Résumé

Have you ever wondered where and how your cryptocurrencies are stored? There are many types of cryptocurrency wallets that token holders can use to store their tokens. However, there are two broad categories: custodial and non-custodial wallets.

A custodial wallet, like Binance Custody, is a service that has the private key to your wallet and holds your assets. Your Binance account is a custodial wallet. Conversely, with a non-custodial wallet, you have full control over your assets. Examples of non-custodial wallets include Metamask and the Binance Chain Wallet.

Each type of wallet has its pros and cons. Let’s take a look at their differences so you know when to use one or the other.

 

Introduction

If you’ve ever used Bitcoin or other cryptocurrencies, you know that having a digital wallet is essential. You’ll need one if you want to make transactions, trade on a crypto exchange, or use blockchain applications. So, it’s important to understand how cryptocurrency wallets work and the main difference between custodial and non-custodial wallet providers.


How a Cryptocurrency Wallet Works

In short, a cryptocurrency wallet is a tool that you can use to interact with a blockchain network. You can use it to send and receive cryptocurrencies or to access decentralized applications (DApps).

Technically speaking, cryptocurrency wallets don’t actually store your digital assets. Instead, they generate the information you need to use the cryptocurrency. However, most users adopt the verb to make it easier for beginners, which is why we’ll use the term throughout this article.

Among other things, a cryptocurrency wallet is made up of two main elements: a public key and a private key.

If people want to send you cryptocurrency, they can make a transaction to one of your addresses, generated by your wallet's public key. Your wallet addresses, as well as your public key, can be freely shared with other people (hence the term public).

Your private key, which you should treat as a confidential password, signs transactions and gives you access to your funds. As long as you keep your private key safe, you will be able to access your cryptocurrency from any device.

While cryptocurrencies are digital, cryptocurrency wallets that contain private and public keys can come in different options: the keys can be printed on a paper, accessed through desktop wallet software, or stored offline in hardware wallets.

Some wallets also offer the ability to store and transfer NFTs, which are non-fungible tokens issued on a blockchain.

Regardless of the type of wallet, you will always have a custodial or non-custodial wallet.

 

What is a custodial crypto wallet?

As the name suggests, a custodial wallet means that the assets are held in your name. This means that a third party will hold and manage your private keys on your behalf. In other words, you don’t have full control over your funds, nor the ability to sign transactions. But using a custodial wallet isn’t necessarily a bad thing.

In the early days of Bitcoin, all users had to create and manage their own wallets and private keys. While “being your own bank” brings many benefits, it can be inconvenient and even risky for less experienced users. If your private keys are compromised or lost, you will lose access to your crypto forever. In fact, it is estimated that nearly 3 million BTC are lost forever.

There have also been cases where crypto asset inheritance was unrecoverable because the private keys were held by the sole original owner of the crypto assets. You can avoid such incidents by sharing access to your assets with a custodian.

So, even if you forget your crypto account password, you should be able to access your account and assets by contacting customer support. However, if you are using a non-custodial wallet, you are solely responsible for the security of your cryptocurrencies.

In many cases, it therefore makes sense to rely on a custodial wallet service. But this also means that you are entrusting your private keys to a third party. That is why it is important to choose a reliable exchange or service provider.

Some of the information to look for when exploring custody providers includes whether they are regulated, what types of services you get, how your private keys are stored, and whether there is insurance coverage.

For example, Binance Custody is both regulated and compliant and also offers standard insurance for Binance Business accounts. It also offers crime insurance coverage and other bespoke insurance requirements available upon request. Binance Custody also uses multi-signature (multisig) wallets, a protocol that eliminates centralized risks by requiring multiple parties to approve cryptocurrency transactions before they can be completed.

 

What is a non-custodial crypto wallet?

A non-custodial cryptocurrency wallet is a wallet where only the holder owns and controls the private keys. For users who want more control over their funds, non-custodial wallets are the best option. Since there are no middlemen, you can trade cryptocurrencies directly from your wallets. This is an ideal option for experienced traders and investors who know how to manage and protect their private keys and seed phrases.

