Self-manage or delegate: How to safely choose your crypto wallets

The SEC has published a comprehensive guide for investors on the custody of digital assets, with specific considerations for both crypto-wallet models. The document focuses on a critical choice that every crypto owner must make: self-management via personal wallets or relying on professional custodians.

The Two Paths: Hot and Cold Wallets

With self-management, investors face a choice between two types of wallets. Hot wallets, which are permanently connected to the internet, offer convenience but greater exposure to online risks. Cold wallets, on the other hand, are stored offline on physical devices, providing more protection against digital attacks.

The SEC emphasizes that this choice has direct implications for both the availability and security of your crypto assets.

The Permanent Nature of Private Keys: What You Need to Know

The core of every crypto wallet lies in key management. Crypto wallets generate two different keys with fundamentally different functions. A private key is a randomly generated alphanumeric code that acts as the sole means to authorize transactions and move funds.

A crucial point: “Once a private key is created, it cannot be changed or replaced. Anyone who loses their private key permanently loses access to their crypto assets,” according to the regulator’s guidelines.

Public keys function differently—they enable verification and allow others to send money to your wallet but do not authorize spending. The agency compares this process to an email address of your crypto identity.

Most wallet providers create recovery phrases that can serve as backups. However, the SEC advises: “Store your recovery phrase in an absolutely secure place and do not share it with anyone.”

Choosing Custodians: Research First, Trust Later

Those who choose to have external parties handle their crypto assets must take precautions. The SEC urges investors to thoroughly check the reputation of these services—via searches for complaints, review status, and regulatory history.

Some key points are essential: Which crypto assets does the custodian accept? Does this party offer coverage against loss or theft? Some custodians participate in rehypothecation, where funds are used as collateral for loans. Others mix client assets instead of keeping them separate.

The risk is concrete: “When an external custodian is attacked, closes its doors, or goes bankrupt, you may lose all access to your holdings,” warns the regulator.

Critical questions for custodians concern their cybersecurity and physical security systems. It must also be clear whether client data is sold to third parties.

Finally: check all fee structures, including annual fees, transaction costs, transfer fees, and administrative costs.

The Bigger Picture

This guide comes after several major failures in the crypto industry, where multiple platforms and custodians have collapsed, leaving thousands of investors unable to access their funds. The SEC’s guidelines provide a necessary framework for those working with crypto wallets.