital walletย is essential. You will need one if you want to make transactions, trade on aย crypto exchange, or useย blockchainย applications. As such, it's important to understand howย cryptocurrency walletsย work and the main difference between non-custodial andย custodial wallet providers.


Howย crypto walletsย work

Aย crypto walletย is a tool that allows you to interact with aย blockchainย network. Among other things, you can use it to send and receiveย cryptocurrenciesย or access decentralized applications (DApps).

Technically speaking,ย crypto walletsย don't reallyย storeย yourย digital assets. Instead, they generate the information you need to use crypto. Still, most users adopt the verb to make it easier forย beginners, so we will use the term throughout this article.ย 

Among other things, aย crypto walletย is made up of two main components โ€“ aย public keyย and aย private key.

If people want to send you crypto, they can make a transaction to one of your addresses, generated by your wallet'sย public key. Your wallet addresses and yourย public keyย can be shared with others (hence the term public).ย 

Yourย private key, however, should be treated as a confidential password because it signs transactions and provides access to your funds. As long as you keep yourย private keyย safe, you will be able to access your crypto from any device.

Whileย cryptocurrenciesย are digital,ย crypto walletsย that hold private andย public keysย can come in various options โ€“ the keys can be printed on a piece of paper, accessed via desktop wallet software, or storedย offlineย inย hardware walletย devices.

Some wallets also offer the option of storing and transferringย NFTs, which are non-fungible tokens issued on aย blockchain.

But regardless of theย wallet type, you will always have either a custodial or aย non-custodial crypto wallet.

ย 

What is a custodialย crypto wallet?

As the name suggests, a custodialย crypto walletย is one where your assets are held in custody for you. This means a third party will hold and manage yourย private keysย on your behalf. In other words, you won't haveย full controlย over your funds - nor the ability to sign transactions. But using a custodialย crypto wallet serviceย isn't necessarily a bad thing.

In the early days ofย Bitcoin, all users had to create and manage their own wallets andย private keys. While "being your own bank" brings a lot of benefits, it can be inconvenient and even risky for less experienced users. If yourย private keysย get compromised or lost, you will lose access to yourย crypto assetsย permanently.ย Blockchainย analysis reports suggest that over 3 millionย BTCย might be lost forever.

There have also been instances of crypto inheritance being unretrievable because theย private keysย were held by the original crypto owner alone. You can prevent such incidents from happening by sharing access to your assets with a custodian.ย 

Even if you happen to forget yourย cryptocurrency exchangeย password, you should still be able to access your account and assets by contacting customer support. However, if you're using aย non-custodial wallet, you are responsible for keeping your crypto safe.

So, in many cases, it makes sense to rely on a custodialย wallet service. But, this also means that you are entrusting yourย private keysย to a third party. That's why it's important to choose a reliable exchange or service provider.

Some information to look out for when exploring custody service providers would be whether it is regulated, what types of services you get, how yourย private keysย are stored, and whether there is insurance coverage.

For instance,ย Ceffu, which is both regulated and compliant, offers standard insurance for corporateย Binanceย accounts. It also offers crime insurance coverage and other bespoke insurance coverage requirements available upon request.ย Ceffu also uses multi-signature wallets (multisig), a protocol that removes centralized risks by requiring multiple parties to approve crypto transactions before they can be carried out.

ย 

What is aย non-custodial crypto wallet?

A non-custodial crypto wallet is a wallet where only the holder possesses and controls the private keys. For users who want full control over their funds, non-custodial wallets are the best option. Since there are no intermediaries, you can trade crypto directly from your wallets. It's a good option for experienced traders and investors, who know how to manage and protect their private keys and seed phrases.

You will need aย non-custodial walletย when interacting with a decentralized exchange (DEX) or decentralized application (DApp). Uniswap, SushiSwap, PancakeSwap, and QuickSwa are popular examples of decentralized exchanges that require a non-custodial wallet.

Trust Wallet andย MetaMask are great examples ofย non-custodial wallet serviceย providers. But remember that with these wallets, you are fully responsible for keeping yourย seed phraseย andย private keysย safe.

