Custodial vs. Non Custodial Wallets - "Not your keys, not your coin" Explained.

[YourNeko]

Greetings!
I've seen many discussion threads about a very well known quote around the bitcoin community.
This quote has many alterations, but some common ones are:
"Not your keys, not your bitcoin"
"Not your keys, not your crypto"
I saw this quote somewhere when I first got in to cryptocurrency, after spending a bit more time learning the difference between types of wallets & what a private key is, I understand this saying. Please note that I do know that threads like this have been made before, which is why I will try to include as much detail as I can, along with doing a comparison between a few types of wallets, ranking them based on their security.

What is custodial & non custodial?
"Not your keys, not your coin" refers to a debate about which is superior, between 2 different types of bitcoin wallet.
These two types are "Custodial" and "Non Custodial". To understand this quote and to get to the core of this debate, we need to understand what these 2 types of wallets are.

What are Custodial Wallets?
A custodial wallet is a type of wallet where your bitcoin private keys are held by a central authority, this still gives you permission to send your bitcoins to other people and receive as well. You essentially have joint custody of the funds, you are allowed to spend and receive, but the master of the wallet is the central authority. All centralized exchanges can be considered as custodial wallets if they allow you to deposit/withdraw, this includes
Some examples of custodial wallets are:
Coinbase - coinbase.com
Freewallet - Freewallet.org (https://bitcointalk.org/index.php?topic=5164369.0 - scam report/neg trust, do not use)
Binance - binance.com
BitMex - bitmex.com

What are Non-Custodial Wallets?
A non custodial wallet is a type of wallet where you are the sole owner of your private key and your bitcoin. There is no middleman or central authority that can control your funds. With a non custodial wallet, no central authority is present to determine what you spend your bitcoin on, or when you are able to spend your bitcoin. Nobody is allowed to impose waiting times or extra fees on you, nor are they permitted to tax your transactions!
Some examples of non-custodial wallets are:
Electrum -  electrum.org - Desktop/App Wallet
Exodus - exodus.io - Desktop/App Wallet
Blockchain - blockchain.info - App/Web Wallet
Ledger Nano X - ledger.com - Hard Wallet
TREZOR One - trezor.com - Hard Wallet

Both custodial and not custodial wallets have their own benefits and perks, but both have their cons as well. I will preface this by stating that in my personal opinion, non custodial wallets are far superior. Different wallets are for different people, bitcoin is not a no-risk hobby, but making the correct choice on what wallet you want to use can ensure at least a decent level of safety.

Custodial Wallet [PROS]
- Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet (THIS IS ARGUABLY A CON AS WELL)
- (In some cases) allows No-Fee transfers to other users of the same wallet due to the transaction being on the side of the authority and not on the bitcoin network.
- Tends to be more convenient, usually quite customer friendly with extra features such as fiat>crypto.
- Usually have some sort of backup fund to compensate if customer funds are lost due to a problem on their end.
Custodial Wallet [CONS]
- They can freeze/confiscate your funds for any reason
- You can be subjected to KYC (Know Your Customer, ID verification) just to gain access to your funds, or just to use the service
- Payments you send may be given extra fees or taxes to allow the wallet to gain profit
- If the wallet is hacked, then your data (KYC information, contact details) AND funds are compromised (Link to articles in appendix)
- Most custodial wallets are dependent on the internet, meaning cold storage/holding crypto offline is impossible

Non-Custodial Wallet [PROS]
- Your funds can not be controlled or held by a central authority.
- You can choose your own fees, you can not be taxed or be forced to pay extra fees
- Since your private key is not stored on a website, the risk of being hacked is greatly lowered and is more down to your own diligence.
- You are subject to no forms of KYC/AML procedures, your coins are your coins and nobody can say otherwise
- Allows for offline storage, since most non-custodial wallets are either Hard Wallets or Desktop Wallets
Non-Custodial Wallet [CONS]
- If you lose your private key somehow and don't have it backed up somewhere safe, your funds are gone forever.
- If your Phone/Computer is compromised (example; a virus) , then your funds are at high risk of being stolen.
- If you in somehow lose your crypto to something like a bug, there is no backup fund that can cover it.
- I'm really racking my brain for another con about non-custodial wallets, since I genuinely can not think of one, please leave a reply to this thread with one that you may have.

