DeutschThey form the backbone of crypto – but what exactly is a non-custodial wallet and why are the programs with the unwieldy name so important for a free financial world? CoinPro provides information.
What is a Non-Custodial Wallet?
The term wallet is unavoidable in the crypto scene. This is where users store their private keys, which they use to gain access to their cryptocurrencies. These are under the control of specific blockchain addresses. Only those who hold the private keys can normally access the cryptos.
A non-custodial wallet is a digital wallet in which the user collects their cryptocurrencies. Only the user is in full control of the coins stored here.
Non-Custodial is an English term that means “unhosted” in German. The investments are therefore in the care of the owner. The terms Self Custody Wallet, Unhosted Wallet or Self Hosted Wallet are synonyms.
They appear both as downloadable programs that are connected to the Internet (Hot Wallets) and as isolated data carriers (Cold Wallets).
What is so Special about a Non-Custodial Wallet?
The explanation of the term already reveals the special feature of the non-custodial wallet. The difference between cryptocurrencies and fiat currencies can be seen. Because: A bank account, which logically contains fiat currencies, is not only under the control of the owner. Banks manage the money and are therefore in a position of increased power. The influence of governments creates another attack vector against the investor.
As is well known, crypto wants to eliminate these disadvantages. To do this, users must be able to independently store and manage their funds. A non-custodial wallet enables exactly that: the self-custody of cryptocurrencies.
In the traditional financial world (TradFi), this is not possible digitally. Here, only cash can be invested without an intermediary gaining control over the user’s assets.
Are you looking for a hardware wallet? CoinPro compares two of the most popular models.
Non-Custodial Wallets Form the Backbone of Crypto: why?
Not every wallet in which you can manage cryptocurrencies is a non-custodial wallet. Their opposite is custodial wallets. These are used, for example, when users use a crypto exchange such as Binance.
The cryptocurrencies are then accordingly in the custody of the crypto exchange. However, Bitcoin and Co. want to bring their users more personal freedom. This is only possible if these users take more personal responsibility.
With crypto, this isn’t even difficult. With a little practice, non-custodial wallets can also be used by beginners without any problems. CoinPro explains how this works in the following guide:
Withdrawing Bitcoin and crypto: Here’s what you need to know!
So why do non-custodial wallets form the backbone of crypto? It’s simple: without personal responsibility, the desired financial freedom does not occur. Anyone who leaves their digital assets in the custody of others remains vulnerable – especially through the managing crypto exchanges and through governments.
A practical advantage over fiat money such as Swiss francs or euros no longer exists. In the worst case, investors experience a total loss as in the case of the FTX crash. Anyone who uses a non-custodial wallet instead is not affected by this.
You can find out here why you should never leave cryptocurrencies on a crypto exchange!
Why are Unhosted Wallets Subject to State Regulation?
Recently, various jurisdictions have been trying to ban non-custodial wallets or make their use impossible. Efforts of this kind on the part of the European Union (EU) are particularly well known. Authorities usually use the term Unhosted Wallet in this context.
State authorities see their power threatened by cryptocurrencies. However, if the entire crypto ecosystem takes place under the control of the authorities, Bitcoin and Co. would no longer be a risk.
State interventions are therefore aimed at processing all transactions only within custody systems. Individual politicians already want to prohibit crypto exchanges from making payments to non-custodial wallets.
Since crypto exchanges are not the originators of cryptocurrencies, but only serve as a marketplace, these projects are unrealistic. Furthermore, a ban on non-custodial wallets is not possible.
The source code of various wallets is in free circulation and the distribution of the programs via the Internet cannot be stopped.
You can find out which other types of wallets exist in our wallet comparison.
How Do You Recognize a Non-Custodial Wallet?
In a non-custodial wallet, there is the option to display the private key or the key phrase. This option does not exist with custodial wallets. Users can then restore the wallet in another wallet software using the private key or the key phrase and have access to the exact same investments from there.
In contrast, a custodial wallet binds the user to a specific interface, as a specific custodian allows access to specific private keys. Should this custodian suddenly deny the user access, the cryptocurrencies are lost. A wallet cannot be restored elsewhere.
