What Is Custodial Wallet?
Also known as: Hosted Wallet, Custodial Crypto Wallet
In short
A custodial wallet is a type of wallet in which the private keys are held by a third party, such as a crypto exchange or a custody provider, instead of the user; the user accesses their assets through their account with that institution.
A user who opens an account and deposits funds on a crypto exchange is in effect using a custodial wallet: their balance appears on the exchange's screen, but the coins sit at addresses controlled by the exchange. The user performs transactions with an email, password and two-factor authentication; if they forget their password, they can recover their account. The absence of responsibility for storing a recovery phrase, customer support and easy buying and selling with fiat currency make this model accessible to beginners.
In return, the user has to trust the custodian. If the institution is hacked, goes bankrupt, freezes withdrawals or restricts accounts under a legal order, access to assets can be lost. The collapse of FTX in 2022 is a concrete example of this risk. The community saying not your keys, not your coins sums up this situation.
In Turkey, under the regulation introduced by Law No. 7518, the custody services offered by crypto service providers have also come under the Capital Markets Board's (SPK) regulation and supervision. In non-custodial wallets, on the other hand, the keys and responsibility rest entirely with the user.
Last updated: · This content is for information purposes only and is not investment advice.