Custodial Wallets vs Non-Custodial Wallets: Control or Convenience?

In the case of custodial wallets, a custodian, like a crypto exchange, stores the wallet's private keys. In contrast, non-custodial wallets allow users to own and control their private or secret keys.

Crypto wallets are divided into different types, with custodial and non-custodial wallets being the major classifications. These wallets differ from each other based on their varied features, such as security, user experience, recovery options, and more.

Owning a crypto wallet is one of the primary steps into the crypto world. From trading tokens and minting NFTs to voting on governance proposals, you'll need a wallet.

According to the Zion Market Research report, the global crypto wallet market size is expected to surpass $47 billion by 2030 with a CAGR of nearly (estimated) 24.23% till 2030.

While one type of wallet opens up the DeFi world for you, the other offers incredible convenience — so which one is right for you?

In this article, we'll discuss custodial and non-custodial wallets in detail to help you answer that question.

 

What are Custodial Wallets?

A custodial wallet is a crypto wallet solution wherein a custodian retains access to your private keys and takes care of private key security on your behalf. This also means that the custodian has complete control over your funds — hence the phrase “Not your keys, Not your crypto.”.

You can create a free custodial wallet through centralized crypto exchanges like Coinbase or KuCoin. Once your wallet is created, you authorize it to perform certain functions like signing transactions, managing the wallet keys, and more.

Most users, especially beginners, prefer to use a custodial wallet as managing private keys is difficult for them. Moreover, losing the private keys to the wallet results in the permanent loss of the stored crypto assets.

 

What are Non-Custodial Wallets?

Non-custodial wallets provide the user with complete ownership of their assets by generating and handing over private keys at the time of wallet creation. Also known as a self-custodial wallet, you're the sole custodian of your crypto wallet.

When you create a new non-custodial wallet, it provides you with sensitive information like recovery phrases and private keys. It is important to keep this information safe to recover your assets in case you lose your wallet password.

Software wallets and hardware wallets are the most commonly used non-custodial wallet types. Software wallets allow you to access your wallet through web browsers, mobile devices, or computers. Hardware wallets are physical devices that help store crypto assets offline.

Learn how to set up a wallet here.

 

Custodial Wallets vs Non-Custodial Wallets

Private Key Ownership

In the case of a custodial wallet, the exchange you choose to create the wallet has complete access to the private keys. As a result, a third party controls your crypto assets stored in the wallet.

Non-custodial wallets allow you to own your private keys independently. So, you have total control of your wallet's activities, and there's no room for unauthorized wallet transactions (unless your private key is exposed — read this post on how to protect yourself from crypto scams).

 

Backup and Recovery

Since a crypto exchange holds the rights to the custodial wallet, you can easily retrieve your password at any time. This process is as simple as recovering our social media accounts after forgetting our login passwords.

However, things get complicated when you lose your wallet's private keys. If you lose your seed phrase and/or private keys, it's impossible to recover the wallet, resulting in the permanent loss of your stored cryptocurrencies or NFTs.

 

User Experience

Custodial wallets often come with a more user-friendly interface. You can use the features of these wallets by reading the simple instructions or watching a YouTube tutorial. For example, people with basic web browsing knowledge can easily use custodial wallets.

On the other hand, non-custodial wallets are suitable for people with basic hands-on experience with crypto-based apps or platforms. Someone new to the crypto space may initially find it a bit technical and confusing.

 

Security

When it comes to storing and transacting crypto assets, security is the most important factor to consider. For instance, the security of your custodial wallet is completely dependent on the security features implemented by the crypto exchanges. As a result, any security glitch in their system could lead to wallet hacks that cause asset loss.

However, non-custodial wallets are way more secure as you're the only person in control of your wallet, restricting unauthorized access. For this reason, hackers have limited opportunities to break into your wallet compared to custodial wallets.

 

Wallet Creation

If you're trying to create a custodial wallet, you need to create an account with the exchanges. In this process, you need to provide your personal information and undergo Know Your Customer (KYC) and Anti-money laundering (AML) verifications. The complexity of these verifications and account creation varies based on exchanges and your jurisdictions.

On the other hand, creating a non-custodial wallet is as easy as ordering a pizza. All you need to do is set a secure password and save your private key or backup text, and you're good to go.

 

Transaction Fees and Time

Custodial wallet-based transactions involve centralized exchanges, so completing a transaction can take more time. In addition, the total fees charged will be higher due to the association of the custodian.

While we consider the non-custodial wallets, the absence of intermediaries plays a crucial role in faster wallet-based transactions. Not only that, the total cost involved is also significantly reduced as there are no exchange fees.

 

Customer Support

Customer support is helpful when a crypto user faces an issue related to wallet services. Most prominent exchanges offer customer support to the owners of custodial wallets. You can raise an online ticket regarding the issue. The support team will analyze the problem and provide suitable assistance.

Unfortunately, when it comes to non-custodial wallets, customer support is unavailable or limited. As a result, in most cases, these wallet users are on their own when facing problems related to wallet-based activities.

 

Real-time Transaction

The crypto transactions made through major custodial wallets don't reflect on the blockchain in real-time. The reason for this delay is the interference of the intermediary in providing permission for every transaction.

In contrast, transactions using non-custodial wallets are directly reflected on the blockchain in real time. Here, the wallet interacts directly with the blockchain network without any need for third-party authorization.

 

Accessibility

The accessibility to create and use non-custodial wallets is limited only to registered users on that particular platform. For example, to use Binance's non-custodial wallet, it's mandatory to create an account with the exchange by providing the required documents and completing the necessary verifications.

On the other hand, the majority of custodial wallets allow you to create a new wallet without any registration or verification process. To do so, you only need to visit their website or install their official app and create a free wallet within a few minutes.

