What’s the Difference Between a Custodial vs. Non-Custodial Crypto Wallet?

Updated: Aug 24, 2021

It’s important to choose a secure cryptocurrency wallet when you enter the crypto space. The most popular type of wallets are software wallets, hardware wallets and paper wallets. Regardless of the type of wallets available on the market, they are categorized into this two categories - ‘custodial wallets’ or ‘non-custodial wallets'.


Before you decide which type of wallet to use, take a look at the advantages and disadvantages of both options.


What is the Difference Between Crypto Custodial and Non-Custodial Wallets?


Custodial wallets

A custodial wallet is a wallet where your private keys are kept by a third party. The concept is similar to a bank, where the money is yours but you do not have full control over them. Custodial wallets are designed to provide user with convenience and quick accessibility in managing their cryptocurrencies efficiently.

Most of the software wallets are custodial wallets or custodial exchanges. Some examples of the most popular custodial wallets and exchanges are Freewallet, Binance, and Coinbase.

Advantages

  • Accessibility. Log in with your credentials in a few clicks and users can access and manage their cryptocurrencies easily.

  • Cheaper or no transaction fees. Most of centralized third-party exchanges offer custodial wallets. Their transaction charges are usually cheaper when compared to the non-custodial crypto wallets.

  • Customer support. Almost all crypto exchanges provide customer support services, whenever users encounter issues with their transactions or account, assistance is available. Although the level of support, accuracy of addressing user's needs and lead time to resolving the issues users are facing differs from each crypto exchange.

  • Convenience. The most important advantage of custodian wallets is, there are no keys to lose. The cryptocurrency exchanges are the custodian of user's private keys, so users do not hold the responsibility and there's no need to worry about losing them. It is a similar concept as to how people trust their banks to hold their gold.


Disadvantages

  • Third-party ownership of user's private keys. Without the private keys, users do not technically own the funds inside your wallets.

  • Risks of data breaches and/or hacks. As cryptocurrency exchanges holds the private keys and safeguards personal information of the users, it is important to choose a highly secured platform. Liquid, a Japanese crypto exchange is recently hacked and crypto-assets estimated to be worth at least $94 million is stolen.

  • Internet accessibility. Custodial wallets are dependent on the availability of the internet. Users are not able to access their funds without it.


Non-custodial wallets

Non-custodial wallets can be in the form of software installed on mobile devices, desktops, browser-based and can even be hardware devices. One of the most secure ways to hold your cryptocurrency is using hardware wallets.


They usually look like a USB storage device with a screen and analog buttons. The most popular non-custodial wallets are Trezor, Ledger Nano X, and Zengo.

Advantages

  • Ownership. One of the main advantages of non-custodial wallets is user will have their own unique key so that no other user can have access to that money. In order to transfer funds, user have to authorize the transaction.

  • Little to no risk of data breaches and hacks. Anyone can be a target of hackers but the funds inside your wallet are small when compared to the funds held in centralized exchanges. Hence, non-custodial wallets have less risk of data breaches and hacks.

  • Internet accessibility is not required. Having a non-custodial wallet does not need to depend on the internet to access your funds. Some non-custodial wallets allow users to manage their crypto-assets in an offline mode using a hardware.

Disadvantages

  • Accountability. With a non-custodial wallet, users are solely responsible for their digital assets. A single typo may result in a loss of cryptocurrency and there is no way to undo it.

  • Set up process. Using non-custodial wallets require users to set up a seed phrase of 12-24 words (for backup purposes) and remember the long alphanumeric private key. The whole process can be overwhelming.

  • Safekeeping. One of the biggest disadvantages is if you lose your keys, you lose your money. Non-custodial wallets are susceptible to human errors. If you damage the physical wallet holding all your funds, there is no other way to get it back.


Buy and sell crypto in whichever way


Before users trade their assets on cryptocurrency exchanges, it is key to leverage on a fiat-to-crypto gateways with these factors in mind:

  • Fast transaction speed

  • Low transaction fees

  • Low commission fees

  • Low currency exchange rate from cash-to-crypto

  • High liquidity pool

XanPool collaborates with both custodial and non-custodial partners to ensure users get to buy and sell crypto-assets seamlessly via local payment methods across 10 countries (and growing!). Without the number of banks, clearing houses and intermediaries as the middlemen, XanPool's decentralized liquidity network gives users a more competitive transaction fee as compared to the credit card networks.


Make a decision

Choosing between a custodial and a non-custodial wallet is an important decision. Ultimately, it depends on various factors such as the user's preference, lifestyle, security practices, credibility of the crypto exchanges and their security policies on data, infrastructure architecture, and operations.


“Not your keys, not your coins” is one of the popular saying for crypto users who prefer to hold their private keys with full control of their crypto-assets. If you are a beginner who wants to learn crypto trading, crypto exchanges may be a good place to start, or you can even use a combination of both wallets. Nevertheless, always make sure to follow the best security practices.