Keeping assets with a custodian or on an exchange: differences, advantages, and disadvantages

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).

• quick and easy account creation – many exchanges require only verification by e-mail for registration, often even without going through the KYC procedure;
• storage of a private key is not required – its loss, theft, etc .;
• the most convenient option for crypto-traders – those who are actively and constantly trading crypto-currencies need to quickly monitor and operate their assets on the wallets of the trading platform to achieve maximum efficiency and speed of transactions;
• low entry threshold – any client (even inexperienced user) can store assets without restrictions on the minimum investment amount;
• a large selection of assets.

• the risk of losing part or all of the assets in the event of hacking of the exchange by scammers;
• possible delays in the execution of orders, withdrawal operations in the event of the high volatility of Bitcoin or due to a rapid change in the trend in the market;
• unavailability of assets due to frequent maintenance of the site’s website;
• sudden drop in liquidity;
• high and constantly “floating” commissions for a number of crypto assets in certain periods of time;
• having full access to the wallets of their users and their assets. In theory, exchanges can use this to their advantage (to conduct unauthorized transactions) without the knowledge of clients.

• work with a licensed (depending on the country) company specializing in the provision of services for the safe storage of assets;
• the ability to store assets in cold wallets, which significantly reduces the risk of their theft by hackers;
• legal liability of the company and availability of guarantees, including through insurance of assets, in case of loss or theft.

• the service is aimed at big (primarily institutional investors, stock exchanges) clients, so some users may face a number of limits, for example, with a high minimum amount for withdrawing funds, etc.;
• a limited list of assets – for custodians it is much poorer than for exchanges and includes only top assets with high capitalization and only a few stablecoins (custodians prefer not to deal with high-risk assets, such as illiquid tokens);
• thorough and complex KYC procedure (no anonymous accounts, unlike exchanges);
• withdrawal operations can take much longer than exchanges (up to several days).