Custodial wallet
A custodial wallet is an account where a company holds the keys: an exchange, a broker, a payment service. What you own is not coins but that company's obligation to hand them over on request.
How it works
Depositing sends coins to the company's address. From then on your balance is a row in its database. Internal transfers between users never touch the blockchain at all; only the records change.
Hence the conveniences: instant operations, no network fees inside the platform, account recovery through support, a familiar password login. You simply do not need keys.
And hence all the risks. An account can be frozen, withdrawals limited, and in a bankruptcy you become one creditor among many. FTX's collapse in 2022 demonstrated this at the scale of billions in client funds.
When it makes sense
- For tradingActive trading needs funds on the exchange. Keeping trading capital there is fine; keeping everything there is not.
- For moving in and out of fiatBuying with euros and withdrawing to a bank account only happens through a licensed intermediary.
- For a beginner at firstLosing a seed phrase is easier than losing a password. A small amount on an exchange is safer than a large one in a wallet with no backup.
- Check who actually holds itA licence, proof-of-reserves reporting and jurisdiction are the only things separating a sound custodian from the next FTX.