If you decide to buy crypto, you’ll first need a crypto wallet. Just as regular bank accounts keep your cash safe, crypto wallets keep your digital currency secure.
There are several different types of crypto wallets, but their core functionality is the same: Every crypto wallet contains a public and private cryptographic key pair, similar in function to a bank account number and PIN. The public key generates an address that lets you receive crypto, while the private key allows you to send or spend crypto from the same address. But that’s where the similarities end.
The first major distinction between crypto wallets is whether they’re custodial or non-custodial. With a non-custodial wallet, you remain in control of your wallet’s private keys. With a custodial wallet, a centralized authority (like a centralized crypto exchange) controls your private keys, providing custody over your assets.
Before proceeding, understand the difference between custodial and non-custodial wallets, and the benefits of each to decide which is right for you.
In this article, we’ll provide a step-by-step guide to setting up a custodial crypto wallet. If you’re looking to set up a non-custodial crypto wallet, refer to our other guide instead.
What’s a custodial crypto wallet, and why should I consider using one?
Custodial crypto wallets have a few key advantages and disadvantages compared to their non-custodial counterparts.
Accessibility and ease of use
Most people get started with crypto using a custodial crypto wallet. These wallets, provided by centralized crypto exchanges (CEXs), provide an easy onboarding experience for crypto newcomers. CEXs generally enable users to buy crypto (with fiat currency) using a familiar process. You create an account using an email address and a password, and buying crypto is usually as simple as connecting a bank account, or using a debit or credit card.
The entire process feels much like checking out on any e-commerce platform. You won’t need to buy any extra hardware, or download any programs like browser extensions. You won’t even need to download any additional software, unless you want to install a CEX’s mobile app on your phone—in which case the process is, again, very familiar.
Compared to hardware wallets, and other types of non-custodial wallets, CEXs are arguably much easier to use.
Regulatory and security measures
Before choosing a custodial crypto wallet, you should consider each platform’s security and regulatory compliance. Although less common today, hackers have stolen billions from CEXs, which is why it’s essential to do your research. Depending on the company’s location and jurisdiction, it may be legally required to follow certain laws and regulations intended to protect users and their funds. Some large, reputable CEXs may even offer some type of deposit insurance for users’ funds—though this certainly isn’t always the case.
Some users consider this an advantage, because CEXs are subject to more legal scrutiny than non-custodial wallet providers. Others see it as a disadvantage, because you need to provide personal information like your legal name, date of birth, social security number (if applicable), and more to use a CEX.
Relatedly, many consider the centralized regulation of CEXs to be their biggest disadvantage. Because CEXs retain complete control over your crypto wallet’s private keys, that means your crypto assets are also under centralized, third-party control. While custodial wallets can be considered more convenient than non-custodial wallets (i.e. you don’t need to worry about keeping a recovery phrase safe), there’s a major tradeoff with security.
When you store crypto assets in a custodial crypto wallet, you’re trusting that company (like Coinbase, Gemini, or Binance, for example) to keep your private keys—and, thus, your crypto—safe. You’re trusting them to store your keys securely (and protect them from theft or hacks), to not go bankrupt, to not misuse user funds, and to always have your assets available for withdrawal—among other things. The recent collapse of FTX illustrates exactly how a centralized exchange can quickly be destroyed, leaving users without access to their assets.
For some, this level of trust in a centralized entity is antithetical to crypto and Web3 itself (though non-custodial wallets still require users to trust third-parties, too—like wallet manufacturers and software providers). Ultimately, users should choose a crypto storage option that best suits their individual needs and preferences.
How to set up a custodial crypto wallet
Note that individual setup instructions will vary based on the custodial wallet provider you choose. For specific instructions, refer to the centralized crypto exchange that hosts your wallet. That said, in general, the setup process will work like this:
1. Choose an exchange
Consider your options, and choose a CEX that fits your needs. Be sure to evaluate an exchange’s ease of use, features, security and regulatory measures, and—most importantly—trustworthiness. It’s best to stick with large, reputable CEXs, but even then, there’s no guarantee of security.
2. Sign up for an account
Before using a CEX, you’ll need to sign up for an account and enter some personal information first, like your name and date of birth. Because CEXs operate in certain jurisdictions, they may or may not be licensed to serve you. Many CEXs will check your IP address to confirm you’re located in an area they can operate in.
3. Pass KYC and AML processes
Once you’ve signed up, you’ll complete Know-Your-Customer (KYC) and Anti Money Laundering (AML) requirements—depending on the location and jurisdiction of the CEX. This may entail confirming your address, taxable status, and identity—including uploading legal documentation (like a government issued photo ID) to prove who you are.
4. Set up a password, 2FA, and other appropriate security measures
During the account setup process, you’ll register with an email address and choose a password. It’s best to use a strong password that’s unique, meaning you’ve never used it anywhere else. If possible, activate two-factor authentication (2FA) to increase your account’s security. Some CEXs may support additional security measures, like hardware security keys.
5. Transfer crypto or purchase it directly
If you already hold crypto in another wallet, you can transfer it to your new wallet using the appropriate wallet address. If you’re buying crypto for the first time, you’ll be able to use a credit or debit card, or connected bank account, to purchase crypto.
Managing your crypto and exploring different types of wallets
Once you’ve set up your new custodial crypto wallet, you’ll be able to store, send, and receive crypto. One thing you won’t be able to do with a custodial crypto wallet, however, is connect to decentralized apps (DApps) on Web3. Keep in mind that you can—and many people do—eventually set up multiple different types of crypto wallets that serve different purposes. It’s common to have a CEX-hosted crypto wallet for quick ease of use, and a non-custodial crypto wallet for DApp connectivity, or for long-term crypto storage.
If at some point you want to explore other types of crypto custody and storage options, you can learn more in our article about crypto custody and the pros and cons of different wallet types. And if you’re interested in a highly secure, browser-native, non-custodial crypto wallet, check out Brave Wallet.