The US SEC teaches you step-by-step how to manage your crypto assets.

Note: On December 12, the U.S. SEC officially published a document providing retail investors with basic knowledge on accepting cryptocurrency custody, helping them decide how best to hold their cryptocurrency assets.

Translated by Jinse Finance:

This investor bulletin issued by the U.S. Securities and Exchange Commission's Office of Investor Education and Assistance aims to help retail investors understand how to hold crypto assets. This bulletin outlines the types of crypto asset custody and provides tips and answers to frequently asked questions to help you decide how best to hold your crypto assets.

I. What is crypto asset custody?

Crypto asset "custody" refers to how and where you store and access your crypto assets. You typically access your crypto assets through a device or computer program called a crypto wallet. Crypto wallets themselves do not store crypto assets; instead, they store the "private key" or password for your crypto assets.

When creating an encrypted wallet, the following two keys or passwords are generated:

1. Private key. A private key is a randomly generated alphanumeric password used to authorize transactions of crypto assets. It's like the password for your crypto wallet. Once created, a private key cannot be changed or replaced. If you lose your private key, you will permanently lose access to the crypto assets in your wallet.

2. Public key. A public key is another type of code used to verify transactions and allow others to send crypto assets to your crypto wallet. The public key does not have access to the private key in the wallet and cannot be used to authorize transactions. The public key is like the email address of your crypto wallet.

These keys together prove your ownership of the crypto assets and give you the right to send, receive, or use them.

II. Hot Wallets and Cold Wallets

There are many types of cryptocurrency wallets, and retail investors hold them in various ways. Cryptocurrency wallets are mainly divided into two categories: "hot wallets" and "cold wallets." Hot wallets are cryptocurrency wallets connected to the internet, and can be desktop applications, mobile applications, or web applications. Hot wallets allow you to easily access and trade your crypto assets, but they also expose your crypto assets to cyber threats.

A cold wallet typically refers to a physical device that is not connected to the internet, such as a USB flash drive, external hard drive, or even a piece of paper. For cryptocurrency transactions, cold wallets are generally less convenient than hot wallets. However, because cold wallets are not connected to the internet, they are usually more resistant to cyber threats than hot wallets. Nevertheless, the physical device containing a cold wallet can still be lost, damaged, or stolen, resulting in the permanent loss of your cryptocurrency assets.

Protect your mnemonic phrase! Many crypto wallets generate a "mnemonic phrase," also known as a mnemonic recovery phrase, backup mnemonic phrase, or memory phrase. A mnemonic phrase is a string of random words that can help you recover your wallet if you lose it or your private key, or if your wallet's hardware or software is damaged. Please keep your mnemonic phrase in a safe place and never share it with anyone.

III. Self-management and Third-Party Management

You will also need to decide whether to self-custody your crypto assets (self-custody) or entrust them to a third party (third-party custody). Both self-custody and third-party custody offer hot wallet and cold wallet options.

Self-managed

By adopting a self-custodial approach, you gain complete control over your crypto assets and are responsible for managing the private keys of all your crypto wallets. This means you have full control over access to your crypto asset private keys, and you bear full responsibility for their security. If your crypto wallet is lost, stolen, damaged, or hacked, you may permanently lose access to your crypto assets.

Key Issues When Choosing a Self-Custodial Crypto Asset Solution

• Are you capable of easily setting up and maintaining your crypto wallet? Setting up and maintaining a crypto wallet yourself may require some technical knowledge. Please ensure you are competent in all the technical aspects required to set up and maintain your crypto wallet.

• Do you want complete control over your crypto assets? Self-custody gives you full control over your crypto assets. You are fully responsible for safeguarding the private keys and mnemonic phrases of your crypto assets. If these keys or mnemonic phrases are lost or stolen, you may lose access to your crypto assets.

• Which type of crypto wallet do you want to use? As mentioned above, you can use either a hot wallet or a cold wallet to store your crypto assets. When choosing the type of crypto wallet that best suits you, carefully consider your convenience and security needs.

• How much do crypto wallets cost? The physical device for a cold wallet usually needs to be purchased, while a hot wallet may initially be free. However, using a wallet for transactions typically incurs fees. Be sure to understand these fees before choosing a crypto wallet or conducting transactions.

escrow

By using third-party custody, you can choose a professional custodian or service provider to hold your crypto assets. Third-party custody institutions include cryptocurrency exchanges and specialized crypto asset custody service providers. The third-party custodian is responsible for managing and controlling access to your crypto asset private keys. The account used by the third-party custodian to hold your crypto asset private keys may be a cold wallet, a hot wallet, or a combination of both. If the third-party custodian is hacked, goes bankrupt, or becomes insolvent, you may lose access to your crypto assets.

Key Issues When Choosing a Third-Party Custodian

• Have you investigated the background of the custodian? Be sure to take the time to thoroughly research any third-party custodian. Search online for any complaints about the custodian. Find out how the custodian is regulated. Although the regulatory framework for the crypto asset industry is still in its early stages, a certain level of regulation already exists.

• What types of crypto assets can I hold with my custodian? The types of crypto assets allowed vary from custodian to custodian. Please ensure that your custodian allows you to hold the types of crypto assets you wish in your account.

• What happens if the custodian goes bankrupt? Find out if the custodian offers insurance against the loss or theft of your crypto assets, and make sure you understand its terms and conditions.

• How does the custodian store and protect your crypto assets? Ask the custodian how they protect your crypto assets and private keys, and who has access to them. Does the custodian store your crypto assets in their own facilities, or outsource their storage to a third party? Does the custodian use hot wallets, cold wallets, or other methods? What type of crypto wallets do they primarily use, and how do they determine the location for storing your crypto assets? Additionally, ask the custodian what types of physical and cybersecurity protocols and procedures they use to protect your crypto assets.

• How do third-party custodians use your crypto assets? Some custodians will use your deposited crypto assets as collateral for their own purposes (e.g., lending). This is sometimes referred to as "recollateralization." To reduce costs, some custodians may also mulch crypto assets together rather than holding them separately for their clients. Please find out if your custodian uses any of these practices and, if so, whether your consent is required.

• What privacy protections do custodians offer? Look for custodians that can protect your sensitive personal information (such as your name, address, Social Security number, and the types of crypto assets you own or have bought or sold). Ask the custodian if they will sell any customer data to third parties, and if so, whether they need your consent.

• What account fees does the custodian charge? Please ask the custodian about the annual asset management fee (annual fee based on the value of your crypto assets), trading fees (the cost of using or trading crypto assets), asset transfer fees (the cost of transferring your crypto assets outside the custodian), and account opening and closing fees.

IV. General Recommendations for Protecting Crypto Assets

1. Carefully research and select any third-party escrow service provider.

2. Never reveal your private key or mnemonic phrase.

3. Protect the privacy of your crypto assets. Do not share the quantity or type of crypto assets you own with anyone.

4. Beware of crypto asset phishing scams.

5. Use strong passwords and multi-factor authentication for all online encrypted asset accounts.