Custody

November 21, 2023 - Around 3 mins mins to read

Understanding Custody

Custody, in the context of finance, refers to the protective service offered by a financial institution to safeguard a customer’s securities. The entity responsible for providing custody services, known as a custodian, collects dividends, interest, and profits from the sale of securities and then distributes the funds according to the customer’s instructions.

Over time, the concept of custody has evolved from a personal relationship to an interaction with a highly regulated institution. This transformation has brought about a new level of financial complexity, further distinguishing the banking sector from everyday life.

Modern custodians not only hold customer funds but also utilize these assets to lend them out for their own benefit. They play a vital role in the financial ecosystem, catering to both novice and experienced users by offering advanced trading tools. Additionally, there has been a rise in the number of firms specializing in asset storage and management, some of which provide insurance to protect clients in the event of financial loss.

Custodians can hold assets in both digital and physical forms. These custodial businesses are typically large and reputable entities, such as major banks, as they are entrusted with safeguarding assets worth millions or billions of dollars.

In the world of blockchain, custodial solutions are often offered by third-party cryptocurrency exchanges. These exchanges hold the private keys of their cryptocurrency users, as well as the crypto assets like Bitcoin and Ethereum.

The custody of cryptocurrencies is entirely controlled by the crypto exchanges, which implement security measures to safeguard users’ digital assets from theft or losses. In the event of a hack or theft, the custodian (crypto exchange) bears full responsibility for reimbursing their users. A notable example of this is the Binance hack of 2019, where $40 million was stolen, and the CEO announced full refunds for the victims.

Crypto custody providers, also known as custodians of crypto assets like Bitcoin, Ethereum, Cardano, and Terra, offer services to both institutions and individuals. These custodians provide user-friendly, secure, and compliant platforms for storing and protecting digital assets.

While cryptocurrency custodians are a reliable way to store digital currencies, users should still exercise caution against major hacks that could result in permanent loss of funds. Experienced crypto investors recommend keeping a significant portion of digital currency holdings in cold storage if they are not actively using them or have no immediate plans to do so. This practice helps protect against hacking activities that may occur on a custodian platform.