Conclusion - what does that quote mean?
After dissecting what custodial and non custodial wallets are, we can determine that the phrase "Not your keys, not your coin" defines a situation where if you are using a custodial wallet, you can not truly say that the funds inside that wallet are yours. Those funds can be taken from you at any time that the centralized authority which controls that wallet deems fit.
Bitcoin is not "the people's money" until we remove the middlemen and the centralized authority from the equation. Lets take back the future of currency back, one private key at a time.

Glossary
Wallet - A place to store your cryptocurrency.
Private key - A secret combination of characters that allows bitcoins to be spent.
PC Wallet - A wallet that is downloadable on Mac/Windows/Linux, usually non-custodial & supporting offline storage.
App Wallet - A wallet that is downloadable on IOS/Android, Some custodial, Some non-custodial, usually viruses (lol)
Web Wallet - A wallet that is accessible on the internet, Almost always custodial & not supporting offline storage.

Appendix
Hacked Exchanges:
https://blockonomi.com/mt-gox-hack/
https://www.bloomberg.com/news/articles/2019-05-08/crypto-exchange-giant-binance-reports-a-hack-of-7-000-bitcoin
https://cryptoslate.com/hackers-laundering-7000-bitcoin-binance-hack/
https://cointelegraph.com/news/round-up-of-crypto-exchanges-hack-so-far-in-2019-how-can-it-be-stopped
A more comprehensive list of all hacked exchanges is available at the following thread due to our lovely friend VB1001
https://bitcointalk.org/index.php?topic=5090869.0

Other sources I used to write this article:
https://freewallet.org/blog/custodial-vs-non-custodial-wallet
https://medium.com/guarda/️custodial-vs-non-custodial-wallet-s-️-benefits-of-light-wallets-87cf701054d1
https://atomicwallet.io/custodial-non-custodial-wallets-comparison
https://www.blockchain.com/learning-portal/how-it-works

Footnotes
Helpful segment from iam_aayushiJ on custodial exchanges

Custodial Exchanges -

• Exchanges which hold your cryptos on your behalf, mostly these are the exchanges where you can do trading, and they also have good liquidity. It is good for users who do daily trading.
• Example - Binance, KuCoin, Huobi Global, HitBtc, Coinbase etc are all custodial exchanges.

Non-Custodial Exchanges

• Exchanges which does not hold your cryptos, you can call the instant exchanges, only when you send them your cryptos for trading, they will be having access to your funds, and then they will return you back the traded coin.
• Example - CoinSwitch Exchange - They are an exchange aggregator service, you can compare the prices offered at all leading exchanges like, binance, changelly, shapeshift, changenow, simpleswap , Changelly, Shapeshift, Swaplab, Blocktrades.
• For trading on instant exchanges you need to store your cryptos in your wallets, exodus, trezor, metamask, trust wallets, atomic wallets are some of the examples of Non Custodial Wallets.

[1714202732]

1714202732

[1714202732]

1714202732

[o_e_l_e_o]

Under "Pro" for a custodial wallet, you write:

Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet

Be aware that his is also a con. If they can reset your password for you, they can reset your password for anyone else as well. A little bit of social engineering or an email hack may be all an attacker needs to convince the third party to let them in to your account.

Talking about your phone/computer being infected with malware - this is one of the main benefits of a hardware wallet such as a Ledger or Trezor. You can use them safely even on infected devices without the risk of your private keys being exposed. They also force you to confirm any transaction on the device itself, which helps to mitigate against clipboard malware (provided the user is following the proper steps and double checking the address).

You also don't mention that many third party and custodial services, including both wallets and exchanges, turn out to be complete scams, and will disappear with your coins and there is nothing you can do about it.

