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Glossary

Custodial Wallet

A custodial wallet is a type of cryptocurrency wallet in which a third party — typically an exchange, fintech platform, or wallet provider — holds and manages the user’s private keys on their behalf. Users access their funds through a standard login interface, similar to online banking, but they do not directly control their private keys.

Custodial wallets are common on centralized platforms like Binance, Coinbase, and Kraken. While they offer convenience and user-friendly interfaces, they also require users to trust the provider with custody of their assets, introducing a trade-off between usability and sovereignty.

How Custodial Wallets Work

  1. Account Creation - Users sign up on a custodial platform with an email and password, rather than generating a seed phrase.
  2. Key Management - The provider stores and manages the private keys in its backend infrastructure.
  3. Transaction Execution - Users request transactions through the platform, which signs and broadcasts them on their behalf.
  4. Access and Recovery - Login credentials (and often two-factor authentication) are used instead of seed phrases for wallet access.
  5. Compliance and Oversight - Custodial wallets often include KYC/AML checks and may be subject to regulatory oversight.

Key Features

  • Third-Party Custody - The platform holds and secures the user’s private keys.
  • Easy Access - Users interact through familiar login flows with email and passwords.
  • Integrated Services - Often includes fiat onramps, trading, and staking directly within the platform.
  • No Seed Phrase - Users don’t need to manage or write down a recovery phrase.
  • Centralized Security - Security is maintained by the provider, not the user.

Benefits of Custodial Wallets

  • User-Friendly - Ideal for beginners unfamiliar with self-custody or private key management.
  • Password-Based Recovery - Easier recovery in case of forgotten credentials.
  • Built-In Features - Many custodial wallets include trading, yield earning, and support.
  • Lower Risk of User Error - No need to manually manage sensitive keys or seed phrases.
  • Customer Support - Platforms often provide assistance in case of account issues.

Use Cases of Custodial Wallets

  1. Centralized Exchanges - Wallets provided by platforms like Binance, Coinbase, or Kraken.
  2. Retail Fintech Apps - Services like PayPal and Revolut offer crypto custody to mainstream users.
  3. Institutional Custody Solutions - Providers like Fireblocks and BitGo offer secure wallets for enterprises.
  4. Beginner Access - Onboarding new users into crypto without requiring technical knowledge.
  5. Fiat-Crypto Integration - Custodial wallets often support seamless bank transfers and card payments.
  6. Managed DeFi Access - Some platforms offer simplified access to DeFi protocols through custodial interfaces.

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