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Note: On December 12, the U.S. SEC officially issued a document to educate retail investors on the basics of crypto asset custody and help retail investors decide how to best hold crypto assets.Bitchain Vision Compilation:
The U.S. SEC’s Office of Investor Education and Assistance issued this investor announcement to help retail investors understand how to hold crypto assets.This bulletin outlines the types of crypto asset custody and provides tips and questions to help you decide how best to hold your crypto assets.
1. What is crypto asset custody?
Crypto asset “custody” refers to how and where you store and access your crypto assets.You typically access crypto assets through a device or computer program called a crypto wallet.Crypto wallets themselves do not store cryptoassets; instead, they store the “private key” or password to your cryptoassets.
Cryptoassets.Cryptoassets refer to assets generated, issued and/or transferred using blockchain or similar distributed ledger technology networks, including assets known as “tokens”, “digital assets”, “virtual currencies” and “cryptocurrencies”.Investors should be aware that the characteristics and design of cryptoassets, as well as the distributed ledger or blockchain technology used for issuance and/or transfer, may differ significantly.In other words, different cryptoassets may bring different benefits or risks.
When creating a crypto wallet, the following two keys or passwords are generated:
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private key.A private key is a randomly generated alphanumeric password used to authorize transactions of crypto assets.The private key is like the password to your crypto wallet.Once a private key is created, it cannot be changed or replaced.If you lose your private keys, you will permanently lose access to the crypto assets in your wallet.
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public key.A public key is another code used to verify transactions and allow others to send crypto assets to your crypto wallet.The public key cannot access the private key in the wallet and cannot be used to authorize transactions.The public key is like the email address of your crypto wallet.
Together, these keys prove your ownership of the cryptoassets and give you the right to send, receive, or use the cryptoassets.
2. Hot wallet and cold wallet
There are many types of cryptocurrency wallets, and the ways in which retail investors hold them vary.There are two main categories of cryptocurrency wallets: “hot wallets” and “cold wallets.”A hot wallet refers to a cryptocurrency wallet that is connected to the Internet and can be a desktop application, mobile application, or web application.Hot wallets allow you to conveniently access crypto assets for trading, but they also expose your crypto assets to cyber threats.
Cold wallets usually refer to physical devices that are not connected to the Internet, such as USB flash drives, mobile hard drives, or even pieces of paper.Cold wallets are generally less convenient than hot wallets for crypto asset trading.However, since cold wallets are not connected to the internet, they are generally more resistant to cyber threats than hot wallets.Still, the physical equipment of a cold wallet can be lost, damaged, or stolen, resulting in the permanent loss of your crypto assets.
Protect your mnemonic phrase!Many crypto wallets generate a “mnemonic phrase,” also known as a recovery phrase, backup mnemonic phrase, or mnemonic phrase.A mnemonic phrase is a random string of words that can help you recover your wallet if you lose your cryptographic wallet or private keys, or if your wallet’s hardware or software is damaged.Please keep your mnemonic phrase in a safe place and never share it with anyone.
3. Self-custody and third-party hosting
You also need to decide whether to self-custody your crypto assets (self-custody) or entrust a third party to manage them (escrow).Both self-hosted and third-party escrow offer hot and cold wallet options.
Self-hosted:
With self-custody, you have complete control over your crypto assets and are responsible for managing the private keys of all crypto wallets.This means that you have full control over access to your cryptoasset private keys, and it also means that you are fully responsible for the security of your cryptoasset private keys.If your crypto wallet is lost, stolen, damaged, or hacked, you may permanently lose access to your crypto assets.
Key questions when choosing a self-custody cryptoasset option
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Are you able to easily set up and maintain your crypto wallet?Setting up and maintaining a crypto wallet yourself may require some technical knowledge.Make sure you are competent in all the technical aspects required to set up and maintain your own crypto wallet.
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Do you want to be fully responsible for your crypto assets?With self-custody, you have complete control over your crypto assets.You are solely responsible for safekeeping the private keys and mnemonic phrases for your crypto assets.If these keys or mnemonic phrases are lost or stolen, you may lose access to your crypto assets.
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What type of crypto wallet do you want to use?As mentioned above, you can use hot or cold wallets to store your crypto assets.When choosing the type of crypto wallet that’s best for you, carefully consider your convenience and security needs.
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How much does a crypto wallet cost?The physical equipment of cold wallets usually requires purchase, while hot wallets may be free initially.However, using a wallet to make transactions usually incurs fees.Before choosing a crypto wallet or trading, be sure to understand these fees.
Third-party escrow:
Through third-party escrow, you can choose a professional custodian or service provider to hold your crypto assets.Third-party custodians include cryptocurrency exchanges and specialized crypto asset custody service providers.Third-party escrow institutions are responsible for managing and controlling access to the private keys of your crypto assets.The account used by the third-party custodian to hold the private keys to your crypto assets may be a cold wallet, a hot wallet, or a combination of the two.If a third-party custodian is hacked, goes out of business, or goes bankrupt, you could lose access to your crypto assets.
Key questions when choosing a third-party escrow provider
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Have you checked the custodian’s background?Always take the time to carefully investigate any third-party escrow provider.Search online to see if there are any complaints about the hosting provider.Find out how this custodian is regulated.Although the regulatory system for the crypto-asset industry is still in its early stages of development, a certain degree of regulation already exists.
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What types of cryptoassets will my custodian allow me to hold?The types of crypto assets each custodian is allowed to hold vary.Be sure to confirm that the custodian allows you to hold the types of cryptoassets you wish to hold in your account.
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What happens if the custodian fails?Find out if the custodian offers loss or theft insurance for crypto assets, and make sure you understand its terms and conditions.
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How does a custodian store and protect your crypto assets?Ask the custodian how it protects your crypto assets and private keys and who has access to them.Does the custodian store your crypto assets in its own facility, or outsource its storage to a third party?Does the custodian use hot wallets, cold wallets, or another method?Which crypto wallets do they primarily use, and how do they determine where to store your crypto assets?Additionally, ask the custodian what types of physical and cybersecurity protocols and procedures are used to protect your crypto assets.
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How does a third-party custodian use your crypto assets?Some custodians will use your deposited crypto assets as collateral for their own purposes (for example, lending).This is sometimes called “remortgaging.”In order to reduce costs, some custodians may also mix crypto assets instead of holding them separately for customers.Find out if your hosting provider uses any of these practices and, if so, whether it requires your consent.
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What privacy protections does the custodian provide?Look for a custodian that can protect your sensitive personal information, such as your name, address, Social Security number, and the types of crypto assets you own or buy or sell.Ask the hosting provider whether it will sell any customer data to third parties and, if so, whether it requires your consent.
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What account fees do custodians charge?Ask your custodian about annual asset management fees (an annual fee based on the value of your crypto assets), transaction fees (the cost of using or trading crypto assets), asset transfer fees (the cost of moving your crypto assets out of the custodian), and account opening and closing fees.
4. General recommendations for protecting crypto assets
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Carefully research and select any third-party escrow provider.
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Never give away your private key or mnemonic phrase.
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Protect the privacy of your crypto assets.Do not share the amount or type of crypto assets you own with anyone.
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Beware of crypto asset phishing scams.
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Use strong passwords and multi-factor authentication for all online crypto asset accounts.
