What is a custody service
Custodial services work by analogy with depositories: they store client funds and private information on the server side. In the case of cryptocurrencies, in addition to personal data, custodial wallets store private keys, passwords, and seed phrases (mnemonic password). In other words, customer data can be compromised by third parties if they gain access to the company's servers.
Custodial services pose a threat to the anonymity and security of users. In addition, custodians can fully control user accounts and cryptocurrency storage: block funds, set limits on deposit/withdrawal, and much more. A request for withdrawal of funds can be processed by the company on an individual basis. Try the safest service here https://redot.com/custody/
There is a partially custodial cryptocurrency wallet. For example, there are limits on the amounts for exchange and withdrawal, but private keys and passwords are not stored. Let's look at the advantages and disadvantages of custodians.
Cons of custodial wallets
The first significant drawback, which we have already talked about, is that the storage of cryptocurrency is not under your control. In case of suspicious activity, the account may be blocked. In addition, no one can guarantee that the company will not misappropriate clients' money if it is located in another country or offshore zone.
The second disadvantage is verification. Companies are required by law to keep records of user transactions in accordance with KYC/AML policies to combat money laundering and other financial crimes. Therefore, you can forget about anonymity. In addition, nothing prevents companies from selling personal information to other companies, and data leaks can also occur.
Insurance. By law, if the company suffers damage, and because of this, it loses customer funds, then the company is obliged to return them. Your funds are insured in any case, even if the company does not provide such services. Of course, except when the contract expressly says that the funds are non-refundable in any case. But the legality of such an agreement will be debatable, and users need to ask themselves: is it worth contacting such a company and is it reliable? Always read the contract carefully.
Your funds are safe. If you lose your password, you can restore your account by writing to technical support. And if there is a leak, then the custodial service will block the account, and no one will be able to withdraw your money.
Free transactions. Some custodial services provide an all-in-one service, so you can transfer funds within the system without fees. For example, the EXMO crypto exchange has special codes that allow you to transfer cryptocurrency to other users for free. It's like in banks - customers can transfer money between accounts, replenish deposits, make payments on loans without paying commissions for this.
Cons of custodial wallets.