How does crypto custodial service work?

[Teresa_FX1]

Hey guys, do you know how does crypto custodial service work at banks or some other financial institutions? Do they actually take your ledger cold crypto wallet and put into a vault or something?

[hosseinimr93]

Custodial services put your coins in their own wallet and show you a number as your balance. That's like having an account in traditional banks.
Note that when you use custodial wallets for storing your coins, you are not the real owner of them. You cannot send your coins without permission of the third party and they can block your account for any reason.
It would be better to use noncustodial wallets instead. In noncustodial wallets, you hold your private keys and can access to your coins at any time.
You must be always the only person who has access to private keys. Not your keys, not your coins.

[DdmrDdmr]

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The means by which the custody service is implemented will differ from one custodian to another, and that is perhaps something which should be more transparent per se, as more corporations implement their custodial services, or delegate on third-party custodians (i.e. Paypal using Paxos). There’s normally a combination of hot (for liquidity proposes) and cold storage, alongside safes, vaults, multisignature protection, hidden replicas, bunkers, … you name it.

The thing is, when we deposit crypto with a Custodian, we are not normally informed on the safety proceedings, which, whatever they may be, are sold as infallible, until they are breached. Exchanges have has a large trajectory of hacks, being Custodial themselves, and one can only wonder what will happen when banks generalize this type of service ...

[Upgrade00]

Hey guys, do you know how does crypto custodial service work at banks or some other financial institutions?

There are currently a few services which have been granted the SPDI charter to function as a crypto bank;
• Kraken Wins First Crypto Bank Charter In U.S. History
• Avanti Digital asset bank
These are custodial services which function effectively as centralized exchanges for buying and selling cryptocurrencies, as well as holding assets for its customers. They also offer banking services like IRA, debit/credit cards as well as asset management services.

Do they actually take your ledger cold crypto wallet and put into a vault or something?

No, although if you're unsure of where to store your hardware or paper wallet, you can keep it in a bank vault, same way precious metals are stored. In this case, you still have control over your funds and can access it through your backup. Custodial services hold your assets as you're storing on their wallet and as such they can freeze your funds and block your account.

[Teresa_FX1]

Maybe this service is designed mainly for institutions not retail customers. I don't really feel comfortable trusting my private keys to a third party..

Custodial services put your coins in their own wallet and show you a number as your balance. That's like having an account in traditional banks.
Note that when you use custodial wallets for storing your coins, you are not the real owner of them. You cannot send your coins without permission of the third party and they can block your account for any reason.
It would be better to use noncustodial wallets instead. In noncustodial wallets, you hold your private keys and can access to your coins at any time.
You must be always the only person who has access to private keys. Not your keys, not your coins.

[Charles-Tim]

I do not think this should confuse you, if you know about custodial exchanges, they are like similar to banks and other companies providing crypto services. Only what you need to do with them is to allow them to hold your bitcoin and other cryptocurrencies for you. This means you are not the owner of the bitcoin and other cryptocurrencies  on the respective blockchain, but you are the owner on the platfroms of the companies providing the custodial services, which means on blockchain, the company providing the custodial service is the owner of your coins.

The companies will have to follow the laws and policies of their country, like subjecting your cryptocurrencies to tax in a way certain percentage of your profits will be taken and be paid as tax to their government. Also, you can not control your coin privately like having it on your own. And I have seen custodial services as the modern era ways of governments compromising privacy.

I have seen the best as the self custody, in which you will have your private key or seed phrase to be able to unlock your bitcoin on blockchian, nobody will be able to manipulate your bitcoin into govermental laws and policies that may not favor you. And you will have much of privacy if you really learn how to maintain privacy and protect your noncustodial wallet(s).

Maybe this service is designed mainly for institutions not retail customers. I don't really feel comfortable trusting my private keys to a third party..

It is both for institutions and retail customers, many people do not know about privacy and do not care about private key or seed phrase because of ignorance. It is you that will choose the best for yourself. And for me, noncustodial way has been the best than governments to compromise my privacy but ignorant people would not know. There are people buying bitcoin now that does not even know private key or seed phrase exist.

[Teresa_FX1]

So, basically they have all the information about me but all the credibility that I have is only trust that they don't go bankrupt or plain exit scam.

Do they actually take your ledger cold crypto wallet and put into a vault or something?

