Custodial wallets are managed by a service provider. Typically these service providers are websites or apps, such as web wallets or exchanges, where you can log in based on traditional accounts.
The main difference between a custodial wallet and a non-custodial wallet is that you do not get a seed phrase. With a custodial wallet you don’t actually have a real wallet. Only the service provider is connected to, for example, the Bitcoin network and has a real Bitcoin wallet with a seed phrase. They thus manage their crypto on behalf of their users and via their website or software you can indicate where they should send them. So, if you have crypto but no seed phrase(s), then you probably use a custodial wallet.
Custodial wallets work a bit similar to traditional banks or payment platforms. As a user you log in to your account where you can make transactions, but the actual moving of the assets is done by the service provider.
A custodial wallet is not necessarily more secure than a self-custodial wallet. On the one hand, service providers simplify use and take on part of the security, but on the other hand they also introduce disadvantages and risks that you do not have with a self-custodial wallet.
Is such a service provider actually reliable? Are they not scammers? What if there is bankruptcy? What about privacy? What about the legislation? Are they really good at security? What if they get hacked? Unfortunately, the latter often happens. Think carefully about who you hand over your crypto to, because once you transfer them to a service provider, you depend on them to get them back.
Accounts at exchanges, brokers or other websites where you can invest and trade in crypto are almost always custodial wallets. It is preferable to use these types of services temporarily for trading, but not for long-term storage as exchanges are regularly targeted by hackers.
