What is Custody
A custodian is an entity that holds an asset on the owner’s behalf. Usually, this is done to protect the owner from theft or loss.
Blockchain networks allow trustless peer-to-peer transactions to take place without the need for an intermediary to manage them. The cryptocurrency owners are the sole holders of the private keys that can be used to access their assets. In this way, they retain full control over their assets. To some, this is part of what makes cryptocurrencies appealing to them.
However, some crypto users, especially new inexperienced ones, opt to employ the services of a third party such as crypto wallets or exchanges. These entities manage the individuals’ private keys on their behalf, providing the users instead with the login setup they are more acquainted with.
While custody reduces the risk of user error, facilitates things for inexperienced individuals by providing them with more user-friendly interfaces, and administers the security of their wallets through key management, it entails risks of its own. If the custodian shuts down or encounters some technical issues, the users can lose their funds. Moreover, they could represent appealing targets to malicious actors as several users’ funds are stored in one place. Finally, they could be censored by authorities.