What Are the Different Types of Crypto Custody and How Do They Work?
Crypto custody refers to the way individuals or organizations store and protect their digital assets. Security remains a top concern, as losing access to private keys can mean losing funds permanently. The main types of crypto custody include self-custody, partial custody, and third-party custody. Each method offers different levels of control and risk. Solutions like Safeheron and MPC Self-Custody help enterprises and institutions manage digital assets with advanced security.
Key Takeaways
- Crypto custody means how people or organizations store and protect their digital assets, with three main types: self-custody, partial custody, and third-party custody.
- Self-custody gives full control but requires strong security practices and responsibility to avoid losing access to assets.
- Partial custody shares control between the user and a provider, balancing security and convenience with backup options.
- Third-party custody offers ease and professional management but involves trusting the custodian and managing counterparty risks.
- Advanced solutions like Safeheron use technologies such as Multi-Party Computation (MPC) to improve security and help institutions manage digital assets safely and efficiently.
Types of Crypto Custody
Understanding the main types of crypto custody helps organizations and individuals choose the right approach for digital asset security. The three primary types of crypto custody are self-custody, partial custody, and third-party custody. Each type offers different levels of control, security, and operational practices.
| Custody Type | Control Level | Security Responsibilities | Operational Practices and Services |
|---|---|---|---|
| Self-Custody | Full control by the organization | Organization manages private keys and security | Requires best practices like hardware wallets, strong passwords, multi-factor authentication; higher risk and responsibility |
| Third-Party Custody | Control managed by professional entities | Use of cold storage, multi-signature technology, regular audits, regulatory oversight | Provide additional services such as insurance, customer support, reporting, and user-friendly custody wallets |
| Partial/Hybrid Custody | Shared control between user and provider | Varies depending on arrangement | May combine elements of self-custody and third-party services |
Self-Custody
Self-custody means the individual or organization holds and manages their own private keys. This method gives full control over digital assets. Users often use hardware wallets, software wallets, or advanced solutions like multisig and Multi-Party Computation (MPC). Self-custody appeals to experienced crypto users who value autonomy and want to avoid counterparty risk. However, it also brings significant responsibility. If private keys are lost or stolen, assets can become permanently inaccessible. Research shows that about 20% of bitcoin is considered lost, often due to lost keys. Safeheron specializes in advanced self-custody for institutions, using MPC and TEE technologies to enhance security and eliminate single points of failure.
Partial Custody
Partial or hybrid custody blends elements of self-custody and third-party custody. In this model, both the user and a service provider share control over the assets. For example, a provider might hold one part of a multisig wallet, while the user holds the others. This approach can balance convenience and security. It allows for backup and recovery options, but still requires trust in the service provider. Partial custody is less common than the other types of crypto custody, but it can suit organizations seeking a middle ground.
Third-Party Custody
Third-party custody involves delegating asset management to a professional custodian, such as an exchange or financial institution. These custodians use advanced security measures, including cold storage, regular audits, and regulatory compliance. Many investors prefer this model for its convenience and added protections. However, third-party custody introduces risks such as data breaches, cyber incidents, and operational failures. In 2023, 61% of companies experienced a third-party data breach or cyber incident. Financial institutions must manage these risks through vendor due diligence and ongoing monitoring. Despite these challenges, third-party custody remains popular, especially among investors seeking regulatory safeguards and customer support.
Note: The types of crypto custody continue to evolve as technology and regulations advance. Solutions like Safeheron’s MPC Self-Custody offer institutions a secure and flexible way to manage digital assets without relying on third parties.
How Each Type Works
Self-Custody Methods
Self-custody gives users direct control over their digital assets. People and organizations use several methods to manage their private keys and secure their funds.
- Hardware Wallets: These devices store private keys offline. They protect against online threats and hacking. Users must physically confirm transactions on the device, which adds a strong layer of security. Backup options like seed phrases or Shamir Backup help recover assets if the device is lost or damaged. Hardware wallets offer high security and control, but users must keep the device safe and remember their recovery information.