You will need a non-custodial wallet when interacting with a decentralized exchange (DEX) or decentralized application (DApp). Popular examples of decentralized exchanges that require a non-custodial wallet include Uniswap, SushiSwap, PancakeSwap, and QuickSwap.

Trust Wallet and MetaMask are great examples of non-custodial wallet service providers. Keep in mind that with these wallets, you are fully responsible for the security of your seed phrase and private keys.

 

Comparing Custodial and Non-Custodial Wallets


Service Custodial

Service non-custodial

Private key

Third-party property

Property of the wallet holder

Accessibility

Registered Accounts

Accessible to all

Transaction costs

Generally higher

Generally lower

Security

Generally lower

Generally higher

Assistance

Generally higher

Generally lower

KYC mandatory

Yes

Non

 

Advantages and Disadvantages of a Custodial Portfolio

As mentioned earlier, the main disadvantage of custodial wallets is that you have to trust a third party to manage your funds and private key. In most cases, these service providers also require identity verification (KYC). The advantage, however, is peace of mind and convenience. You won’t have to worry about losing your private key, and you can contact customer support if anything goes wrong.

When using custodial services, be sure to choose a reputable company that offers high security and insurance coverage. Look for custodians that are regulated and compliant.

Some cryptocurrency custodians also have other requirements that you may not be eligible for. For example, Binance Custody is a custodial service that is currently only available to professionals. You can check out the Binance Custody FAQ for more information.

 

Advantages and Disadvantages of a Non-Custodial Wallet

With no third parties, non-custodial wallets offer complete control over your keys and funds. In other words, you truly own your assets and become your own bank. Additionally, non-custodial transactions tend to be faster, as you don’t have to wait for approval to make a withdrawal. Additionally, they don’t have any additional third-party fees.

As we have seen, one of the drawbacks of using non-custodial wallets is accessibility and ease of use. They are generally less user-friendly and tend to be problematic for new cryptocurrency holders. As non-custodial service providers evolve, this will be resolved.

Of course, you also take sole responsibility for your keys and must take your own precautions when handling them. This means that instead of trusting someone else to take care of your funds, you must trust yourself.

To secure your crypto and protect yourself from hackers, you should consider the following security measures:

  • Use a strong password.

  • Enable two-factor authentication (2FA) to add an extra layer of security.

  • Stay vigilant against scams and phishing attacks.

  • Be careful when clicking on links or downloading software.

 

What type of wallet should I use for my crypto?

Both types of wallets are used to store your crypto assets, including NFTs. Most traders and investors use both in different situations. However, you need to make sure that the wallet you use supports the type of crypto you want to store. Not all crypto can be stored in the same way.

There are different blockchain networks that handle different types of cryptocurrencies. We can classify these types based on the token standards, but keep in mind that the same tokens can operate on multiple blockchains with different standards. For example, you will find BNB as BEP-20 on the BNB Smart Chain, but also as BEP-2 token on the BNB Beacon Chain.

Here are the main standards:

  • BNB Smart Chain : BEP-20, BEP-721, BEP-1155

  • BNB Beacon Chain : BEP-2

  • Ethereum : ERC-721, ERC-1155

  • Solana : SPL

MetaMask, Trust Wallet, and MathWallet are all non-custodial wallets that support the most common cryptoassets. If you are unsure which tokens your wallet supports, check its official FAQ or documentation for more information.

Sometimes, wallets that are constantly being upgraded to meet the demands of their users may support more tokens over time. Binance Custody currently supports BTC, ETH, BCH, LTC, BUSD, BNB, CAKE, and many other ERC-20 tokens. Binance Custody will gradually include more token types to meet user demand.


To conclude

Custodial vs. Non-custodial Wallets? Most crypto users use both, but it all depends on your needs. If you like to have complete control over your assets or simply use blockchain technology to interact with DeFi applications, you should consider a non-custodial wallet. Conversely, if you are looking for a service provider that can take care of your storage needs while you trade or invest, you can look for reliable custodial wallet providers.

Remember, whether you are using a custodial or non-custodial wallet, you should always exercise caution and follow best practices to ensure the safety of your funds.