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Custodial vs Non Custodial Wallet

The difference between a custodial wallet and a non-custodial wallet is in who controls the private key. In custodial wallets, the private key is held by a third party (e.g., an exchange), while in non-custodial wallets the private key is held by the owner(s) of the wallet. Whoever controls the private key also controls the funds. Non-custodial wallets are usually associated with increased responsibility for the user in securing, backing up, and maintaining the private key, and this squarely places security risk on the users themselves. Losing the private key usually leads to losing the funds, thus non-custodial wallets may be more suitable for experienced users. On the flip side, users maintain full ownership and control of the assets with non-custodial wallets, which can offset counterparty risks of the custody provider or cryptocurrency exchange that holds the funds (e.g., the risk of an exchange to default, of being hacked, having their funds frozen or confiscated by a central authority etc.). When contracting with qualified and reputable custodians, custodial wallets can offer users increased security and formality over their assets. Custodial wallets may be more suitable for entry level users who are comfortable passing the responsibility of maintaining the private keys to these third parties.

Note: These are non-technical definitions meant for a general audience and should not be used as legal definition
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