For any investor, the safe and reliable storage of their assets has great value. Yes, investments are both important to preserve and increase. The virtual asset market offers a huge number of options for storing assets. They can be located on cold, hot, software, and hardware wallets, in custodial and non-custodial storages and services. The storage of assets can be entrusted to a custodian or an exchange. It is important for an investor to understand what are the differences between all these options, to know the advantages, disadvantages, and risks of each format of asset storage in order to make the most correct and balanced decision. In this article, we will compare two options for storing assets – with a custodian and on a cryptocurrency exchange.
First, let’s understand the term “custodian”. It came from the digital asset market from the banking sector and the stock market. Basically, a custodian is a licensed company, which can hold and, if necessary, manage the assets of its clients. The second function is optional because the first goal is to ensure the safe storage of valuables, assets, and liabilities entrusted to the custodian. And if in the stock market assets are stocks, bonds, etc., then in the cryptocurrency market, the main assets are cryptocurrencies and tokens. In fact, a custodian is an intermediary company that an investor entrusts with the storage of their virtual assets on their wallets and servers.
There are also non-custodial solutions on the market. These are services that provide their storages with the ability to access assets only from the owner, or rather, using his private key. If the key is lost, the investor is literally deprived of all assets.
Using the custodian service, the investor transfers all private keys to it (or they are initially generated on the side of the custodian when creating wallets). Therefore in this case we are talking about trust and transfer of full control of assets to the custodian in exchange for the maximum security of their storage, including legal liability to the investor.
An investor needs to know that a cryptocurrency exchange can both independently store its assets and use a custodian for this. It depends on the requirements of the regulators in a particular country. For example, in the United States, all exchanges, after exceeding a certain threshold in attracting assets, are forced to resort to the services of custodians, as required by local law. Therefore, large exchanges in the United States sooner or later face a difficult choice. They need to either license such activities and become, in fact, custodians (the Coinbase and Gemini exchanges took this path) or buy (actually absorb) custodian companies that already have a license to provide this type of service (the oldest custodian of Xapo cryptocurrencies was bought by Coinbase).