Self-custody or provider custody: what is the difference?
Who holds the means of access to your crypto-assets, what MiCA says about custody by a provider, and five questions to ask before choosing. Educational content.
A crypto-asset is not stored in an app the way a photo is stored on a phone. It is recorded on a ledger, and whoever controls the keys can move it. The real question of custody is therefore simple: who holds the means of access?
Two models
- Self-custody. You hold the private keys or the recovery phrase yourself, in a software or hardware wallet. Nobody else can move the assets, and nobody else can restore access if you lose the phrase.
- Provider custody. A company holds the keys for you, and you see a balance in its app. Access depends on the provider, its systems and its rules.
Neither model is free of risk. The risks are simply in different places.
What MiCA says about providers
The EU's Markets in Crypto-Assets Regulation (Regulation (EU) 2023/1114) treats custody as a regulated service. It defines it as "the safekeeping or controlling, on behalf of clients, of crypto-assets or of the means of access to such crypto-assets".
The recitals of the regulation describe what is expected of such a provider: an agreement with each client with certain mandatory terms, a custody policy that clients can obtain on request, and a rule that clients' crypto-assets are not used for the provider's own account.
To check whether a provider is authorised in the EU, see how to check a crypto provider in the ESMA register.
Five questions before you choose
- Who can move the assets? Only you, only the provider, or both?
- What happens if you lose your device or phrase? With self-custody, a lost recovery phrase usually means lost access.
- Is the provider authorised, and in which country?
- Can you read its custody policy, and the terms for withdrawals?
- How will you keep backups, and who else knows where they are?
A note on habits
Self-custody puts the responsibility on you: the recovery phrase must be written down and stored safely, never typed into a website or a message. Provider custody puts trust in a company. Many people use both, for different purposes.
Related: Your seed phrase in 5 rules · Hot wallet or cold wallet · Kripto Akadémia
Educational content. Not investment advice.
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