- Software Wallets: These wallets run on computers or smartphones. They provide easy access and convenience. However, they store private keys on internet-connected devices, making them more vulnerable to malware and hacking. Software wallets are popular for daily transactions but require careful security practices.
| Performance Metric | Hardware Wallets | Software Wallets |
|---|---|---|
| Security | Private keys stored offline, immune to online threats | Susceptible to malware and hacking |
| Transaction Verification | Requires physical confirmation on device | No physical confirmation required |
| Backup and Recovery | Uses recovery seed phrases and advanced options like Shamir Backup | Relies on seed phrases or backup files |
| Accessibility | Requires physical device connection | Easily accessible via internet on multiple devices |
| Convenience | Lower; device needed for transactions | High; quick and easy to use |
| Cost | Higher; typically $40-$200 | Generally free or low cost |
| Durability | Built tough with strong casing to resist damage | Vulnerable to software issues and data loss |
| Mobility | Less mobile; must carry device | High mobility via apps on smartphones/computers |
| Control | Full control over private keys | Full control but more vulnerable to device compromise |
Hardware wallets excel in security by isolating private keys offline and requiring physical confirmation for transactions. Software wallets offer more convenience but come with higher risks.
- Multisignature (Multisig) Wallets: These wallets require multiple approvals for a transaction. For example, a company might need three out of five managers to sign before moving funds. Multisig adds protection against mistakes or theft.
- Multi-Party Computation (MPC): MPC splits the private key into several parts, held by different parties or devices. No single person ever has the full key. This method eliminates single points of failure and boosts security. Institutions often use MPC for advanced self-custody.
Safeheron’s MPC Self-Custody solution uses both MPC and Trusted Execution Environment (TEE) technologies. This approach protects private keys, supports customizable wallet governance, and streamlines approval workflows. Many institutions choose Safeheron to manage digital assets securely and efficiently.
A recent survey found that 63% of institutional investors see improved custody solutions as a key reason for adopting cryptocurrencies. Solutions like Safeheron’s MPC Self-Custody help build trust and confidence for large organizations.
Partial Custody Methods
Partial custody, also called hybrid custody, combines features of self-custody and third-party custody. Both the user and a service provider share control over the assets.
- Shared Multisig Wallets: In this setup, the user and the provider each hold part of the signing power. For example, a wallet might need two out of three signatures, with the provider holding one key and the user holding the other two. This arrangement allows for backup and recovery if one party loses access.
- Distributed Key Control with MPC: Hybrid custody can use MPC to split key control among multiple parties. No single party can move funds alone. This method prevents unauthorized transactions and increases security.
- Wallet Temperature Models: Hybrid custody often uses a mix of hot, warm, and cold wallets. Hot wallets stay online for quick access, while cold wallets remain offline for better security. Warm wallets require manual approval, balancing convenience and safety. Most funds stay in cold storage, with smaller amounts in hot or warm wallets for daily use.
Hybrid custody models distribute risk and responsibility. They use multi-party signing protocols and fund distribution strategies to balance security and operational efficiency.
- Pooled vs. Allocated Funds: Some providers pool client funds together, while others keep them separate. Allocated models offer better legal protection and clearer asset tracking.
Third-Party Custody Methods
Third-party custody means a professional custodian manages the digital assets. These custodians use advanced security and compliance measures.
- Custodial Exchanges and Institutions: Users deposit assets with exchanges or financial institutions. The custodian holds the private keys and manages security. Users access their funds through the custodian’s platform.
- Cold Storage and Hardware Security Modules (HSMs): Custodians store most assets in cold wallets, which are offline and physically protected. They may use HSMs to safeguard private keys and automate secure transactions.
- Regular Audits and Compliance: Third-party custodians follow strict regulations. They conduct regular audits, comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) rules, and often carry insurance to protect against theft or hacking.
Institutional custody solutions focus on transparency, compliance, and insurance. They use segregated wallets, regular audits, and advanced security frameworks like MPC and hardware isolation.
- User Experience and Automation: Many custodians offer user-friendly interfaces, real-time monitoring, and API access for automated transactions. These features improve efficiency and make digital asset management easier for clients.
- Security Risks: Third-party custody introduces counterparty risk. Recent statistics show that 98% of global organizations connected to at least one third-party vendor that experienced a breach in the past two years. Indirect cyberattacks through third parties have increased from 44% to 61%. These numbers highlight the importance of strong risk management and continuous monitoring.
The types of crypto custody each use different methods to balance security, control, and convenience. Institutions and individuals must choose the right approach based on their needs and risk tolerance.
