Custodial vs non-custodial wallets: What’s the difference?

By: Tim Mcintosh

Hardware wallets resemble a USB thumb drive, and are only online when connected to a computer or mobile device. The signing of transactions using the private key happens within the device itself and is only sent to be confirmed by the blockchain once it’s back online. With non-custodial wallets, a crypto user has complete control over their private key, along with their funds. Non-custodial wallets tend to be a bit more technically complex than custodial wallets, so they’re generally more favored by experienced crypto users. Custodial wallets are nearly always web-based, and are usually provided by centralized crypto exchanges like Coinbase.

The private key helps to prove asset ownership, create digital signatures, and execute transactions on the blockchain. Custodial crypto wallets compliant with existing regulatory regimes are usually safer than non-compliant wallets. Users can also opt for custodial wallets that offer insurance coverage for theft or misuse of funds. With the non-custodial wallet, you have complete control of your private key. As a result, a non-custodial wallet offers higher security but demands more technical expertise.

Notable custodial services

Therefore, the wallet providers have control over the funds of the user on behalf of the latter. The most popular wallets preferred by newcomers, such as Coinbase, are custodial wallets. If asset owners lose or inadvertently destroy their private keys and seed phrases, their tokens may be permanently lost. This is why it’s of utmost importance that you hold your private keys and seed phrases in a safe and responsible manner if you decide to opt for non-custodial wallets.

difference between custodial and non custodial wallet

Hardware wallets are physical devices that help store crypto assets offline. Most non-custodial wallets do not require you to provide any personal information in order to create an account. For example, you can create your Valora wallet today with just a phone number — and even that phone number is only to make it easier to send money between friends. Additionally, self-custody options do not require users to hand over any information via a KYC or AML process. Custodial wallet services hold onto the private keys of the user, storing and securing them on the user’s behalf.


Digital assets are not recognized as legal tender, and transactions involving them may be irreversible. Before using the platform, users are urged to carefully How To Start A Cryptocurrency Trade evaluate these risks. In the case of a custodial wallet, the exchange you choose to create the wallet has complete access to the private keys.

difference between custodial and non custodial wallet

In this process, you need to provide your personal information and undergo Know Your Customer (KYC) and Anti-money laundering (AML) verifications. The complexity of these verifications and account creation varies based on exchanges and your jurisdictions. However, non-custodial wallets are way more secure as you’re the only person in control of your wallet, restricting unauthorized access.

Start your crypto journey with MoonPay

Custodial wallets also give users peace of mind that a lost or forgotten password doesn’t mean they lose access to their funds. Most of the time providers or exchanges can simply reset your password with a few security questions. If a non-custodial wallet holder loses their private key, their funds could be unrecoverable. The DeFi Wallet is a non-custodial wallet that lets users easily manage and store their crypto, as well as provides secure access to a full suite of DeFi services all in one place. Unlike with a centralised custodial solution, users have full control and ownership of their crypto when they use DeFi Wallet. Users rely on custodial wallets because managing private keys is not an easy task.

difference between custodial and non custodial wallet

Your private key, on the other hand, functions similarly to a secret password in that it signs transactions and grants access to your wallet. While cryptocurrencies are digital, you can print your private and public key crypto wallets on paper, accessed via desktop apps, or stored offline in hardware wallet devices. Custodial wallets are wallet services offered by a centralized business such as a cryptocurrency exchange. Custodial wallets have certain benefits, such as less user responsibility regarding private key management. When a user outsources wallet custody to a business, they are essentially outsourcing their private keys to that institution.

Funds backup and recovery

In the case of custodial wallets, a third party takes charge of users’ private keys. This entity gains complete control over the crypto assets, assuming responsibility for managing the user’s wallet key, authorizing transactions, and safeguarding the cryptocurrency holdings. A custodial wallet is a type of cryptocurrency wallet that is managed by a third party. In this case, the third party takes custody of the user’s cryptocurrency, and the user does not have control over their private keys.

  • In other words, users do not control the access to their funds as they are stored on the provider’s servers.
  • Some non-custodial wallets are browser-based, but there are a few other types available.
  • Additionally, self-custody options do not require users to hand over any information via a KYC or AML process.
  • Go for platforms with more options if you want to try trading less common currencies soon.
  • They don’t need to trust a third party exchange to properly manage their assets.
  • BitPay Wallet makes it easy for users to manage their assets across platforms, including an easy integration to your Coinbase account.

Custodians usually only require you to care after a username and password instead of your private keys or seed phrases. The responsibility of safeguarding your private keys will be in their hands. As a result, centralized wallet providers and exchanges grew into some of the most famous names in the space. They onboarded millions of people by providing a faster, simpler way to get started — and importantly, a way for people to easily discover, buy, and trade new crypto assets. In the early days of Bitcoin and Ethereum, decentralized exchanges simply didn’t exist.

Many cryptocurrency users utilize both, and the choice ultimately hinges on individual needs. Opt for a non-custodial wallet if you prefer complete control over your assets or seek to engage with DeFi applications using blockchain technology. On the other hand, if you value a service provider handling storage requirements while you engage in trading or investment activities, explore reputable custodial wallet service providers. This phrase serves as a backup and recovery mechanism if the original device is lost. However, caution is necessary, as anyone with access to the seed phrase gains full control over the user’s wallet, and losing the seed phrase results in permanent loss of access to the funds.

difference between custodial and non custodial wallet

On top of it, users have not recovered anything from the attack, thereby creating questions on the efficacy of custodial wallets. Another downside is that custodial wallets typically don’t offer the same level of security as non-custodial wallets. This is because they often sacrifice some security features to make them easy to use.

Self-custodial wallets are highly safe if the user follows best practices for wallet security and employs robust safety measures. This, however, implies that you are entrusting your private keys to a third party. If you lose your recovery phrase (also known as a seed phrase) and/or your private keys, it will be impossible to access and use your funds. By giving you the ability to safeguard your own private keys, self-custody wallets provide you with greater autonomy, more control, and more flexibility when it comes to your digital assets. The two keys are used together in order to send cryptocurrency from one wallet to another.

A non-custodial crypto wallet is one in which only the holder can access and control the private keys. Non-custodial wallets are the best option for users who want complete control over their funds. It’s a good choice for seasoned traders and investors who understand managing and safeguarding their private keys and seed phrases. The main purpose of a crypto wallet is to keep the private keys secure and accessible to the user when needed. The private keys are used to sign transactions and access the funds stored in the wallet.


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