What does “custodial” mean and why should we care?
It all comes down to this: If it’s your crypto, then you and only you are the one in charge of it. You can send or spend it at will. It can’t be confiscated or locked. Simply put, you are the custodian.
In other words:
Not Your Keys— Not Your Coins.
If you want to store all your crypto on the same centralized crypto exchange where you bought it, that’s completely up to you. It will likely make things simlper overall and it should be OK if you’re using a reputable one like Coinbase, Kraken or Newton.
But it’s worth noting that FTX, Celsius and Voyager were also considered to be trustworthy by a lot of people. People who now wish they’d known better.
To be absolutely clear, your centralized crypto exchange will be the custodian of all of the crypto you store there. Again, this may simplify things becasue you don’t need to worry about seed phrases and recovery — they know who you are and if there’s an issue with your account Customer Service should be able to sort it out.
They’ll hold all your assets for you and they can make decisions that affect you – like whether to freeze your account because you donated to the wrong political cause or party. Or in the unlikely worst case scenario they even could go bankrupt and take all the customer funds with them into Chapter 11.
This happens. Unfortunately it’s not even all that uncommon.
Of course these scenarios are 100% oidable by using a private, self-custody wallet but with great reward comes added responsibility.
Private wallets do not require KYC registration (Know Your Customer) and they do not ask for, nor keep, any information on Exodus users. They don’t need your name, phone number, credit card or anything else.
Centralized crypto exchanges require KYC, because they’re dealing with bank transfers and fiat currency. All of which is subject to anti-money laundering laws (AML), fraud prevention and other regulations depending on where you’re located.
Bottom line: Being responsible for your own Private Keys means that you must make absolutely sure that you safely backup your Recovery Phrase. Do not ever share this with anyone. Your keywords in the correct order will be the only way to recover your wallet and funds if you ever lose your device. Anyone who has your seed phrase can also access your funds.
It’s great power with great responsibility.