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Crypto Terms:  Letter C
Jun 19, 2023 |
updated Apr 02, 2024

What is Custodial?

Custodial Meaning:
Custodial - system is one in which the service provider has the private keys required to access the clients’ funds and provides them with a simple login account.
2 minutes

Let's find out Custodial meaning, definition in crypto, what is Custodial, and all other detailed facts.

A custodial system is one in which the service provider has the private keys necessary to access a customer's funds while providing a login account. It is usually utilized in the concept of cryptocurrency exchanges and wallets.

Custodial cryptocurrency organizations hold their clients’ funds for a set period of time.

Although the services are convenient and simple to use, they are associated with some custodial concerns. For example, by holding numerous clients' money in one spot, the funds can be readily attacked by hackers, targeted for official censorship, and even simple incidents can occur, such as hardware failure.

Furthermore, cryptocurrencies are well-known for being completely in the hands of their owners. Every public address is linked to a private key known only to the owner. Keeping that in mind, without the key, it is impossible to reach the funds kept in that address.

Although this structure could be one of the primary selling aspects of cryptocurrency for people, others may view the effort of rigorously monitoring their own keys to be not worth the benefits of having absolute control over their own funds. 

So, custodial wallets handle the user's private keys and allow them to reach their funds through a simple and conventional login-password combination, as they are used to.

Another frequent type of custodial service is centralized cryptocurrency exchanges. These exchanges enable clients to accumulate cryptocurrency funds in an exchange account. After that, they can exchange them for other cryptos or fiat currencies.

The transactions are not stored on the blockchain. Likewise, every client's money is retained in custody from the minute they are acquired until they are removed from the exchange.