With the increasing adoption of cryptocurrencies, the need for secure storage solutions to manage and store cryptocurrency has become critical as the financial world is prone to cyber threats and hacks. This is why we have cryptocurrency wallets, which are software applications used to send, receive, store, and manage crypto assets. There are primarily two types of wallets: Custodial wallets and Non-Custodial Wallet. While custodial wallets are managed by third-party service providers – crypto exchanges – who control the private keys, non-custodial wallets allow users to maintain complete control over their digital assets by managing the private keys that give them access to those funds.
This article explains everything you need to know about a Non-Custodial Crypto Wallet and its legal aspects.
What is a Non-Custodial Wallet?
Non-custodial wallets, also known as self-custody wallets, are platforms in which users can store and manage their crypto assets securely. These wallets give the owner full control of their private key – which are alpha-numerical codes that act as a password to access the funds. This means users have exclusive control and full responsibility over their crypto and its use and can buy, sell, or trade coins without depending on a third party.
How Do Non-Custodial Wallets Work?
Self-custody wallets encourage users to be their own banks by taking custody of crypto assets they bought on exchanges and managing their usage without bearing any limitations imposed by custodial platforms.
You can set up your own web, mobile, or hardware-based self-custody wallet, as per your priorities and convenience. When a wallet is created, it will generate a public key and a private key pair. A public key is the address on your wallet, which can be shared with others to receive funds or airdrops. Meanwhile, Private Key is a set of 12-24 seed phrases that act as a password to your wallet. Lose the seed phrase and your wallet will be compromised. It is important to keep your private key safe.
If you want to send cryptocurrency, just go to the wallet application and enter the recipient’s public address and the amount you wish to send. The transaction is only confirmed after you have signed it using your private key. To receive funds in your wallet, simply share your public key with the sender or enter it on the exchange platform from where you will be transferring the tokens.
Advantages and Disadvantages of Non Custodial Wallets
The major perks of using a non-custodial wallet are:
- Unrestricted Control
A non-custodial wallet gives you direct control over your assets. This indicates that you are completely responsible for your assets and don’t have to rely on a third-party exchange for management.
- Security
Non-custodial wallets promise high security, as one will need the private key to access the funds stored within. This stresses the importance of keeping it safe. Offline wallets, or hardware wallets, add another layer of security as they are safe from the clutches of online hackers.
- Speed
Sending and receiving funds with non-custodial wallets are usually faster as they do not require the approval of any intermediary exchanges.
- Interoperability
Most non-custodial wallets support cryptocurrencies issued on various blockchains. This allows users to manage various crypto assets from a single platform.
- Decentralization
Non-custodial wallets align with the whole theme of decentralization of blockchain technology ensuring that no single party other than the wallet holder controls the funds.
- Flexibility
Self-custody wallets allow users to buy, sell, and swap tokens through decentralized exchanges (DEXs) that can be accessed through its interface. They have built-in browsers within them that allow users to access DEXs.
Even though non-custodial wallets come with a lot of advantages, they are not without drawbacks:
- Responsibility
In a non-custodial wallet, it is the duty of the user to protect their cryptocurrencies. User must take measures to ensure that their keys are secured with strong passwords and it is backed up properly. - Risk of Loss
Non-custodial wallets pose the risk of completely losing funds permanently if the user forgets to backup keys or misplaces them. - Complication:
Cryptocurrencies operate on complex blockchains with security protocols that might be challenging to understand and deal with for those who are new to this field. - Absence of Inheritance Solutions
It is important to specify an inheritor who will get ownership of the user’s funds in case of any adversity. Not doing so poses the risk of losing the funds forever without any possibility to access them again.
Popular Non Custodial Wallets
Here are some popular non-custodial wallets in the market:
- Browser-Based Wallets: MyEtherWallet, Exodus, MetaMask, Atomic Wallet
- Mobile-Based Wallets: MetaMask, Coinomi, Trust, Coinbase, BRD, Mycelium, Zengo
- Hardware-Based Wallets: Ledger, Trezor, Cypherock, NGRAVE ZERO
Legal Requirements Of Non-Custodial Wallets
Both custodial and non-custodial wallets have very distinctive legal requirements since they interact differently with third parties. Since no third party is involved and they require no license or authorization to operate, non-custodial wallets have zero regulations overseeing them.
Users can make an effort to follow the best practices like using a reputable wallet provider, implementing security measures, and keeping their private keys secure. This does not mean that non-custodial wallets are exempt from laws regarding illegal activities like money laundering and terrorist financing, which will be monitored by the government.
Check whether the country of your residence has any rules regarding transactions or non-custodial wallet usage. In the US, there is a proposed regulation for wallet providers to collect user information, which is yet to be implemented. It is also important to have inheritance solutions set for your wallet, in case the ownership has to be transferred to close ones.
Final Thoughts
Non-custodial wallets offer greater control over your assets, and you can manage them without any restrictions. MetaMask, Trust Wallet, Coinomi, and Exodus are a few examples of non-custodial wallets.
Even though it gives you greater autonomy, non-custodial wallets are not without risks. They require a higher level of responsibility from the user side as the safety of the funds completely depends on them. It is important to not misplace or forget the private key as it can lead to permanent loss of your digital assets.
Disclaimer: This is not financial advice and is written solely for informational purposes. Please treat it as such and be aware of the risks before you decide to commit to any crypto activities.