What is a crypto wallet?
A crypto wallet is software or a device that stores the private keys to crypto-assets and signs transactions with them. The assets stay on the blockchain; the wallet controls access to them. In a custodial wallet a provider holds the keys, in a non-custodial wallet the owner does. The German term is Krypto-Wallet.
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Crypto wallets in brief
| Term | Crypto wallet, also cryptocurrency wallet, with the same meaning. German: Krypto-Wallet. |
|---|---|
| What it holds | Private keys. The crypto-assets are entries on the blockchain. |
| Custody in EU law | Article 3(1)(17) of Regulation (EU) 2023/1114 (MiCA): safekeeping or controlling crypto-assets for clients, "where applicable in the form of private cryptographic keys". |
| Wallet without a provider | "Self-hosted address" in Article 3(20) of Regulation (EU) 2023/1113, the Transfer of Funds Regulation. |
| Date of application | Both regulations apply from . |
| Supervisors | BaFin in Germany, FMA in Austria, FINMA in Switzerland. |
What is a crypto wallet used for, and how does it work?
A crypto wallet is used to prove ownership of crypto-assets and to move them. In classic finance the bank keeps the ledger and checks who may use an account. On a blockchain the ledger is public, and the proof is a digital signature made with a private key. The Ethereum documentation puts it this way: "You never really hold cryptocurrency, you hold private keys" (ethereum.org, ).
The wallet software shows the balance, builds a transaction and signs it with the key; the network checks the signature against the public key. The documentation's definition separates the two terms: "An account is not a wallet. A wallet is an interface or application that lets you interact with your Ethereum account." Wallets also let users sign in to applications with the same account.
What is a crypto wallet address?
A crypto wallet address is the public identifier to which others send crypto-assets, comparable to an IBAN. It is derived from the public key, which in turn is derived from the private key; the reverse path is not possible. On Ethereum the address is the last 20 bytes of the Keccak-256 hash of the public key with the prefix 0x, so it has 42 characters. The address can be shared freely. The private key must stay secret. More on the two keys: What is a private key vs a seed phrase?
Custodial vs non custodial wallet: who holds the keys?
In a custodial wallet a provider holds the private keys for the client; in a non custodial wallet, also called a self custody wallet, the owner holds them. A custodial wallet is closest to a securities account at a bank. The Ethereum wallet page describes the trade-off: exchanges link the wallet "to a username and password that you can recover in a traditional way", but the client trusts the exchange with custody, and "if the exchange has financial trouble, your funds would be at risk" (ethereum.org, ).
| Feature | Custodial wallet | Non-custodial wallet |
|---|---|---|
| Who holds the keys | The provider, often an exchange | The owner |
| Lost access | Recovery through the provider | Recovery only with the owner's backup |
| Main risk | Failure or fraud at the provider | Loss or theft of the keys |
| EU law | Custody under Article 75 of MiCA | No license; transfers from a provider to such an address follow Article 14(5) of the Transfer of Funds Regulation |
Crypto wallet vs exchange is therefore a question of custody: an exchange account is a custodial wallet.
Hot vs cold crypto wallet: what is the difference?
A hot wallet keeps its keys on a device connected to the internet; a cold wallet generates and stores them offline. The wallet vendor Trezor defines a hot wallet as one "stored on an internet-connected device, such as a mobile app, browser extension, or desktop application" and a cold wallet as one "where private keys are generated and stored offline" (Trezor).
The wallet types can be explained by device: ethereum.org lists hardware wallets, mobile apps, browser wallets, browser extensions and desktop applications. Of these, the hardware wallet is the device that keeps the keys offline. How it signs without exposing the key is on the page What is a hardware wallet?
Crypto wallets in Germany, Austria and Switzerland
A bank or asset manager that holds private keys for clients provides custody under MiCA, which applies directly in Germany and Austria. BaFin states that the definition covers "insbesondere Anbieter von Wallets für Kryptowerte", wallet providers in particular, and compares the service with the former crypto custody business under the KWG (BaFin, ). A credit institution may start after a notification under Article 60(1), at least 40 working days ahead. A UCITS management company or alternative investment fund manager can notify only services equivalent to portfolio management, advice and order transmission under Article 60(5); custody is not on that list.
Article 75 then sets the duties: a client agreement, a register of positions per client, a custody policy, a statement at least every three months, and client assets held separately on the ledger and in insolvency. The custodian is liable for losses attributable to it, capped at the market value of the lost asset. BaFin supervises in Germany under the KMAG, the FMA in Austria.
Switzerland is outside the EU, so MiCA does not apply there. FINMA explains in Guidance 08/2023 that Article 16 no. 1bis of the Banking Act separates custodied crypto-assets from a bank's estate in bankruptcy. Holding payment tokens for clients in a collective account needs a banking license, or a FinTech license if the tokens are held in readiness at all times. Individual custody needs neither, only membership of a self-regulatory organization for anti-money laundering. This page gives no legal advice.
Sources
- ethereum.org: Ethereum accounts, updated
- ethereum.org: Ethereum wallets, updated
- Trezor: Trezor hardware wallets and their advantages, retrieved
- European Union: Regulation (EU) 2023/1114 on markets in crypto-assets,
- European Union: Regulation (EU) 2023/1113 on information accompanying transfers of funds and certain crypto-assets,
- BaFin: Merkblatt: Hinweise zu den Kryptowerte-Dienstleistungen nach MiCAR,
- Federal Republic of Germany: Kryptomärkteaufsichtsgesetz (KMAG),
- FINMA: FINMA publishes guidance on staking services, with Guidance 08/2023,