In the financial sector, the simplest definition of Custody is when an institution holds assets on behalf of someone else.
Custody is a term used in the context of traditional finance, with reference to the assignment of assets, properties and investments by investors to financial institutions that act as custodians. This reduces the risk for clients to lose their assets or have them stolen.
Another important aspect of custody is that the company or bank providing this service is responsible for your assets in the event of loss or theft. In some cases, depending on the contract in place with the company or the bank, if it is robbed, it is required to restore all your assets, because it is responsible for the loss. This is why the companies or banks that offer Custody service have very expensive insurance policies.
One last important element is that companies do not earn interest from the custody service. This is because the company that holds your assets is not allowed to reinvest them, as is the case when we deposit money into a bank account.
For this reason, a custody agreement often requires the investor to pay commissions in return for service and insurance in the event of a loss.
Therefore, to sum up, custody is a service that:
- involves entrusting your money to a bank or a company without the latter being able to reinvest it.
- guarantees a refund in case of loss or theft of your money
- can charge commissions in exchange for security and loss insurance.
Differences between Custody and Deposit
When we deposit money into a bank account or savings account, the bank is free to invest or reuse our money.
For example, it can allocate them to customers who take out a mortgage, and earn from the interest they generate.
On the other hand, if you sign a contract for the custody of your assets, the bank or institution to which you entrust your money and assets can only store and protect them on your behalf, without reinvesting them.
Custody in the Crypto sector
In the crypto sector, Custody means to protect and secure users’ wallets.
The custody of a wallet means the custody of its private keys and the cryptocurrencies that are deposited there. The company that offers Custody service has the full responsibility to protect your funds.
Today there are several companies that provide cryptocurrency custody services.
Like in a classic agreement, they protect your digital assets and offer guarantees in case of loss. Since they do not earn interest from the custody service, they usually charge a commission.
The Importance of Custody
The cryptocurrency market is still unregulated and quite risky, mainly because of hacker attacks that attempt to penetrate investors’ wallets and steal their funds. At the same time, since it is a decentralised system, the custody of private and public keys is entirely entrusted to the investor. If he loses the access data to his wallet, he cannot turn to anyone to recover his assets.
Therefore, companies that provide custodial services are becoming critical at this stage of the market, because they can recover your wallet access data in case you lose it and guarantee a refund if the system is hacked.
Custody platforms are designed to act as independent storage and security units, primarily aimed at institutional investors. These solutions, most of the time, tend to make use of a combination of online and offline custody technologies.