What is a custody service?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Custody is the business of holding private keys on someone else's behalf. Institutions and companies use it to avoid running key management themselves at scale. In Japan, holding crypto for others is itself part of what requires exchange registration.
Key points
- A specialist business that holds private keys for clients
- Used by firms that do not want to run key management in-house
- Holding crypto for others triggers registration in Japan
- The risk of the custodian failing or being breached remains
Definition
The business of holding and administering crypto for others, covering key generation, storage and withdrawal approval, with internal controls and insurance intended to limit the damage when something goes wrong.
For a company holding serious sums, having one employee carry a hardware wallet does not work. Resignation, disaster or insider fraud each leave the assets stranded. Custodians answer that with split key storage, multi-person approval and audit logs.
Technically this usually means multisig or threshold signatures, so no single person can move funds. Withdrawals pass through several approvals with deliberate delays, giving time to stop anything anomalous. Some custodians carry insurance, though the cover always has conditions.
In Japan, holding crypto for others falls within the definition of exchange business, so a domestic custodian must be registered. For the client, that means checking registration, how assets are segregated, and what audits the custodian submits to.
Watch out for
- · Once you hand over the keys you are taking on the custodian's own failure risk
- · Where insurance exists, the covered events and the cap differ by contract
- · Registration requirements change with the law, so check current FSA material