Term
Custodial wallet
A custodial wallet is one where a third party (an exchange, a payment processor, a custodian) holds the private keys and manages the funds on behalf of the user — the user has an account with the service, not direct control of the underlying crypto.
A custodial wallet is any wallet whose private keys are held by a third party. The user gets a login to an account and can request deposits, withdrawals, and trades — but they never see the actual private keys and cannot sign transactions independently. Exchange wallets (Binance, Coinbase, Kraken), custodial payment processors, and enterprise custody services (Fireblocks, BitGo) all fall in this category.
The trade-off is convenience for control. Custodial wallets are simpler to use (password recovery, familiar UX, no seed phrases to lose) and often required for regulated services. But the custodian can freeze accounts, restrict withdrawals, get hacked, go insolvent (FTX), or be forced by regulators to comply with orders that affect user balances. "Not your keys, not your coins" is the common phrase.
Self-custodial wallets (MetaMask, Ledger, Trezor, Trust Wallet, Muun) put the user in direct control of the keys. The trade-off flips: you cannot be locked out by a company, but you also cannot recover a lost seed phrase from support. Different assets and use cases justify different mixes of the two.
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