A custodial wallet is a wallet arrangement in which a third-party service provider controls or administers the private keys or signing authority used to move a user's digital assets.
Custodial wallet providers commonly maintain customer accounts and execute blockchain transactions on behalf of users. Transfers between customers of the same provider can occur on an internal ledger without an on-chain transaction. The user therefore relies on the custodian's security, operational controls, recordkeeping, withdrawal process, and legal obligations.
Custody refers to control or administration of the signing credentials. A self-custodial wallet leaves that authority with the user.
Custodial wallets can simplify recovery, compliance, and transaction management while introducing counterparty and custody risk.
An exchange can hold the private keys controlling pooled stablecoin addresses while crediting each customer with a balance on its internal ledger.