The SEC’s investor education arm has issued a fresh bulletin urging retail crypto investors to take custody risks seriously — and to understand exactly what their wallets do (and don’t) protect. Why this matters now The Office of Investor Education and Assistance (OIEA) published guidance explaining how crypto wallets work, the trade-offs between self-custody and third-party custody, and the specific risks that have left users locked out of holdings after recent exchange and custodian failures. Wallets hold keys, not coins The bulletin stresses a fundamental point that’s often misunderstood: crypto wallets do not store tokens themselves — they store the private keys that control access to those tokens. - Private keys: Randomly generated alphanumeric passcodes that authorize transactions. “Once created, a private key cannot be changed or replaced. If you lose your private key, you permanently lose access to the crypto assets in your wallet,” the SEC warned. - Public keys: Used to verify transactions and let others send assets to your wallet, but they cannot authorize spending. “A public key is like the e-mail address to your crypto wallet,” the bulletin added. Hot vs. cold wallets The guidance distinguishes between hot wallets (connected to the internet) and cold wallets (stored offline on physical devices), outlining the different security profiles of each. Seed phrases and recovery Many wallets generate seed phrases that can restore access if a private key is lost or a device fails. The SEC’s simple advice: store your seed phrase in a secure place and do not share it with anyone. Self-custody vs. third-party custody Investors must pick between managing their own keys or entrusting a custodian to hold assets. The SEC urged careful vetting of any third-party custodian: - Research background: Look for complaints, enforcement actions, and the custodian’s regulatory status. - Asset support and insurance: Verify which crypto assets the custodian supports and whether they offer insurance for loss or theft. - Ask about security: Inquire into physical and cybersecurity protocols and whether customer data is sold to third parties. - Fees: Check fee structures — annual asset-based fees, transaction costs, asset-transfer fees, and account setup/closure charges. Hidden risks: rehypothecation and commingling The bulletin warns that some custodians may rehypothecate deposited crypto (using it as collateral for lending) or commingle customer assets instead of holding them individually. If a custodian is hacked, shuts down, or goes bankrupt, customers may lose access to their crypto assets. Practical takeaway — a short checklist - Know whether you control private keys or a custodian does. - Securely store and never share your seed phrase. - Run internet searches for complaints or regulatory actions against custodians. - Confirm which assets are supported and whether insurance exists. - Ask direct questions about rehypothecation, commingling, and security protocols. - Review all fees before committing funds. The SEC’s bulletin comes as a reminder amid a recent string of custodial failures that left customers unable to access holdings, underscoring that custody decisions can be as consequential as the assets themselves. Read more AI-generated news on: undefined/news

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