Speaking of scams, I would be careful about recommending freewallet. There have unresolved scam accusations against them, couple with active negative trust and warning flags. See here for more information: Freewallet.org is a fraudster who cheated me out of 15.2BTC.

[YourNeko]

Under "Pro" for a custodial wallet, you write:

Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet

Be aware that his is also a con. If they can reset your password for you, they can reset your password for anyone else as well. A little bit of social engineering or an email hack may be all an attacker needs to convince the third party to let them in to your account.

Talking about your phone/computer being infected with malware - this is one of the main benefits of a hardware wallet such as a Ledger or Trezor. You can use them safely even on infected devices without the risk of your private keys being exposed. They also force you to confirm any transaction on the device itself, which helps to mitigate against clipboard malware (provided the user is following the proper steps and double checking the address).

You also don't mention that many third party and custodial services, including both wallets and exchanges, turn out to be complete scams, and will disappear with your coins and there is nothing you can do about it.

Speaking of scams, I would be careful about recommending freewallet. There have unresolved scam accusations against them, couple with active negative trust and warning flags. See here for more information: Freewallet.org is a fraudster who cheated me out of 15.2BTC.

Adjusted the original post, thanks for your contribution

[Freewallet]

Under "Pro" for a custodial wallet, you write:

Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet

Be aware that his is also a con. If they can reset your password for you, they can reset your password for anyone else as well. A little bit of social engineering or an email hack may be all an attacker needs to convince the third party to let them in to your account.

Talking about your phone/computer being infected with malware - this is one of the main benefits of a hardware wallet such as a Ledger or Trezor. You can use them safely even on infected devices without the risk of your private keys being exposed. They also force you to confirm any transaction on the device itself, which helps to mitigate against clipboard malware (provided the user is following the proper steps and double checking the address).

You also don't mention that many third party and custodial services, including both wallets and exchanges, turn out to be complete scams, and will disappear with your coins and there is nothing you can do about it.

Speaking of scams, I would be careful about recommending freewallet. There have unresolved scam accusations against them, couple with active negative trust and warning flags. See here for more information: Freewallet.org is a fraudster who cheated me out of 15.2BTC.

Adjusted the original post, thanks for your contribution

Hi,

I am confident the thread has been read carefully as there is a resolution at the end. If you'd like more details about the case, I will be happy to provide them in private and I hope into a reconsideration of the scam accusation in your post.

- Lauren

[iam_aayushiJ]

I would like to add on the `Custodial And Non Custodial Exchanges`

Custodial Exchanges -

• Exchanges which hold your cryptos on your behalf, mostly these are the exchanges where you can do trading, and they also have good liquidity. It is good for users who do daily trading.
• Example - Binance, KuCoin, Huobi Global, HitBtc, Coinbase etc are all custodial exchanges.

Non-Custodial Exchanges

• Exchanges which does not hold your cryptos, you can call the instant exchanges, only when you send them your cryptos for trading, they will be having access to your funds, and then they will return you back the traded coin.
• Example - CoinSwitch Exchange - They are an exchange aggregator service, you can compare the prices offered at all leading exchanges like, binance, changelly, shapeshift, changenow, simpleswap , Changelly, Shapeshift, Swaplab, Blocktrades.
• For trading on instant exchanges you need to store your cryptos in your wallets, exodus, trezor, metamask, trust wallets, atomic wallets are some of the examples of Non Custodial Wallets.

[YourNeko]

I would like to add on the `Custodial And Non Custodial Exchanges`

Custodial Exchanges -

• Exchanges which hold your cryptos on your behalf, mostly these are the exchanges where you can do trading, and they also have good liquidity. It is good for users who do daily trading.
• Example - Binance, KuCoin, Huobi Global, HitBtc, Coinbase etc are all custodial exchanges.

