Crypto Custody Solutions: Safeguarding Digital Assets

Custody is the power of a financial institution to hold and safeguard its customers’ financial assets to prevent the theft or loss of assets.

What is custody?

In the world of finance, custody is a service that a financial institution provides to safeguard a customer’s securities. The organization that provides custody of securities is called a custodian, who collects dividends, interest and profits from the sale of securities for a fee and redistributes the funds according to the client’s instructions.

Custodial custody transformed from a personal relationship to face-to-face contact with a highly supervised institution. This led to a new degree of financial sophistication, further separating the secretive realm of banking from everyday life.

Custodians, in accepting customer funds, now commit themselves not just to holding funds on behalf of the customer, but to using them for profit.

Custodians play an important role in the financial ecosystem, from attracting newcomers to offering advanced trading tools to seasoned users. At the institutional level, there are a growing number of custody and asset management firms, and some of them are also insured for their clients’ financial losses.

Custodians can hold assets in both digital and physical form. Custodial businesses are often very large and well-respected organizations (like large banks) because they are responsible for holding the assets of a large number of clients, which in most cases are in the millions or billions of dollars.

In the blockchain industry, custodial solutions are most often provided by a third-party cryptocurrency exchange that stores the private keys of its cryptocurrency users in addition to crypto-assets such as Bitcoin and Ethereum.

Cryptocurrency storage is entirely the responsibility of cryptocurrency exchanges, which use security solutions to secure their users’ digital assets from theft or unpredictable loss. If hacked or stolen, the responsible party (the crypto-exchange) is fully responsible for returning funds to its users.

A good example was the 2019 Binance hack, one of the largest crypto hacks in history, when $40 million was stolen from online wallets. In response to that hack, the CEO of the world’s largest exchange, Changpeng “CZ” Zhao, announced a full refund to victims.

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