▫️Custody portfolio

Custody portfolio

Before diving into the discussion of the different physical/software forms a digital wallet can take, it is important to understand the difference between custodial and non-custodial wallets.

The former is essentially where a cryptocurrency investor entrusts a third party with the management/protection of their wallet keys. This third party takes on the role of "custodian," tasking them with preserving the cryptocurrency owners' property. Accounts at cryptocurrency exchanges comprise most custodial wallets. For example, let's say a new cryptocurrency investor creates an account at a major cryptocurrency exchange like Binance or WalletVPN. Imagine they buy cryptocurrency, but decide to leave it in their exchange account.

Their cryptocurrency is held in a custodial wallet by Binance/WalletVPN, which now takes responsibility for managing the wallet keys. The growth in popularity of custodial wallets is also increasing amid rising investor interest in cryptocurrency investment products. Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs) of digital/cryptoactive assets continue to secure approval around the world. The issuers of ETFs/ETPs act as custodians of investors' funds, including in the case of cryptocurrencies. This means that they take responsibility for managing the keys to the portfolio in which the investors' cryptocurrencies are being held.

Pros of custodial wallets

For investors with a limited understanding of crypto technology, allowing a third party to manage their holdings can be an attractive proposition. Beginners often make the mistake of losing their wallet keys and losing access to their holdings.

Cryptocurrency newbies may prefer to leave the responsibility of wallet key management to professionals with a better understanding of blockchain technology. For example, large cryptocurrency exchanges store user funds in a complex mix of hardware and software wallets. It may be difficult for many casual cryptocurrency investors to replicate this level of security sophistication.

Cons of custodial portfolios

Custodial wallets are not without risk. Cryptocurrency holders risk losing their property if the security or solvency of the custodian is compromised. Those who follow cryptocurrency news will remember the abrupt collapse of cryptocurrency lending service Celsius Network. The platform, which previously managed tens of billions of dollars in investor funds, suddenly stopped withdrawals from depositors in June.

A number of other struggling cryptocurrency lending platforms quickly followed suit, leaving cryptocurrency investors out of billions in cash.Elsewhere, some cryptocurrency purists point out that custodial wallets result in centralization that goes against the ethos of cryptocurrency decentralization. Holders of cryptocurrencies stored in custodial wallets may come into conflict with the custodian or the government agencies that regulate the custodian.

This leaves their cryptocurrency at risk of seizure. Meanwhile, cryptocurrency custodians are typically subject to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Many crypto purists see this as a violation of cryptocurrency user privacy.Meanwhile, some custodial providers charge fees that can eat into profits.