Non-Custodial Exchanges

• Exchanges which does not hold your cryptos, you can call the instant exchanges, only when you send them your cryptos for trading, they will be having access to your funds, and then they will return you back the traded coin.
• Example - CoinSwitch Exchange - They are an exchange aggregator service, you can compare the prices offered at all leading exchanges like, binance, changelly, shapeshift, changenow, simpleswap , Changelly, Shapeshift, Swaplab, Blocktrades.
• For trading on instant exchanges you need to store your cryptos in your wallets, exodus, trezor, metamask, trust wallets, atomic wallets are some of the examples of Non Custodial Wallets.

Currently all out of sMerit but ill put some on this post when i have some, thanks for this ill edit this in to the OP

[iam_aayushiJ]

I would like to add on the `Custodial And Non Custodial Exchanges`

Custodial Exchanges -

• Exchanges which hold your cryptos on your behalf, mostly these are the exchanges where you can do trading, and they also have good liquidity. It is good for users who do daily trading.
• Example - Binance, KuCoin, Huobi Global, HitBtc, Coinbase etc are all custodial exchanges.

Non-Custodial Exchanges

• Exchanges which does not hold your cryptos, you can call the instant exchanges, only when you send them your cryptos for trading, they will be having access to your funds, and then they will return you back the traded coin.
• Example - CoinSwitch Exchange - They are an exchange aggregator service, you can compare the prices offered at all leading exchanges like, binance, changelly, shapeshift, changenow, simpleswap , Changelly, Shapeshift, Swaplab, Blocktrades.
• For trading on instant exchanges you need to store your cryptos in your wallets, exodus, trezor, metamask, trust wallets, atomic wallets are some of the examples of Non Custodial Wallets.

Currently all out of sMerit but ill put some on this post when i have some, thanks for this ill edit this in to the OP

Hi, thanks for being generous and considering my content for your post. I have a request please add custodial exchanges and non custodial exchanges in your post, I do not see that. Also I would like to tell you that I work at instant exchange coinswitch.co , and you we are proudly serving exodus, trezor wallet. They use our APIs for exchanging customers funds within the wallet. Do try us out, and let me know if you have any other queries.

[hd49728]

Currently all out of sMerit but ill put some on this post when i have some, thanks for this ill edit this in to the OP

I gave you one for your good thread. Honestly, I have not known about Custodial and Non-custodial wallet terms before reading this thread. I knew about the importance of fully control on private keys, that is why I use Electrum wallet for my bitcoin. Nevertheless, as I admited, did not know about those terms before. You are a good case demonstrates that a Newbie can contribute helpful things for forum users. Much appreciated.

[YourNeko]

Currently all out of sMerit but ill put some on this post when i have some, thanks for this ill edit this in to the OP

I gave you one for your good thread. Honestly, I have not known about Custodial and Non-custodial wallet terms before reading this thread. I knew about the importance of fully control on private keys, that is why I use Electrum wallet for my bitcoin. Nevertheless, as I admited, did not know about those terms before. You are a good case demonstrates that a Newbie can contribute helpful things for forum users. Much appreciated.

Well I'm glad that I was able to teach something haha

[GreatArkansas]

Newbies should really know this because I am sure, that almost new people starting to use Bitcoin are using Custodial Bitcoin wallets, which can also help them the ;easy to use', 'easy to set-up' features of those Custodial Bitcoin wallets.
Some custodial bitcoin wallets required some email address or phone numbers, while non-custodial Bitcoin wallets will make them more complicated since they are still new in those things, (they will think where they can store their private keys or how it is really important, how they will use it, etc.).

Check this thread also for more list of Bitcoin wallets: [General] Bitcoin Wallets - Which, what, why?

[Velkro]

Custodial Wallet [PROS]
- Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet (THIS IS ARGUABLY A CON AS WELL)

Really? Its like banks all over again. It needs security in case of bankcrupcy of centralized company so it needs a lot of regulation. Its step backwards.
For me custodial wallets are disaster to happen, in a way its like keeping BTC on exchange. (really really bad thing to do)
We need more easy-to-use and mistake-forgiving wallets, thats it but with full control.

