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

What is Custody?

Custody Meaning:
Custody - is the process through which financial institutions hold and safeguard the financial assets of their clients in order to prevent asset fraud or loss.
3 minutes

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

Custody is the procedure through which financial organizations keep and preserve their clients' financial assets in order to prevent asset fraud or loss. It might be seen as a protection service offered by a financial institution.

The primary goal is to safeguard the cryptocurrency assets that use private keys. The private keys allow users to perform transactions and access their crypto assets. Besides, the keys are complicated to remember and have the potential to be stolen or hacked.

Custody had changed from being a personal relationship to engaging with a managed institution. This evolved into a new level of financial complexity, further dividing daily life and decentralized banking. Besides, the institution that offers custody is designated as a custodian, and it gathers earnings, interest, and gains from asset sales in exchange for a fee and redistributes money according to the client's orders.

Custodians are fairly essential in the financial environment, they provide advanced trading tools to advanced users.

Crypto custody providers are those who hold crypto assets such as Bitcoin, Ethereum, Terra, and Cardano. They serve customers who want to maintain and protect their virtual assets in a user-friendly, protected, and regulated custodial system.

Custodians can maintain assets in two forms - digital and physical. Custodial enterprises are often large banks or other reputable institutions in charge of safeguarding the assets of a large number of clients. In most situations, this refers to billions of dollars.

There are different types of crypto custody alternatives though, such as self-custody, meaning having control over your crypto assets with software, hardware, or paper wallets. Exchange wallets are another option, as well as a third-party custodian.

From a blockchain perspective, the services are usually offered by a third-party crypto exchange provider. The exchange keeps the secret keys of its cryptocurrency users as well as the crypto assets.

The custody of cryptocurrencies is completely maintained by crypto exchanges, which deploy security technologies to protect their users' digital assets against fraud or unexpected losses. In the event of a breach or robbery, the custodian is entirely liable for repaying their customers.

Important to note though that users should be cautious when utilizing cryptocurrency custodians as a way to keep virtual currencies. There is no guarantee that a major hack won’t happen to take their holdings away for good.

Skilled crypto investors advise users to put virtual currencies in cold storage if they are not regularly using them or do not intend to use them in the nearish term. This is necessary to protect the funds against fraud and other harmful activities.

Overall, blockchain and cryptocurrency are actively revolutionizing the financial world, and custody is essential for the growing ecosystem.