Custody

Written by Regan Grishaber

Introduction

Custody is the safeguarding of assets and a custodian is the institution or individual charged with this responsibility. The traditional notion of custody involves the secure holding of personal property or funds in a physically secure location, such as a bank vault or safe. In the world of digital assets, custody is concerned not with the storage of physical assets but with storage of the private keys used to access the digital good. In bitcoin, for example, one’s private key is used to unlock the UTXOs that enable funds to be spent.

With distributed ledger technology, custody is a double-edged sword in that it requires some level of trust in the custodian, while the technology’s stated purpose is to eliminate the need for trusted third parties. Different custody solutions exist on the market today to combat this dilemma. Cold storage is the custody option with the least amount of trust required as it enables users to store their digital assets in an offline wallet, protecting the funds from cyberhacks and other vulnerabilities that a wallet connected to the Internet (hot wallet might be exposed to.

Exchange custody is another storage option where the exchange an investor trades on also stores the investor’s private keys. Typically exchanges will hold at least enough funds in a hot wallet to address daily customer needs and keep the remaining balance in cold storage.

Third-party custody outside of an exchange is also common and has attracted firms specializing in custodial solutions. A best practice among third-party custodians is to use multisig, where multiple keys are required to access funds. By spreading the keys between several different counterparties, custodians can improve security by eliminating single points of failure.

Suggested Reading

Custody of Your Investment Assets by SEC

Crypto Custody Explained by Moe Adham

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