Custodial vs Non-Custodial Storage

There are 2 main methods of storing cryptocurrency: one involves storing it yourself (non-custodial storage), and the other is to have another individual, business or entity store it for you (custodial storage).

Custodial Storage

Custodial storage involves entrusting a 3rd-party service with the protection, storage and ultimately control over your cryptocurrency. This is a solution mostly favoured by those who are intimidated by the process of non-custodial storage or those who entrust their cryptocurrency with an exchange or broker for the purpose of being able to swiftly act on changes in market trends, sentiment or prices.

For example:

• Jane signs up to an exchange and deposits $5,000 AUD to buy 0.5 BTC.

• She leaves the BTC stored in the exchange wallet issued to her by the custodian (i.e. the exchange).

• In this case, the exchange controls the private key associated with the BTC that Jane bought, and they maintain a record that shows that Jane is the rightful owner of the BTC.

• Jane may send the BTC from the exchange wallet at any time. If the exchange was hacked or turned malicious, Jane would risk her BTC.

The decision to use custodial storage services is personal. It should be based on your level of risk appetite and how much of your investment you’re willing to leave in the possession of someone else.

Some good questions to ask yourself when considering custodial solutions include:

“Is the custodian insured against theft or loss?” – if a custodian is not insured, there is a risk that your funds could be lost if the custodian is hacked or your funds are stolen.

“If the funds I store with a custodial solution are lost or stolen, how would this affect my financial situation?

Examples of custodial storage solutions include exchanges (e.g. Binance, Independent Reserve), brokers (e.g. Caleb and Brown) and dedicated custody solutions (e.g. Kingdom Trust, BitGo).

Non-Custodial Storage

Non-custodial storage is the act of storing your own cryptocurrency. Non-custodial wallet options give you full control of your private key and therefore full control of your cryptocurrency.

It’s often suggested that one of the best investments you can make is in your own knowledge and learning and by investing time into learning how to secure your own cryptocurrency, you ensure that control over your cryptocurrency is exclusively yours. In this way, you aren’t relying on someone else to store and secure your cryptocurrency for you, you are truly ‘your own bank’. Yet, not everyone is prepared to bear the responsibility of controlling their private keys—which is why professional custodian services exist.

Example:

• John signs up to an exchange and deposits $5,000 AUD to purchase 0.5 BTC.

• He invests time researching and learning how to generate his own public and private keys and how to use a non-custodial wallet.

• He transfers his 0.5 BTC from the exchange wallet to his newly generated public address.

• In this case, John is the only one in control of his private keys and thus has full control over his 0.5 BTC.

• Whilst he avoids the risks associated with custodial storage solutions, John is taking full responsibility for the safety and security of his BTC. If he makes a mistake or jeopardises the security of his private key, he risks losing his BTC.

Examples of non-custodial storage solutions are Electrum, Ledger, Trezor, KeepKey and Metamask.