The U.S. Securities and Exchange Commission has released a new investor bulletin outlining best practices and key risks associated with cryptocurrency custody. The guidance is aimed at helping investors better understand how digital assets are stored and the trade-offs involved in different custody arrangements.
The SEC highlights the differences between self-custody and using third-party custodians. While self-custody gives investors direct control over their digital assets, it also places full responsibility for security, private keys, and recovery on the individual. In contrast, third-party custody can offer convenience and professional security measures, but investors are urged to carefully review a custodian’s policies.
Investors should understand whether custodians re-collateralize or lend out deposited assets, and whether customer funds are pooled together or held in segregated accounts. These practices can significantly affect risk exposure, especially in cases of insolvency or market stress.
The SEC also breaks down different types of cryptocurrency wallets, comparing internet-connected hot wallets with offline cold wallets. Hot wallets provide easier access and faster transactions but are more vulnerable to hacking, while cold wallets offer stronger protection against cyber threats at the cost of reduced convenience and accessibility.
Overall, the SEC emphasized that custody choices play a critical role in managing crypto-related risks, encouraging investors to carefully assess storage methods, security practices, and the transparency of service providers before committing funds.