 

What are the Pros and Cons of Custodial Wallets?

Pros	Cons
Less user responsibility on private keys	Third parties control private keys
User-friendly wallet interface	Required to complete KYC and AML verifications
Easier to recover wallets	No offline storage options
Smooth learning curve for beginners	Limited wallet features
Customer support availability	Vulnerable to hacks and wallet attacks

 

What are the Pros and Cons of Non-Custodial Wallets?

Pros	Cons
Complete ownership of private keys	The user holds total responsibility for the private keys
Faster wallet creation	Less user-friendly interface
No need for KYC or AML verifications	More technical knowledge is required
Offline storage options availability	There are no recovery options once private keys are lost
Access to numerous dApps	Limited customer support options

 

How to Choose a Custodial Wallet?

Choose a reputed crypto exchange that has been in the crypto space for a while. It's best to choose prominent exchanges with proof of reserves, which adds a certain degree of guarantee for your assets in case of events like bankruptcy. You can check the Trust Score of exchanges on CoinGecko before creating a new custodial wallet.

You can also use exchanges like Coinbase or Gemini, which offer insurance to avoid loss in case of wallet hacks. For example, an insurance fund completely covered customers’ stolen assets worth $280 million in the KuCoin exchange hack of 2020.

Finally, check the exchange or platform's compliance with your jurisdiction. For instance, look for licenses and registrations like FIU for India, FCA for the UK, FinCEN for the USA, FINTRAC for Canada, etc.

 

How to Choose a Non-Custodial Wallet?

While choosing a non-custodial wallet, always go for reputed ones like Ledger, Tangem, Trust Wallet, MetaMask, etc. Moreover, look for Evaluation Assurance Level (EAL) ratings of at least EAL6 for hardware wallets. In the case of software wallets, check for audit reports by reputed firms like Halborn, Certik, and Hacken.

It is also a good practice to research the wallet's hack or theft history. For example, non-custodial wallets like Coinomi have never been hacked since their launch in 2014.

If the wallet has Transak integrated, then it becomes even more convenient. Users can buy crypto directly from the wallet without having to first go on an exchange and then manually send the coins to the wallet. Consequently, users enjoy faster execution, which usually takes hours or days, depending on network congestion and the exchange's lengthy KYC process.

Transak fast tracks the lengthy KYC process by introducing a multi-level KYC solution. Read more about Transak’s multi-level KYC here.

 

Examples of Custodial Wallets

The list of the best custodial wallets is as follows:

1. Bybit: Launched in 2018, Bybit's custodial wallet has a user base of over 20 million, and it provides 24/7 customer support to users from more than 160 countries.
2. Binance: With over 185 million users, the Binance wallet allows users to participate in NFT and token-based activities and offers 24/7 customer assistance in 40 languages.
3. Coinbase: The Coinbase platform has users' assets of over $130 billion, and its custodial wallet allows users to trade, swap, and bridge tokens.

 

Examples of Non-Custodial Wallets

Now, we'll explore the list of the best non-custodial wallets:

1. Ledger: Ledger offers a few varieties of non-custodial hardware wallets with thousands of token support to store tokens and NFTs offline.
2. Zengo: Available for iOS and Android users, Zengo is a mobile app-based non-custodial wallet with an impressive track record of not being hacked since its inception in 2018.
3. TotalSig: TotalSig is a non-custodial, multi-chain multi-sig crypto wallet that offers strong security with a user-friendly interface for managing digital assets.

 

Should You Choose Custodial or Non-Custodial Wallets?

Recent events in the crypto industry have underlined the risks of custodial wallets. If the exchange holding your funds fails, mismanages assets, or gets hacked, you could lose everything. Self-custody, where you are your own custodian, is becoming the favored approach for users who want genuine ownership of their crypto.

Transak understands the importance of secure, user-centric crypto solutions. Our commitment to self-custody resonates with those who value these principles:

• True Ownership: Transak believes users should have complete control over their crypto, not cede authority to an exchange.
• Enhanced Security: When you hold your keys, you dramatically lower the chances of external threats impacting your funds.
• Transparency and Trust: True digital asset ownership fosters trust. With Transak's non-custodial approach, you know your funds are always accessible, always under your control.

Note that, while self-custody of funds is mathematically more secure due to the underlying cryptography, you have to take precautions. Just like how you’d protect your email password or ATM pin, you should also protect your wallets’ private keys from prying eyes.

If you are not confident about keeping your crypto secure by yourself or feel self-custody is overwhelming, consider creating an account with a regulated crypto exchange in your country.

You can also use both custodial and non-custodial wallets for different use cases. For example, you can use custodial wallets to engage in campaigns, promotions, and other opportunities offered by exchanges. Non-custodial wallets are useful for the rest of DeFi — think airdrops, DEX trading, etc.

 

Conclusion

The decision between custodial and non-custodial wallets boils down to a fundamental question: do you prioritize convenience and support over absolute control? Or are you willing to accept the responsibility of managing your assets for the freedom that self-custody brings?

Custodial wallets make onboarding painless, easing new users into the world of cryptocurrency. If you're just dipping your toes in, this simplicity can be enticing. However, as the saying goes, "not your keys, not your crypto." Exchanges are attractive targets for hackers, and even well-regulated platforms aren't immune to mismanagement.

Non-custodial wallets put you in the driver's seat. This is liberating, yet unforgiving. You must secure your keys and seed phrases — losing them means losing your assets permanently. This kind of responsibility is empowering, but it demands a deeper understanding of how crypto works.

There is no one-size-fits-all answer. The key takeaway is this: Educate yourself. Understand the risks and rewards of each type of wallet. Think carefully about your goals with cryptocurrency and choose the path that aligns with your comfort and risk tolerance.

For more information, visit transak.com or follow on twitter.com/transak.