Custodial Wallets: Pros and Cons

Most crypto wallets are custodial wallets, and it’s very likely that the first time you purchase crypto, it will end up in a custodial exchange crypto wallet.

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There are mainly two kinds of wallets that hold our cryptocurencies – custodial and non-custodial wallets – with the key difference coming from who who holds the security keys for the wallets.

With a custodial wallet, another party controls your private keys. In other words, you’re trusting a third party to secure your funds and return them if you want to trade or send them somewhere else. 

On the other hand, you have sole control of your private keys with a non-custodial wallet, which in turn controls your cryptocurrency and proves the funds are yours.

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SEE ALSOHere is a List of 16 Wallets to Store Your Ethereum (ETH)
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Most crypto wallets are custodial wallets, and it’s very likely that the first time you purchase crypto, it will end up in a custodial exchange crypto wallet. With this being the common route to holding crypto, here are the benefits of custodial wallets:

Benefits of Custodial Wallets

  • They are easy to manage with little responsibility and are usually more convenient
  • If you lose your password you can usually reset it
  • Offer a range of features including providing an exchange to buy and sell many different cryptocurencies
  • The services have usually developed a good user experience from their apps to customer service

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On the other hand, custodial wallets come with a few detractions:

Disadvantages of Custodial Wallets

  • You do not have total control of your crypocurrency and your custodian has freedom to freeze your funds
  • You cannot gain access to your funds or any of the related services without proving your identity through KYC and AML rules
  • The entire wallet service has some vulnerability to data breaches and hacks
  • You usually need to be connected to the internet to access your wallet

Still, custodial wallets are generally secure and is an easy route for people who are interested in crypto but do not have much technical knowledge.

Some of the popular custodial wallet services include:

  • Coinbase
  • Paxful
  • Binance
  • Localbitcoins

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RECOMMENDED READING: How to Implement Internal Control Manuals on Accounts and Crypto Wallets Management for Companies

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