Pros and Cons
Self-Custody Pros and Cons
Self-custody gives users complete control over their digital assets. This approach appeals to those who value autonomy and privacy. However, it also brings significant responsibility and risk. The table below summarizes the main benefits and risks of self-custody solutions:
| Aspect | Details |
|---|---|
| Wallet Types | Hot wallets offer speed but expose keys online. Cold wallets keep keys offline for security but require manual steps. Warm wallets balance speed and security but can be prone to human error. |
| Technology Risks | Cyberattacks, phishing, poor API security, and unpatched software can lead to loss of funds. |
| Operational Risks | Insider fraud, poor key protection, and single-person control can cause business continuity issues. |
| Compliance Risks | Regulatory scrutiny is increasing. Non-compliance can result in fines or legal trouble. |
| Benefits | Full control, immediate transactions, and privacy. |
| Recommendations | Experts suggest using qualified custodians for wallet architecture and keeping emergency funds in self-custody. |
Safeheron’s MPC Self-Custody addresses many of these challenges for enterprises. By using MPC and TEE technologies, Safeheron eliminates single points of failure, enforces strong governance, and supports secure, auditable workflows.
Partial Custody Pros and Cons
Partial custody, or hybrid custody, splits control between the user and a provider. This model can offer a balance between security and convenience. Users gain backup and recovery options, while still retaining some control. Studies show that shared custody can reduce stress and improve satisfaction in certain contexts, but these benefits depend on the quality of relationships and clear role definitions. For organizations, partial custody can help distribute risk and prevent single-person errors. However, it may introduce complexity and require trust in the provider’s processes.
Partial custody works best when both parties maintain strong communication and clear responsibilities. The model suits organizations seeking a middle ground between full autonomy and outsourced management.
Third-Party Custody Pros and Cons
Third-party custody places asset management in the hands of professional custodians, such as exchanges or financial institutions. This approach offers several advantages. Users benefit from regulatory compliance, insurance, customer support, and easy access to fiat on-ramps. Institutions often choose third-party custody for operational redundancy and institutional-grade security.
However, third-party custody also introduces risks. Users must trust the custodian to act responsibly. High-profile failures, such as those involving Celsius and FTX, show that insolvency or fraud can lead to loss of funds. Withdrawal restrictions, service fees, and regulatory exposure can also affect user experience. Some custodians use omnibus wallets to improve liquidity and reduce transaction costs, but this can make asset tracking more complex.
Choosing the right custody model depends on an organization’s risk tolerance, operational needs, and regulatory environment. Reliable governance and transparent processes remain essential for all custody types.
Comparing Types of Crypto Custody
Comparison Table
The table below offers a quick reference for comparing the main types of crypto custody. It highlights differences in security, control, convenience, and risk.
| Custody Type | Security Features | Control Level | Convenience Level | Main Risks and Mitigations |
|---|---|---|---|---|
| Self-Custody | Hardware wallets, MPC, multisig, offline storage | Full control over keys | Moderate (requires expertise) | Loss of keys, human error, device loss; no third-party recourse |
| Partial/Hybrid Custody | Shared multisig, distributed key control, tiered wallets | Shared control | Moderate to high | Complexity, reliance on provider for recovery, role confusion |
| Third-Party Custody | Cold storage, HSMs, insurance, audits, regulatory compliance | Low (custodian controls keys) | High (user-friendly, easy access) | Counterparty risk, hacking, insolvency; mitigated by insurance and audits |
Tip: Self-custody gives users the most control but also the most responsibility. Third-party custody offers convenience and support but introduces counterparty risk.
Key Differences
The types of crypto custody differ in several important ways:
- Self-custody allows individuals or organizations to manage their own private keys. This method provides full control but demands technical skill and careful security practices. Loss or theft of keys can result in permanent asset loss.
- Partial or hybrid custody splits control between the user and a provider. This model uses shared multisig wallets or distributed key management. It balances convenience and security, making it suitable for organizations that want backup options without giving up all control.
- Third-party custody places asset management in the hands of professional custodians. These providers use advanced security measures, insurance, and regulatory compliance to protect assets. Users benefit from easy access and customer support, but must trust the custodian’s reliability.
Recent industry reports show that 41% of C-suite executives prioritize compliance support when choosing a custodian. Regulatory compliance remains a key factor, especially as global rules continue to evolve. Some custodians segregate client assets and maintain insurance to reduce risk. Others offer regular audits and transparent reporting to build trust.
