What is the cold wallet custody requirement?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Japanese crypto exchanges are required to hold most customer crypto in cold wallets disconnected from the internet. For the portion kept online in hot wallets, the firm is expected to hold equivalent assets of its own as backing. The framework was built in the wake of large thefts.
Key points
- Most customer crypto sits in an offline environment
- The online portion must be backed by the firm's own assets
- The rules were shaped by earlier large-scale thefts
- Slow withdrawal processing is often a side effect of this
Definition
The requirement that an exchange keep the crypto it holds for customers in an environment cut off from network access, with any online portion backed by assets of the same kind and quantity.
As long as a private key sits on a networked machine, anyone who breaks in can move the funds. So the bulk of customer crypto is kept on machines with no connection, and signing happens only when a person steps in to authorise a withdrawal.
Put everything offline, though, and no withdrawal could be processed at all. A working balance therefore stays in hot wallets, and the firm is expected to hold equivalent assets of its own so customers can still be made whole if that balance is drained.
For users this shows up as withdrawals taking tens of minutes to a few hours, or a late-night request being handled the next business day. The delay is inconvenient, but it is also the sign that the keys are not sitting online. Check each provider's stated processing windows before you need funds urgently.
Watch out for
- · Cold storage does not eliminate insider fraud or operational error
- · Overseas services may not follow anything comparable
- · The required standard moves with legal and self-regulatory revisions