Custodial

Custodial means a third party keeps the keys. When you buy crypto on Coinbase or Binance and leave it there, the exchange controls the wallet and records your balance in its database. You have a claim on the company, similar to a bank deposit, but you do not hold the asset on the blockchain yourself.

Custody has real benefits. You cannot lose your funds by forgetting a seed phrase, you can recover your account through normal identity checks, and you can trade instantly without paying on-chain fees. Regulated custodians such as Coinbase Custody and BitGo hold the assets behind spot Bitcoin ETFs and serve institutions that must use a qualified custodian by law.

The downside is counterparty risk. If the custodian is hacked, becomes insolvent, freezes withdrawals, or is ordered by a government to seize assets, you may lose access. FTX customers learned this in 2022 when the exchange used their deposits for its own purposes. Unlike a bank, most crypto custodians offer no government deposit insurance.