No, you're sending your Bitcoin to them. Then they're the one who have control over your Bitcoin and you trust them for everything (not only for sending Bitcoin, but also for various things such as protecting your privacy)

[Teresa_FX1]

Thank you for better understanding! yes, for me too, noncustodial way sounds much better

I do not think this should confuse you, if you know about custodial exchanges, they are like similar to banks and other companies providing crypto services. Only what you need to do with them is to allow them to hold your bitcoin and other cryptocurrencies for you. This means you are not the owner of the bitcoin and other cryptocurrencies  on the respective blockchain, but you are the owner on the platfroms of the companies providing the custodial services, which means on blockchain, the company probidimg the custodial service is the owner of your coins.

The companies will have to follow the laws and policies of their country, like sunjecting your cryptocurrencies  to tax inna way certain percentage of your profit will be taken and be paid as tax to their government. Also, you can not control your coin privately like having it on your own. And I have seen custodial services as the modern era ways of governments compromising privacy.

I have seen the best as the self custody, in which you will have your private key or seed phrase to be able to unlock your bitcoin on blockchian, nobody will be able to manipulate your bitcoin into govermental laws and policies that may not favor you. And you will have much of privacy if you really learn how to maintain privacy and protect your noncustodial wallet.

Maybe this service is designed mainly for institutions not retail customers. I don't really feel comfortable trusting my private keys to a third party..

Both for institution and retail customers, many people do not know about privacy and do not care about private key or seed phrase because of ignorance. It is you that will choose the best for you. And for me, noncustodial way has been the best than governments to compromise my privacy.

[Charles-Tim]

So, basically they have all the information about me but all the credibility that I have is only trust that they don't go bankrupt or plain exit scam.

I do not know about future, but as of today, it is clear that custodial services are not secure and safe by design, it is very possible some of them will be hacked by hackers and may go bankrupt. I was even thought they are making use cold wallet before, but according to some crypto news, they are making use online/hot wallets. The online/hot wallet they are using to store millions of people funds including the huge amount stored makes the companies rendering custodial crypto services attracted to hackers.

[Fundamentals Of]

Thank you for better understanding! yes, for me too, noncustodial way sounds much better

Of course it's so much better. Not just better but also proper. It is really not in line with Bitcoin if you are having someone else keep it on your behalf. That is not what Bitcoin is promoting. That does not give you freedom and independence from third parties.

But you should also know the cost of keeping your Bitcoin to yourself. That entails so much responsibility over its safekeeping. That means you should be fully aware of the dos and don'ts in owning Bitcoin and the risks as well.

[erikoy]

No they aren't physical things to be taken from you if you are using custodial wallet. I think custodial wallet are also good because they hold your funds. The wallet that they provide you for your access are controlled by them and they can get your money whenever they wanted. But this could not happen unless they wanted to scam the users usng their services. But they know the possible consequencies  they could get and of course in jail. However, if you wanted a more secure form if holding your funds in crypto then better use non custodial wallet. You have hold of everything that includes your wallet private keys and your crypto funds. Meaning if you lost your wallet keys then no one could get it for you except you yourself only.

[sheenshane]

I would also say no because it's not a physical thing that you need to deposit on your trusted bank instead you will only give them access to your crypto and provide security on it.  With a custodial wallet, there are some advantages that you may consider like in a sudden death then the custodial wallet can give access to the legal beneficiary of the owner.  

However, IMO I will also suggest a noncustodial wallet because with this you will still have full control over your property deciding on how and when to spend it and be liable for any possible loss of your own private key and finding ways to retrieve it.

[Jawhead999]

Thank you for better understanding! yes, for me too, noncustodial way sounds much better

It does, as many people say about Bitcoin is "Be your own Bank!"

Since you're interested about non-custodial wallet rather than custodial wallet, this thread would make you understand and knowing the non-custodial wallet it is Custodial vs. Non Custodial Wallets - "Not your keys, not your coin" Explained.

[enhu]

I heard this is one way to make your coins available and to be inherited by your children once you're dead. It's not really the ideal one but it could work if your kids are just not as techy for now. Sending your BTC to a 3rd party is like giving away your coins already. This contradicts the famous mantra in crypto that goes “Not your keys, not your coins.”  This is why sending your coins to a  digital bank means you already lose your coins.

[hatshepsut93]

There's many types of custodial wallets/services. Any online service that holds your Bitcoin balance can be considered as such, for example a casino or an exchange. You send them your coins and they store them in their wallets. If you store your seed or ledger in a bank's safety deposit box, that too can be considered a custodial service. PayPal is too a custodial service, with a difference that you can't get your Bitcoin, only sell it on their platform.