How Do Custodial Exchanges Typically Secure the Private Keys They Hold?
Custodial exchanges use a combination of strategies to secure private keys. The majority of funds are typically held in "cold storage," meaning the private keys are stored on devices that are not connected to the internet, making them immune to online hacking attempts.
A smaller portion of funds is kept in "hot wallets," which are online, to facilitate withdrawals. These are protected by measures like multi-signature schemes, which require multiple authorizations for a transaction, and secure hardware environments.
They also employ strict internal controls and access policies.
Glossar
Cold Storage
Storage ⎊ Cold Storage denotes the practice of securing private keys for cryptocurrency assets entirely offline, disconnected from any internet-enabled device, to provide the highest level of defense against remote hacking attempts.
Private Keys
Ownership ⎊ Private Keys are the secret cryptographic credentials that mathematically prove ownership and grant exclusive control over associated cryptocurrency addresses and the assets they secure.
Secure Hardware
Custody ⎊ Secure hardware, within the context of cryptocurrency, options trading, and financial derivatives, represents a critical layer in mitigating counterparty and operational risk, functioning as a dedicated environment for private key management and cryptographic operations.
Strict Internal Controls
Procedure ⎊ Strict Internal Controls are the mandatory, formalized procedures and policies implemented across a financial institution to manage operational risk, prevent fraud, and ensure the accuracy of financial reporting.
Secure
Framework ⎊ Within cryptocurrency, options trading, and financial derivatives, a secure framework prioritizes the integrity and resilience of underlying systems against adversarial attacks and operational failures.
Custodial Exchanges
Infrastructure ⎊ These venues operate centralized order books and matching engines, providing the necessary throughput for high-frequency options and futures trading in the crypto space.