To keep ownership of your crypto assets you need to have private keys.

Ownership of liquid assets such as stocks or crypto is a contentious issue.

As they say in crypto, “not your keys, not your coins.”

Past Incidents of Misuse of Ownership Rights

From past experiences of scams and hacks in financial markets, it is better to keep the ownership of your assets intact.

An example of its importance is the Karvy scam wherein the stockbroker, Karvy, secretly pledged the shares of the investors without their consent. 

Pledging means taking a loan against stocks. These funds were then invested in the other ventures of the brokers.

It resulted in a loss of millions for thousands of investors.

Karvy misused the Power of Attorney (PoA) signed by the investors.

Similar scams have taken place in cryptoverse such as the Quadriga CX and Thodex rug pull.

In both these scandals, the owners of the Centralized Cryptocurrency Exchange (CEX) fled with investor money.

Other than that, if a CEX gets hacked, even then the investor cannot recover the funds unless the exchange takes responsibility and returns the investor money. For, instance Binance was hacked in 2019, but it covered the investors under its Secure Asset Fund emergency insurance fund.

To protect yourself from such malicious actors, the best solution is to keep crypto assets in a Non-Custodial wallet.

These wallets do not keep the ownership. The owner of the wallet owns the private keys of the crypto assets, hence has the sole discretion over the funds.

Let’s cover both Custodial and Non-Custodial wallets in detail.

Custodial Wallet

This wallet holds the funds of the user, but it does not provide the user with ultimate ownership. The private keys lie with the service providers who are also responsible for the security of the assets.

Its benefit is that the user does not need to protect the private keys or the seed phrase. Losing any of that puts the funds in danger or can result in loss of funds. 

Another benefit is the user-friendly interface of the wallet. It hides all the complexities of interacting with the blockchain, smart contracts, etc., providing a high-level view of the operations.

Usually, when an investor purchases crypto on a CEX, the assets are held in the exchange’s wallet, which in most cases is a Custodial Wallet.

The biggest disadvantage is discussed above with respect to the different scams and hacks. Whoever holds the keys, controls the assets. So, in the case of Custodial Wallets, the ultimate owner is the service provider who can use the funds without the consent of the owner.

Non-Custodial Wallet

These wallets provide the user with private keys or seed phrases. The funds are stored on the blockchain rather than the wallet which is just used to interact with the blockchain. Non-Custodial Wallets act as a User Interface between the user and the blockchain.

In order to use the funds, the user has to sign the transactions with the private keys. Usually, Non-Custodial Wallets provide the user with a mnemonic seed phrase consisting of words. The phrase is used as a backup password recovery method. So, if a user loses the password of the wallet, they can recover it through the seed phrase.

The most significant benefit is that the user has the ultimate ownership and exercises complete control over the crypto assets.

The funds can be lost only if the user loses keys, the wallet is hacked or the blockchain gets compromised.

An issue with Non-Custodial Wallets is that the user has to interact with the blockchain which can be cumbersome for some. These wallets do not have as user-friendly experience as the Custodial Wallets do. Moreover, users should also have a basic knowledge of how to backup and restore their wallets.

Examples of Non-Custodial Wallets are Trezor, Metamask, Trust Wallet, Ledger, , etc.

One can use any type of wallet according to the circumstances. It should be kept in mind that nothing is hackproof. Any digital service one may use can be hacked. So, it is recommended to use only trustworthy services with robust security and control.