ย 

Custodial vs non-custodial wallets


Custodial service

Non-custodial service

Private Key

Third-party ownership

Wallet holder ownership

Accessibility

Registered accounts

Accessible to anyone

Transaction Costs

Typically higher

Typically lower

Security

Typically lower

Typically higher

Support

Typically higher

Typically lower

KYC requirements

Yes

No

ย 

Pros and cons of custodial wallets

As discussed, the major downside of custodial wallets is that you have to trust your funds andย private keysย to a third party. In most cases, these service providers will also require identity verification (KYC). The advantage, however, is the peace of mind and convenience. You won't have to worry about losing yourย private keyย and you can contact customer support when you run into trouble.

When using custodial services, make sure you choose a reliable company that offers high security and insurance coverage. Look out for custodians that are regulated and compliant.

Some crypto custodians also have other requirements that you may not qualify for. For instance,ย Ceffu is a custodial service provider that only onboards corporate users at the moment. You can check theย Ceffu FAQ for more information.

ย 

Pros and cons ofย non-custodial wallets

Without a third-party guardian,ย non-custodial walletsย offerย full controlย over your keys and funds. In other words, your assets are truly yours and you can be your own bank. In addition, non-custodial transactions tend to be faster as you donโ€™t have to wait forย withdrawalย approval. Finally, without a custodian, you don't incur extra custodial fees, which may be costly depending on the service provider you choose.

As weโ€™ve seen, one disadvantage of usingย non-custodial walletsย relates to accessibility and ease-of-use. They are usually lessย user-friendlyย and tend to pose a problem to first-time crypto holders. As non-custodial service providers evolve, this should be resolved in the future.

Of course, you also bear the sole responsibility of your keys and have to take your own precautions when managing them. This means that instead of trusting someone else to take care of your funds, you have to trust yourself.

Toย secure your crypto and protect yourself againstย hackers, you should consider the followingย security measures:ย 

  • Using a strong password.

  • Enabling two-factor authentication (2FA) as an added layer of protection.ย 

  • Staying alert toย scams andย phishing attacks.

  • Being cautious when clicking links and downloading new software.

ย 

Whichย wallet typeย should I use with my crypto?

Bothย wallet typesย are good to store yourย crypto assets, includingย NFTs. Most traders and investors use both in different situations. However, you should make sure that the wallet you use supports the type of crypto you wish to store. They can't all be stored in the same way.

There are different blockchain networks running various types of cryptocurrencies. We can classify these types by their token standards, but keep in mind that we may have the same tokens running on multiple blockchains under different standards. For example, you can find BNB as a BEP-20 on the BNB Smart Chain, but also as a BEP-2 token on the BNB Beacon Chain.

ย Here are some of the most common token standards:

  • BNB Smart Chain: BEP-20, BEP-721, BEP-1155

  • BNB Beacon Chain: BEP-2

  • Ethereum: ERC-20, ERC-721, ERC-1155

  • Solana: SPL

MetaMask, Trust Wallet, andย MathWallet areย non-custodial walletsย that accept the most common and popularย crypto assets. If you are unsure of what tokens your wallet supports, check their official FAQ or documentation for more information.

Sometimes, wallets that are constantly upgrading to meet the demands of their users might support more tokens as time goes by. For instance,ย Ceffu currently supportsย BTC, ETH, BCH, LTC, BUSD, BNB, CAKE, and many other ERC-20 tokens.ย Ceffu will gradually include more token types to support user demand.


Closing thoughts

Custodial wallet orย non-custodial wallet? Most crypto users use both, but it all depends on your needs. If you like havingย full controlย over your assets, or simply want to useย blockchain technologyย to interact withย DeFi applications, you should consider aย non-custodial wallet. However, if you are looking for a service provider that can take care of your storage needs while you trade or invest, you can look for reliable custodialย wallet serviceย providers.ย 

Bear in mind that whether you are using a custodial or non-custodial wallet, you should always be careful and adopt best practices to enhance the security of your funds.

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