In finance, the term “custody” describes the process of an institution retaining assets for a client. An asset owner may find it advantageous to utilize a custodial service because it reduces security concerns like theft and loss.
Since they cannot use the assets they retain for their own purposes, custodians typically vary from banks in this regard. The institution normally charges a fee for the custody of the assets as compensation for their trouble. This may also include any sales made at the customer’s request.
Custodial cryptocurrency solutions are ones where a third party maintains custody of the user’s private keys to their funds. The only people that can indeed send and receive the user’s coins are them. Although the cryptocurrency’s owner legally owns it, they do not own any ownership rights at the protocol level. Almost all exchanges use a custodial strategy since it enables them to offer a better user experience.
Custodial solutions may be more secure for new users who are not yet familiar with key management. However, it should be highlighted that this exposes consumers to counterparty risk. When a custodian is compromised or shut down, users have few options for recovering their currencies.
