Crypto glossary
Custodial wallet
A custodial wallet is a crypto account in which a third party, usually an exchange, holds the private keys and controls the funds on the user's behalf.
With a custodial wallet, the user signs in with a password and sees a balance, but the private keys belong to the provider. Withdrawals and transfers are requests that the company carries out from its own wallets. Most balances on centralized exchanges work this way, as do many payment apps that offer crypto.
The model is popular because it feels like online banking: forgotten passwords can be reset, support is available and trades inside the platform are instant. Some publish proof of reserves, and rules such as MiCA in the EU set requirements for how licensed providers safeguard client assets.
The trade-off is counterparty risk. If the provider is hacked, freezes withdrawals or goes bankrupt, as FTX did in 2022, customers may lose access to their funds or recover them only years later. The saying not your keys, not your coins sums up the case for moving long-term holdings to self-custody.
Example
When someone buys 0.1 BTC on an exchange and leaves it there, the bitcoin sits in the exchange's custodial wallets, and the customer holds a claim on the platform rather than coins they control directly.
Related terms
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