On December 14, the U.S. Securities and Exchange Commission (SEC) released guidance on cryptocurrency custody, outlining best practices and common risks of different forms of cryptocurrency storage for investors' reference, including the differences between self-custody and allowing a third party to hold the cryptocurrency on behalf of the investor. If investors choose third-party custody, they should understand the custodian's policies, including whether the custodian will "re-collateralize" the custodian assets by lending them out, or whether the service provider will commingle client assets in the same pool instead of storing the cryptocurrency in segregated client accounts.
The guide also outlines the types of encrypted wallets and analyzes the advantages and disadvantages of hot wallets connected to the internet and cold wallets (offline storage). According to the SEC, hot wallets are vulnerable to hacking and other cybersecurity threats, while cold wallets are at risk of permanent loss in the event of offline storage failure, theft of storage devices, or leakage of private keys.
