The global crypto market is currently worth over $1 trillion. While this figure is undoubtedly huge, it points to the growing adoption of cryptocurrency. Over the years, institutional and individual investors have trooped to the crypto wave. However, a prevalent problem with crypto investment is the security of investors’ assets. Crypto custody services emerged to solve this problem.
Here, we will discuss crypto custody services and why they are essential.
What are Crypto Custody Services?
Custody services are a norm in the traditional financial system. Because there is always a risk that individuals or institutions will lose their funds, they entrust the funds to financial institutions. These institutions are called custodians. While this service flow also applies in the crypto ecosystem, it is pretty different.
In crypto, custodial entities do not safekeep your actual assets. This is because all crypto assets are deployed and stored on the blockchain. However, custodial entities safekeep your private keys. A private key is a collection of secret numbers used to execute transactions and prove ownership of a blockchain address. These keys are similar to a password. This is why people without private keys will find it impossible to access their crypto assets.
Crypto custody services are often offered to institutional investors. This is because institutional investors are often weary of the risk of asset loss. The charges required by custodial entities differ—however, most charge account creation fees, annual custody fees, and withdrawal fees. Top crypto custody providers include BitGo and Coinbase.
Why Crypto Custody Services are Important
As earlier stated, the security of assets is one of the most critical concerns of crypto users. Since private keys are vital to crypto transactions, there are huge risks that users may lose all their funds if they lose the keys. However, the loss of private keys is a common occurrence. For instance, last year, a man lost the private key to the wallet that contained his $220 million worth of Bitcoins. The loss of the private key meant that the Bitcoins were permanently irretrievable.
Another concern for many crypto users is that crypto exchanges are susceptible to hack attacks. These hack attacks can result in investors losing a significant proportion of their funds. Crypto custody services help solve these problems. Third-party crypto service providers integrate high-grade security systems to store clients’ private keys safely. Many of these service providers also have insurance policies that will cover funds in cases of hack attacks.
However, apart from the technical necessities of crypto custody services, the law can also make them necessary. For instance, US regulators require that investors holding more than $150,000 worth of crypto entrust the assets to custody providers.
There is no doubt that the crypto wave is here to stay. However, as crypto adoption increases, investors will undoubtedly require custody services to keep their funds secure. National governments are also likely to regulate these providers to protect investors.