[YourNeko]

Custodial Wallet [PROS]
- Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet (THIS IS ARGUABLY A CON AS WELL)

Really? Its like banks all over again. It needs security in case of bankcrupcy of centralized company so it needs a lot of regulation. Its step backwards.
For me custodial wallets are disaster to happen, in a way its like keeping BTC on exchange. (really really bad thing to do)
We need more easy-to-use and mistake-forgiving wallets, thats it but with full control.

Just noticed this post.
Do note that I have included a little section next to that stating that it can also be viewed as a con.
In some instances, depending on the security of the custody holder, it can actually be viewed as a perk because the mentality that "once your bitcoin is gone, it's really gone" mentality can be forgotten, as stated prior I much prefer non custodial wallets and I do very well understand how it is viewed as a con, but for the purpose of keeping this unbiased I will keep it in the pro's section.

[BayAngelo]

Under "Pro" for a custodial wallet, you write:

Centralized authority allows easy recovery if you forget your access password or some how lose access to your wallet

Be aware that his is also a con. If they can reset your password for you, they can reset your password for anyone else as well. A little bit of social engineering or an email hack may be all an attacker needs to convince the third party to let them in to your account.

Talking about your phone/computer being infected with malware - this is one of the main benefits of a hardware wallet such as a Ledger or Trezor. You can use them safely even on infected devices without the risk of your private keys being exposed. They also force you to confirm any transaction on the device itself, which helps to mitigate against clipboard malware (provided the user is following the proper steps and double checking the address).

You also don't mention that many third party and custodial services, including both wallets and exchanges, turn out to be complete scams, and will disappear with your coins and there is nothing you can do about it.

Speaking of scams, I would be careful about recommending freewallet. There have unresolved scam accusations against them, couple with active negative trust and warning flags. See here for more information: Freewallet.org is a fraudster who cheated me out of 15.2BTC.

I know a friend that lost a huge amount of money. over 12,000usd from one company that designed a stellar wallet. he invested in the wallet and deposited his funds there. unfortunately, the project disappeared with his funds. he made reports to the stellar platform but their is little or Nothing for them to do.

[pooya87]

it can actually be viewed as a perk because the mentality that "once your bitcoin is gone, it's really gone" mentality can be forgotten,

custodial wallets don't fix this, you are just replacing it with another issue: "if the company is gone, your bitcoin is really gone too". and that is not the only issue, there is a new one too which is "if the company decides to shut YOUR wallet  down, your bitcoin is really gone".
this last one may not seem so serious because it hasn't happened to you yet but nowadays with stupid rules that these centralized services are starting to enforce (eg. coins that had a history of being in a coinjoin) you will be a victim sooner or later.

[hd49728]

custodial wallets don't fix this, you are just replacing it with another issue: "if the company is gone, your bitcoin is really gone too". and that is not the only issue, there is a new one too which is "if the company decides to shut YOUR wallet  down, your bitcoin is really gone".
this last one may not seem so serious because it hasn't happened to you yet but nowadays with stupid rules that these centralized services are starting to enforce (eg. coins that had a history of being in a coinjoin) you will be a victim sooner or later.

People use custodial wallets put all their capital under hands of third-party companies and governements. Companies can do scam exits, steal capital of all customers.

Governments can submit sanctions, law enforcement requests on companies and force them to lock (custodial) wallets or shut down companies that own those wallet services.

PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets

Hack is another reason to not use custodial wallet on exchanges. Not your keys, not your Crypto – Kucoin Hacked! $150m Stolen.

When I joined crypto, I did not know what are custodial and non-custodial wallets. I only knew that I need a bitcoin wallet to store my bitcoin and blockchain.info (now is blockchain.com) wallet is my first bitcoin wallet. 2 years later, I know how bad that wallet is and I decided to move to non-custodial wallets. Began with Bitcoin Core but it requires huge space in disk to sync and RAM as well to sync the wallet. Finally, I chose Electrum wallet to use.