5. Options for crypto custody
Lets first define a few common crypto terms that are used in this section:
A public key is a long numeric code that is cryptographically derived from a specific private key and is publicly available. A public key allows you to receive cryptocurrency transactions. Anyone can send transactions to the public key but you need the correct, corresponding private key to “unlock” them and prove that you are the owner of the cryptocurrency received in the transaction.
A private key is a randomly generated binary number that is used to encrypt and decrypt information and is only made available to the originator of the encrypted content. A private key gives you the ability to prove ownership or access the funds associated with your public address.
A cryptocurrency wallet is a device, physical medium, program or service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet often also offers the functionality of encrypting and/or signing information.
There are many custody options available to both individual investors and institutional players, falling within three main categories:
Self custody: These include hardware, software or paper wallets in which the digital asset investor independently stores private keys.
Exchange wallets: Control and management of public and private keys are handed over to an exchange, but the investor maintains access via an online wallet.
Third-party custodian: Typically aimed at institutional investors and large family offices, these service providers store digital assets on behalf of customers using institutional grade security and controls to protect investors’ assets.
Custodians safeguard digital assets by ensuring that investors’ private keys are maintained securely. This is achieved by either storing the assets online, a method called hot storage, or offline, known as cold storage, or through a multiple approval approach, known as multi-signature and smart contract wallets.