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Custodial vs Non-Custodial Wallet: What’s the Difference?

Cryptocurrency wallets can differ from each other in many regards: the level of protection they offer, the number of available coins, the method of storing keys and many others. However, all cryptocurrency wallets can be divided into two groups: custodial and non-custodial. In this article, we will analyse custodial and non-custodial wallets, compare them and identify the pros and cons of each.

What is a custodial wallet

A Custodial Wallet is a wallet type where your private keys are held and managed by a third party. That is, the company or service that stores your cryptocurrency has access to your funds. Cryptocurrency exchange wallets can be classified as custodial. They are used for the daily tasks of traders and other market users: exchanging, trading, depositing and withdrawing funds.

Private keys are the foundation of cryptocurrency security, as they allow the owner of the wallet to sign transactions and confirm ownership of crypto assets.

When keys are held by a third party, the user is effectively handing over control of their cryptocurrency to them. This approach to storage can be compared to the banking system: you put your money in the bank, trusting the organisation itself to keep it safe. The main advantage of custodial storage is ease of use. You don’t need to worry about the safety of private keys or restoring access in case of loss or breakage of the device which the wallet was installed on. All management and security is taken care of by the service. If you, for example, forget the password from your account on the exchange, your wallet provider customer support will help you restore it by verifying your identity. However, such convenience comes with a risk. You put control of your funds in the hands of an external organisation. This means that if the service is hacked or compromised, you could lose your money. That’s why it’s important to choose trusted and reliable platforms

What is a non-custodial wallet

A non-custodial crypto wallet is a type of wallet which places the full control over the funds in the hands of the user. Unlike custodial wallets, where a third party (such as a cryptocurrency exchange) is responsible for the security of the keys, in non-custodial wallets the user is responsible for the safety of the keys. The obvious advantage of non-custodial wallets is increased security and privacy, as only you can manage your funds. However, it also places the responsibility for the protection of private keys on the user: if the device which the wallet is installed on (such as a hardware wallet) is broken or lost, you will not be able to get the access to your funds back, since there is no support service to help you. The security measure in this case is a seed phrase consisting of 12 or 24 English words. It is generated when you create the wallet. This seed phrase will become your access to private keys when you install the wallet on another device. That is why it is recommended to write it down on paper and keep it in a safe place.

Comparing custodial and non-custodial wallets

In order to choose the most suitable option for you, it is important to understand the main differences between these two types of storage. Next, we’ll break down their features in more detail:

Characteristics	Custodial	Non-Custodial
Security	Depends on the reliability of the platform you’re using. If the platform is compromised, funds may be lost;	High level of security due to the fact that only the user manages the keys;
Funds control	Funds are controlled by a third party (a platform or an exchange);	Complete control of funds by the owner;
Ease of restoring access to your funds	Access can be restored through the platform, e.g., through customer support, by providing identification;	Access can only be restored with a seed phrase;
Risks	Dependent on the security of the platform, there may be a possibility of it being compromised;	Losing a seed phrase can mean losing assets with no way to recover them;
Privacy	Less privacy, as transaction information may be available to the platform;	Full privacy, as all transaction information is exclusively controlled by the user;
KYC	As a rule, identity verification is mandatory.	The wallet can be used without KYC verification.

Pros and cons of custodial wallets

If after comparing these wallet types you have decided to choose a custodial wallet, here are the main advantages and disadvantages to consider:

Pros:

Ease of use: the management of funds is carried out by a third party;
The ability to regain access through customer support, even if you lose access to the wallet;
Suitable for users who interact with cryptocurrency on a daily basis (e.g. traders).

Cons:

The platform that stores your keys effectively controls your assets;
The risks of losing access to cryptocurrency if the service is hacked or goes bankrupt increase;
The need to undergo KYC (identity verification), which can be a disadvantage for those who value privacy.

Nevertheless, if you want to start using a custodial wallet, you should still keep some of your assets in a non-custodial one, as it is safer. We believe you should not put all your eggs in one basket. 🙂

Pros and cons of non-custodial wallets

Non-custodial wallets are a great choice for those who value independence and a high level of security. However, before choosing to create one, it is also worthwhile to understand its advantages and disadvantages:

Pros:

Full control over the funds: only the owner has access to the assets;
There are no risks of a third party interference;
High level of security with proper key storage;
No need to undergo identity verification;
Suitable for long-term storage of cryptocurrency.

Cons:

The user is responsible for the safety of their funds and keys;
Less convenient for frequent interaction with cryptocurrency, for example, for trading.

Best Custodial Wallets

If you want convenience and security without having to manage private keys, consider the following solutions:

Coinbase Wallet is a custodial wallet integrated with one of the largest cryptocurrency exchanges Coinbase. Provides a high level of security and ease of use, especially for beginners. It is possible to restore access through the customer support service;
Binance Wallet is a cryptocurrency wallet from the Binance platform. This wallet utilises many different technologies to enhance security. For example, MPC technology divides your private key into several parts rather than storing it in its entirety. A high degree of protection is also achieved thanks to two-factor authentication, protection against entering the wrong address and other features;
Kraken Wallet is a solution from the Kraken exchange platform for secure cryptocurrency storage. This wallet, like many other provided by crypto exchange platforms, has a large number of available cryptocurrencies. Kraken Wallet guarantees its users that their data is encrypted and safe. To use this vault you need to pass KYC verification and install two-factor authentication.

Best non-custodial crypto wallets

For those who want to maintain full control over their funds, there are plenty of great options. These can be used as Bitcoin wallets and wallets for Ethereum, as well as many other coins:

MetaMask is one of the most popular vaults for Ethereum and ERC-20 tokens. Ideal for users actively interacting with decentralised applications (dApps) and DeFi;
Trust Wallet – One of the largest multi-currency wallets with support for over 70 blockchains and multiple cryptocurrencies. Easy to use, with the ability to interact with DeFi protocols and decentralised applications;
Exodus – A non-custodial vault with a user-friendly interface that supports multiple cryptocurrencies. In addition to asset management, offers built-in cryptocurrency exchange and provides complete security of user data.

Frequently Asked Questions

What is the difference between custodial and non-custodial wallets?

Custodial wallets have a third party storeing and managing your private keys. This removes some of the responsibility from the user, but shifts it to the platform, so it is important to choose a reliable and trusted wallet. Non-custodial wallets give you full control over your keys, which, in turn, gives you more freedom, but makes you responsible for the safety of your assets.

How safe are custodial wallets?

Custodial wallets can be safe if they have a reliable service behind them. However, we advise taking advantage of additional security measures, such as setting up two-factor authentication. But there is always a risk of hacking: if a platform neglects security norms, it can fall victim to a hacker attack.

What to choose: custodial or non-custodial wallet?

If you care about ease of use and do not want to worry about the security of your keys, choose a custodial wallet. If you want full control over your funds and are willing to ensure their safety, a non-custodial wallet is a better choice.

Agatha Redich

Articles author, editor

Articles author and website editor. Works with texts for over 12 years. Among Agatha’s clients: Rossman, Zara, Bosch, ING Bank, Lexus and others. Crypto journalist since 2018. She wrote more than a hundred articles about cryptocurrencies and the crypto market. Agatha's professional credo is to reveal complex topics in an accessible and simple way.

Emil Rabin

Site expert

Cryptocurrency expert and financial analyst. Emil has working experience in Bain and KPMG, collaborated with PayPal and Revolut, organized more than 30 educational events about blockchain and cryptocurrencies in Eastern Europe. An expert of the TGDRatings.com portal since 2022.