Cryptocurrency custody services: who holds your keys
A cryptocurrency custody service holds your crypto and its private keys, so you own a legal claim, not the keys. It is not FDIC or SIPC insured.
Vahe HakobyanEditor-in-chief
Updated Oct 5, 20263 min readFact-checked
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On the Ethereum blockchain, whoever holds the keys can move the assets. That fact shapes every choice between a custody service, an exchange account and a wallet you control.
What is a cryptocurrency custody service?
In a custody arrangement, a firm holds a customer's digital assets and keys on the customer's behalf. The client keeps a legal claim to the assets, and the custodian controls the private keys. The custodian signs transfers when instructed and often keeps records for the client.
Custody service vs exchange vs self-custody
A custody service is not an exchange account, and it is not self-custody. An exchange may act as the custodian or use a third party, and it links your holdings to a username and password. Self-custody puts the keys in your hands.
How does a custody service work?
Custodians protect keys with cold storage, multisig and MPC. Cold storage keeps keys on machines that stay offline. Multisig requires several keys to approve one transfer. MPC splits one key into shares held in different places.
- Generate keys in a controlled setting and keep backups.
- Keep most keys offline.
- Require several approvals before a transfer.
- Test recovery plans.
Who uses custody services and why?
Institutions, funds and registered investment advisers are the main users, because US rules can require them to keep client assets with a qualified custodian. Some individuals use a custody service for large holdings or for help with record keeping.
A custody service can also handle staking, reporting and transfers for a client. The client still owns the assets and takes the market risk.
What are the risks and US rules?
US rules differ by regulator and state. An adviser that has custody of client assets generally must keep them with a qualified custodian under securities rules. Some states grant trust charters to crypto custodians, so oversight is not uniform.
Frequently asked questions
Usually yes, as a legal claim on the assets. The custodian holds the keys, so your agreement and law govern what you can do with them.
Not by the FDIC or SIPC. Some custodians buy private insurance, which usually covers only part of a loss.
Usually yes, when you ask. The custodian may review the request and can set limits or delays.
A US custodian may file information returns and will usually send you records. You still report your own gains and losses to the IRS.
