Custodial tech providers vs. digital asset custodians: the 4 key differences

With self-custody via technology providers, investors take on some of the duty of storing and safeguarding their assets, while digital asset custodians provide this expertise on behalf of their clients. It’s the decision between taking on self-custody vs. delegating for enhanced security and peace of mind. It is crucial for investors to thoroughly assess their requirements and make a well-informed choice regarding the storage and protection of their digital assets.

• In this article, you will learn:
• What are custodial technology providers?
• What are digital asset custodians?
• Four key differences between technology providers and digital asset custodians

What are custodial technology providers?

Custody technology providers are companies that provide infrastructure services and software solutions for the secure storage of digital assets. They provide an agile environment for institutions to satisfy their business demands by offering software and/or hardware infrastructure. These providers enable their clients to independently organise the storage of their digital assets without requiring the providers to store the clients’ private keys. Fireblocks, Metaco, Ledger, and Blockdaemon are examples of leading technology providers.

Technology providers offer a distinct approach to self-custody that differentiates them from basic self-custody. Unlike basic self-custody, which lacks advanced features, technology providers supply the essential infrastructure for securing and enhancing the capabilities of digital assets.

Institutional investors considering self-custody should recognise that the loss or compromise of their private keys can result in permanent asset loss. According to research from Chainalysis, 20 percent of the existing bitcoin that has not moved from its respective wallet addresses in five years or more is considered lost.

What are digital asset custodians?

Digital asset custodians are third-party companies that safekeep digital assets on behalf of their clients in a safe, secure, and auditable way. Depending on the jurisdiction they are based in, digital asset custodians are also required to be compliant with regulatory requirements and registered with regulatory bodies.

Operating with regulatory oversight, registered digital asset custodians have a proven track record in safeguarding digital assets on behalf of their clients. The core custodial offering is invariably supplemented by value-add services such as off-exchange settlement to reduce counterparty risk, access to yield generating protocols, and a chance to participate in governance and security of blockchains via staking.

Hedge funds, large corporations, and asset managers are examples of such client types.

Four key differences between custodial technology providers and digital asset custodians

• Access and control: – Technology providers and custodians serve distinct roles in the world of digital asset custody. Unlike custodians, technology providers do not possess the authority or capability to freely move their clients’ assets. This places the responsibility solely on clients to assume full responsibility for sending and transferring assets to custody wallets. When you take on the duty of self-custody, the safety of your assets is entirely in your hands. This means that if the recovery phrase is not carefully secured, you run the risk of indefinitely losing access to your funds. To mitigate any potential loss, it is important to recognise the critical role of securely storing your recovery phrase.
• Backup and recovery possibility – Clients share the burden of securing their assets, including in backup and recovery scenarios, when working with a technology provider. By contrast, custodians bear full responsibility of assets both in business as usual and disaster recovery scenarios. Consequently, recovery possibilities may be more limited when relying on tech providers compared to the comprehensive options offered by digital asset custodians.
• Lack of regulatory protection - Technology providers and digital asset custodians have distinct differences in terms of asset storage and regulatory obligations. Technology providers, unlike custodians, are not tasked with storing their clients’ digital assets and, as a result, are exempt from holding regulatory licences and are not subject to the same regulatory requirements as custodians for the safeguarding of digital assets.
• Insurance coverage – There is often a wide variation across the industry in the type and scope of insurance cover offered to protect digital assets under custody.  Due to the difference in burden of responsibilities, it is best to check the scope of insurance cover carefully when going down a tech provider route to ensure that your assets will be protected in all reasonable scenarios. Custodians typically provide a more comprehensive and higher grade insurance cover that can be reassuring for clients.

For institutions aiming to navigate the world of digital assets, Zodia Custody stands as a trusted custodian, assuring the safety and security of your assets. This peace of mind empowers you to explore the untapped potential of the digital asset market.