Crypto Custody: What it is and How to Keep Your Assets Safe

 

Keeping your crypto assets safe is crucial to keeping your investment safe, but it isn’t always straightforward. 

 

Crypto custody refers to the process of storing your assets in an environment that is both secure and compliant with applicable regulation. While this may sound simple, it can be difficult to find a service that’s up to the task. 

 

This guide will explain what crypto custody entails and how you can find a crypto custodian that’s right for you.

 

What is Crypto Custody?

 

Custody refers to how a third party manages your assets. In the financial world, custody can mean where your stocks or bonds are kept while they are being held by a bank or broker, for example. 

 

In the crypto world, different cryptocurrencies require different levels of security in order to keep your assets safe. There are four types of cryptocurrency custody: 

 

• Hot wallet: A hot wallet refers to any digital form of currency that is connected to the internet. Hot wallets are considered riskier than other forms because they have less protection against hackers and malware. 
• Cold storage: Cold storage refers to storing cryptocurrency offline on a device such as USB key or external hard drive, with no connection to the internet whatsoever.
• Paper wallet: Paper wallets refer to printing out your private keys onto a piece of paper which you then store securely somewhere like in a safety deposit box. 
• Hardware wallet: The last type of cryptocurrency custody is called a hardware wallet and this is an electronic device that stores coins privately and securely. You would use this if you wanted to trade or exchange coins directly from the device instead of sending them from your computer via an online exchange. Hardware wallets are a good option for those who want to hold large amounts of cryptocurrency and who may be concerned about cyber theft. However, before using a hardware wallet, make sure it’s compatible with your devices operating system. 

 

Why Should I Use Crypto Custody?

When you purchase cryptocurrency, there are two places where your assets could be stored: On the exchange or In your wallet. 

 

The key difference between the two is control. When you hold your cryptocurrency on an exchange, you have little to no control over who has access to your private keys and what they can do with those keys. 

 

In contrast, when you hold your crypto in a wallet that gives you full control of the private keys, only YOU have access to them. 

 

If someone does manage to get their hands on your private keys, all they will find is encrypted data. They won’t be able to decrypt anything without your password and even then, if you use a strong password, it will take months for them to crack it.

 

The Best Practices in Securing Your Cryptocurrency

The best practices for securing your cryptocurrency are as follows:

 

• Use a wallet that you control private keys for (ie. Jaxx, Trezor).
• Don’t store large amounts of cryptocurrencies on exchanges.
• Separate your coins into different wallets with different passwords. 
• Move them to cold storage such as a hardware wallet or paper wallet when they are not being used.

 

With these best practices in mind, there are five levels of security required in securing your cryptocurrency. As long as you meet these standards, even if someone gets their hands on your crypto assets there will be multiple layers of security preventing them from accessing your crypto assets without additional credentials/know-how.

 

How to Choose a Good Crypto Custodian?

It is important that you choose a crypto custodian that meets your needs. Some factors to consider are the country in which they are based, their security protocols, what kind of assets they hold, how much they charge for services, if they offer cryptocurrency exchange services (withdrawals) and whether or not they allow you to take custody of your own private keys.

 

A good crypto custodian will give you some kind of peace of mind. They should be able to answer questions like ‘Where am I storing my assets?’, ‘What exactly am I storing?’ and ‘Can someone access my account?’ 

 

For example, Coinbase is registered with FINCEN as a money transmitter and can legally operate as an agent on behalf of customers so there is no need for concern about safekeeping on their part.

 

Different Categories of Cryptocurrency Assets and Where They Belong

There are many different categories of cryptocurrency assets and where they belong. There are privacy-focused coins, store-of-value coins, utility tokens, staking tokens, etc. 

 

As a result, there is no one place for all your crypto assets. Therefore, you need to know how to keep them safe. Below we will look at the different categories of crypto assets and how they should be stored:

 

Cold storage:

Cold storage refers to any kind of wallet that isn’t connected to the internet, meaning that it cannot receive or send information online. 

 

These wallets are considered safer because they are offline, but still vulnerable if someone has physical access to them. 

 

Hence why many people use hardware wallets like Trezor or Ledger Nano S with their cold storage wallets as a precaution.

 

Exchange tokens:

Exchange tokens have an inherent risk associated with them since they can be hacked or attacked by bad actors such as scammers. That said, not all exchange tokens are risky so long as you make sure to read reviews about the company before signing up for an account.

 

Utility tokens:

Utility tokens allow users to purchase products from companies and services from individuals who accept these types of payments. 

 

It is important to note that this category does not fall under the custody of the user since they don’t actually own anything. However, there is potential for theft from hackers looking to take advantage of this category. 

 

Securities tokens:

Securities tokens represent shares in a business venture or investment vehicle. These are high risk investments because just like stocks, they’re subject to fraud and market fluctuations.

 

Nevertheless, some investors choose to trade security tokens for greater profits due to the high level of risk involved. 

 

All in all, understanding what each type of crypto asset is and how it should be handled is crucial when keeping your assets safe. 

 

Conclusion

So now that you know what crypto custody is, you can start making the decision of how to protect your assets. Whether you decide on a custodial or non-custodial wallet will depend on your security preferences. 

 

The safest thing for most people would be to use a custodial wallet, but this doesn’t give the user control over their private keys. If you want control over your private keys, then the best option for you would be a non-custodial wallet.