SEC Highlights Custody Risks for Crypto Investors in Wallets and Private Keys

Crypto

SEC Highlights Custody Risks for Crypto Investors in Wallets and Private Keys

The SEC‘s investor bulletin highlights key crypto custody risks, emphasizing that wallets store private keys essential for asset access. Investors must weigh self-custody’s full responsibility against third-party options potential for rehypothecation and commingling, ensuring secure key management to avoid permanent losses.

• Wallets hold private keys, not assets: Losing keys or seed phrases means irreversible loss of crypto access.
• Hot wallets provide easy transactions but expose users to hacking and phishing attacks due to internet connectivity.
• Cold wallets minimize online threats yet risk physical damage or theft; third-party custodians introduce reliance on their security measures and practices like asset pooling.

What Are the Main Risks in Crypto Custody According to the SEC？

The U.S. Securities and Exchange Commission (SEC) outlines significant crypto custody risks in its investor bulletin, focusing on how private keys control access to digital assets. Investors face permanent loss if keys are misplaced, while third-party custodians may engage in practices like rehypothecation that could jeopardize holdings. Understanding these elements is crucial for secure asset management in the evolving crypto landscape.

How Do Hot and Cold Wallets Differ in Security？

Hot wallets, connected to the internet, enable quick transactions but heighten vulnerability to cyber threats such as hacking and phishing, as noted by the SEC. In contrast, cold wallets remain offline, substantially lowering the risk of digital attacks; however, they are susceptible to physical issues like theft, damage, or loss. The bulletin advises investors to evaluate these tradeoffs based on their transaction frequency and risk tolerance, drawing from established cybersecurity data that shows online wallets accounting for over 80% of reported breaches in recent years.