- There is no single global standard for crypto custody. Each jurisdiction sets its own requirements. This patchwork of rules affects how providers protect client assets, especially during insolvency.
- Best practices include segregating assets, ensuring bankruptcy protection, managing cyber risks, and providing clear disclosures.
Choosing the right custody solution depends on an organization’s need for control, convenience, and regulatory compliance. Institutions often select regulated custodians for legal protection, while experienced users may prefer self-custody for autonomy.
Choosing the Right Solution
Factors to Consider
Selecting the right crypto custody solution requires careful evaluation of several factors. Enterprises and institutions must balance security, control, compliance, and operational scale. The market for crypto custody continues to grow, with more organizations adopting solutions that fit their unique needs. Recent trends show that enterprises use a mix of self-custody, third-party custodians, and advanced methods like Multi-Party Computation (MPC) to manage digital assets securely.
Key due diligence metrics help organizations assess potential custody providers. The table below summarizes critical considerations:
| Due Diligence Metric | Description |
|---|---|
| VASP Screening | Ensures compliance with anti-money laundering standards. |
| Wallet & Transaction Screening | Detects illicit activity in wallets and transactions. |
| Insurance Coverage | Protects assets against loss or theft. |
| Segregated Asset Storage | Keeps client assets separate for enhanced security. |
| Regulatory Adherence | Meets licensing and ongoing regulatory requirements. |
| Transparency | Provides clear communication about fees and operations. |
| Operational Controls | Implements strong procedures for daily risk management. |
Other important factors include credit risk, market volatility, and third-party dependencies. Organizations should also review technical details, market dynamics, and the regulatory landscape. Transparency and skepticism remain essential when evaluating new solutions.
Tip: Enterprises should look for solutions that integrate with existing compliance systems and offer continuous risk monitoring.
Safeheron for Institutions
Safeheron stands out as a leading provider for institutions seeking robust digital asset management. Its MPC Self-Custody solution uses advanced technologies like MPC and Trusted Execution Environment (TEE) to eliminate single points of failure. Safeheron supports customizable wallet governance, real-time monitoring, and flexible approval workflows, making it ideal for financial institutions, asset managers, and trust companies.
Many enterprises now prefer solutions that combine security, compliance, and operational efficiency. For example, HashKey OTC Global adopted Safeheron to manage high-volume, multi-chain transactions. This partnership improved operational reliability and compliance while supporting business growth. Safeheron’s platform enables rapid deployment, seamless integration, and strong asset protection.
The types of crypto custody available today allow organizations to choose the best fit for their needs. Safeheron’s institutional-grade features help clients meet regulatory standards, manage risk, and scale operations confidently.
The types of crypto custody offer different levels of control, security, and convenience. Institutions must assess their needs and risk tolerance before selecting a solution. Advanced platforms now address traditional challenges by combining automation, real-time monitoring, and regulatory compliance.
- Safeheron delivers institutional-grade self-custody with MPC and TEE technologies.
- The platform features distributed key management, dynamic security, and adaptive compliance.
- It supports multi-party governance and efficient cross-border transactions.
Recent industry analysis shows that these innovations improve operational efficiency, reduce costs, and enhance security, making advanced custody solutions a strong choice for organizations. For more on digital asset security, explore Safeheron’s resources and product documentation.
FAQ
What is the main difference between self-custody and third-party custody?
Self-custody gives users full control over their private keys. Third-party custody means a professional service manages the keys. Self-custody offers more autonomy. Third-party custody provides convenience and support.
How does Multi-Party Computation (MPC) improve digital asset security?
MPC splits a private key into several parts. Different parties or devices hold these parts. No single person can access the full key. This method reduces the risk of theft or loss.
Why do institutions choose Safeheron for digital asset management?
Institutions select Safeheron for its advanced security features. The platform uses MPC and TEE technologies. It supports customizable governance and real-time monitoring. Safeheron helps organizations meet compliance and scale operations.
Can Safeheron integrate with DeFi protocols and exchanges?
Yes. Safeheron supports integration with all public EVM-compatible blockchains and DeFi protocols. The platform also connects with major exchanges. This allows seamless asset management across different platforms.
What should organizations consider when choosing a crypto custody solution?
Organizations should review security, control, compliance, and operational needs. They must check for insurance, regulatory adherence, and transparent processes. The right solution matches the organization’s risk tolerance and business goals.
