What is a Crypto Wallet?

Cryptocurrency holdings live on the blockchain and can be accessed using a private key, which is a string of alphanumeric characters that acts like a password. Crypto wallets keep private keys protected and accessible, allowing users to prove ownership of their digital assets and make transactions. 

Wallets range from user-friendly apps to more complex security solutions. “Hot” wallets, like mobile apps or web-based wallets, are connected to the internet. They offer easy access and are ideal for managing frequent transactions. “Cold” wallets consist of offline storage options, like a thumb drive that is stored securely and only connected to the internet when you want to make a transaction. These types of wallets often offer enhanced security and may be more appropriate for long-term holdings.  

When users set up an account with an exchange like Coinbase, the exchange provides them with a hosted crypto wallet that safely stores their private keys. It’s called a “hosted” wallet because the exchange holds the keys on the user’s behalf, while the user maintains full ownership and control over their crypto. With a hosted wallet, users don’t need to manage their own private keys and can easily make basic crypto transactions via the exchange’s app or website.

Separate from this service are wallets known as “self-hosted” or “self-custody” wallets, which allow users to store and manage their own private keys. One example is Coinbase Wallet, which operates separately from the main Coinbase app, and lets users secure their own private keys through a recovery phrase (also known as a seed phrase). With a self-custody wallet, unless you choose to share your private key or seed phrase, no third party will ever know or have access to them. For the same reason, it is important to be very cautious about sharing this information, as it enables access to the crypto in your wallet.

Another reason that some users may prefer a self-custody wallet is that it serves as the gateway to the entire universe of onchain apps that’s emerged over the last several years — in much the same way a web browser is your gateway to the internet. For example, Coinbase Wallet supports over 2 million tokens across 8 different chains: Ethereum, Base, Arbitrum, Optimism, BSC, Polygon, Avalanche, and Solana. It also includes an in-app browser that enables users to explore the growing onchain world, including decentralized finance (or DeFi), NFTs, staking, and gaming.  

More recently, the innovation of “smart” crypto wallets have enabled features such as seamless onboarding, automatic payments, and the ability for users to take their wallet, identity, and balances with them to thousands of popular onchain apps. These wallets use smart contracts, or onchain software that executes automatically when certain conditions are met, to manage crypto assets and provide a more user-friendly experience. Smart wallets are especially useful in DeFi, business operations, and personal finance management.

Crypto wallets have evolved from basic tools for key storage to sophisticated solutions like smart wallets. As crypto and blockchain technology continue to evolve and interact with other innovations (for example, in AI), we should expect to see more secure and user-friendly options for storing private keys, transacting in crypto, and accessing experiences onchain.  

The ability of users to self-custody digital assets is not only a convenient option for many, but serves as a foundational principle of the digital asset ecosystem, built on the ethos of open access, equality, security, and low cost. It is important for policymakers and regulators to preserve the benefits of self-custody while ensuring appropriate oversight. For example, self-custody can be entirely compatible with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) goals. In fact, solutions in blockchain analytics — powered by AI and machine learning models — are positioned to meet and exceed traditional financial systems in detecting illicit activity. The possibility of new and better approaches to addressing these serious risks should be viewed as an important opportunity, both by the private sector and by policymakers.