Crypto Custody
Crypto custody is holding someone else’s crypto-assets, or the means of access to them, in a way that lets you move them. The test is control in fact — who could move the balance without the customer’s cooperation — not how the service describes itself in its terms.
Also called: digital asset custody · custodial
How control is actually held
Crypto custody is not one technical arrangement. A service may hold a private key outright. It may hold two shards of a three-part multi-party computation setup, in which case it can sign without the customer. It may be one signer on a multi-signature wallet where its own signature meets the threshold. It may hold a recovery key, a co-signing key, or an administrative key on a smart-contract wallet that lets it upgrade the contract, freeze a balance or sweep it. It may hold no key on the customer’s behalf at all, and instead record the balance as an entry in its own books while the coins sit in a pooled wallet of its own.
Those are different designs with the same practical answer: the service can move the assets. A service that genuinely cannot — no key, no shard combination above the signing threshold, no administrative power over the contract, no ledger entry it can pay out — is not in custody, however much of the interface it operates.
Why the control question comes first
Supervisors test what a business is able to do, not what it says it does. A product page calling a wallet non-custodial settles nothing if the operator holds a key that can sign alone, and an institutional arrangement with no consumer wallet at all can still be custody.
What follows from the answer varies by market. In the United States a wallet provider with total independent control over the value is treated as a money transmitter whatever label it applies to itself. In the European Union, safekeeping or controlling clients’ crypto-assets or the means of access to them is one of ten authorized crypto-asset services — exchange, running a trading platform, executing orders and transferring assets for clients each require authorization on their own, with no custody involved. So the control question decides a great deal and settles nothing by itself. It is also the line that separates self-custody from a hosted wallet, and the reason a transfer out to an unhosted wallet is treated as leaving the firm’s perimeter.
In practice
Custody turns on who can actually move the assets, not on how a service describes itself, and keys are only one way of holding that control — a balance recorded as an entry in the provider’s own books is custody too. It is a central licensing question but not the only one: in the United States independent control over the value makes a wallet provider a money transmitter, while in the European Union custody is one of ten crypto-asset services and exchange, trading platforms, order execution and transfers all need authorization without it.
Example
A wallet provider markets a non-custodial product built on multi-party computation. Keys are split three ways: the customer holds one shard, the provider holds two, and any two can sign. The customer can move funds without the provider, which is the feature being sold. The provider can also move funds without the customer, which is custody.
Commonly confused with
| Term | How it differs |
|---|---|
| Self-Custody | In self-custody only the user can produce a valid signature; in custody a third party can sign on the user’s behalf, with or without being asked. |
| Hosted Wallet | A hosted wallet is a product built on top of custody; custody is the underlying control relationship, and it also exists in institutional arrangements with no wallet product at all. |
| Segregated Account | Segregation is about whose assets are kept apart from whose; custody is about who is able to move them, and a custodian can segregate perfectly and still control everything. |
See also
- Self-CustodySelf-custody is an arrangement in which the user alone holds the private keys and no service can move the assets. A provider may build the wallet, host the interface and broadcast the transaction, but if it cannot produce a signature, the balance is beyond its reach.
- Hosted WalletA hosted wallet is a wallet where a service holds the private keys on the user’s behalf. The user sees a balance and can instruct a transfer, but the provider is the party that signs, and the provider’s records are what the balance actually rests on.
- Unhosted WalletAn unhosted wallet is a wallet whose private keys are held by the user, with no service in a position to move the funds. Regulators use the term mainly to describe the far end of a transfer: a counterparty that is a person and a device rather than a firm.
- Virtual Asset Service ProviderA virtual asset service provider, or VASP, is the FATF category for a business that exchanges, transfers, safekeeps or administers virtual assets for other people, or provides financial services around their issuance. It is an international standard-setter’s term, not a license.