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OwningLevel 2Intermediate9 minUpdated Wallets, custody and private keys
Crypto has one question a stock investor never faces: who holds the keys. The answer decides what happens to you if the counterparty fails.
- Three ways to own crypto, and what you actually control in each.
- What hot, cold and MPC mean in custody.
- Why segregation of customer assets is the single most important protection.
The key is ownership
Crypto-assets are always on the chain. What is stored is the private key: a string of characters that proves the right to move the assets. A lost key means lost assets, and there is no recovery. A stolen key means stolen assets, and there is no reversal.
That is why the question is not “where is my crypto” but “who can sign a transfer on my behalf”.
Three ways to own
Regulated service
- The service provider takes care of managing the keys.
- Customer assets segregated, supervision by an authority.
- Custody always involves counterparty and operational risks.
Your own wallet
- No counterparty risk related to a custodian.
- Full control over the assets.
- All the responsibility, and all the mistakes, are yours.
Exchange-traded product
- Trading in a familiar securities account.
- Custody and record-keeping taken care of.
- You don't control the coins and can't transfer them.
Hot, cold and MPC
Professional custody is split across three techniques that are used together. The point is not which one is better but how they are combined.
| Method | How it works | Strength and weakness |
|---|---|---|
| Hot wallet | The key is on a server connected to the internet. | Fast for withdrawals, but more exposed to attacks. Kept to a small share. |
| Cold storage | The key is stored offline, physically isolated. | The most secure, but slower to use. Most of the assets are kept here. |
| MPC | The key is split into parts held by several parties, and nobody controls it alone. | Removes the possibility of misuse by a single person. Requires a sophisticated system. |
| Your own wallet | A hardware wallet or software for which you hold the recovery phrase. | No counterparty. Losing the recovery phrase is final. |
Segregation of customer assets
The single most important protection in a regulated service is segregation: the customer's money and crypto-assets are kept separate from the company's own assets. That way, if the company goes bankrupt, the customer's assets are not mixed up with the company's debts.
This is exactly what the collapsed unregulated platforms lacked. On an unregulated platform the customer often has only a claim against the platform, not coins on the chain. If the platform uses customer assets for its own business, its collapse takes the customer's assets with it, even if the blockchain works flawlessly.
Three questions to ask a service provider
- Does it have an authorization, and who supervises it? In the EU the answer should be a MiCA authorization and a national supervisor.
- How are customer assets segregated? Segregation must cover both money and crypto-assets.
- What happens if the business ends? A good provider tells you this in advance and clearly.
An unclear answer is an answer in itself.
This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.
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