Custodial Wallet
A wallet where a third party (like an exchange) holds your private keys on your behalf.
When you hold USDC on Coinbase or another exchange, the exchange controls the private keys. You're trusting them to secure your funds. This is convenient because you don't have to worry about losing your keys, and you can recover your account with email and password.
The trade-off is counterparty risk. If the exchange gets hacked, goes bankrupt, or freezes your account, you could lose access to your funds. The FTX collapse in 2022 is a cautionary example. That said, major regulated exchanges have insurance and security measures that make them reasonably safe for most users.
Related Terms
Wallet
Software or hardware that stores your private keys and lets you send, receive, and manage cryptocurrency.
Self-Custody
Holding your own private keys, giving you full control over your cryptocurrency without relying on a third party.
Private Key
A secret cryptographic code that proves ownership of a blockchain address and authorizes transactions.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.