Learn the basics

What is a crypto custodian?

Mar 11, 2021

The main function of cryptocurrency custody solutions is asset protection. In the world of crypto assets, this means safeguarding private keys. A private key is like the secret name of a place on the blockchain. Knowing the secret name grants ownership of the tokens registered under that secret name. An example of an Ethereum private key could be this:

0xdc0cf347dbc59d31c1358c8e5cf5e45b822ab85b79cb32a9f

If the wallet is not enough, the solution is a custodian

Wallet services are actually an interface from which you can easily create a private key. Continuing with the Ethereum example, any token generated on that platform can be sent or received in a private key. Having a private key means in practice having control of a “wallet”, and without it it is impossible to manage any token that has been sent to that private key.

If we lose the keys to our house or if it is stolen, there’s a solution. We can make a copy of the key and we can change the lock. On the other hand, if we lose the private key of our wallet, it has been lost forever. If we have a wallet, for example in an exchange such as Coinbase, a hacker who enters their servers and obtains our private key can steal everything in it (that is, registered on the blockchain to that private key).

Blockchains are decentralized software. There is a team that works on complex updates to the Ethereum platform, but it works without supervision. Anyone can go online and create a wallet. If the private key is lost there is nothing you can do, if someone steals it, practically nothing.

That is why the use of so-called cold storage is recommended. It consists of saving the private key offline, in devices designed for it. There are retail solutions for the small investor in crypto assets, and although their security is increasing, the risk of theft, loss or damage does not completely disappear.

To solve all these problems, the role of the custodian specialized in crypto assets arises, used by institutions holding large amounts of crypto assets. Custodians take precautions to the extreme, storing assets in cold wallets, which in turn are stored in security cameras in monitored facilities with all kinds of anti-theft measures. Many also offer the option of insuring their clients' assets in the event of an incident.

In the USA, the main crypto custodians include BitGoCoinbase Custody and Anchorage. In Europe there’s TanganyMetacoArkane Network or Prosegur Crypto.

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