What Are the Security Implications of a Custodial Exchange Holding Private Keys?

When a custodial exchange holds private keys, it creates a centralized point of failure, making it a prime target for hackers. A successful attack can result in the loss of all user funds stored on the exchange.

Users are entrusting the exchange's security measures to protect their assets. Conversely, this model can be more convenient for users who are not confident in their own ability to securely store private keys.

Losing a key means losing access to the funds forever, a risk that is mitigated by a custodian.