Definition ∞ Custodian risk is the inherent danger associated with entrusting digital assets to a third-party custodian, such as a cryptocurrency exchange or a specialized custody provider. This risk encompasses the potential for the custodian to experience a hack, internal fraud, operational failure, or regulatory seizure, which could lead to the loss of client assets. It represents a significant counterparty exposure inherent in relying on external entities for asset security. Thorough due diligence is essential when selecting a custodian.
Context ∞ High-profile exchange collapses or security breaches frequently bring custodian risk into sharp focus within crypto news. Debates continue regarding the optimal balance between self-custody and institutional custody solutions, especially for large investors and financial institutions. Regulatory frameworks are increasingly addressing custodian responsibilities and mandating insurance requirements to mitigate these prevalent risks.
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