Coinbase.com is a crypto brokerage where you buy or sell crypto in exchange for cash. Coinbase.com stores your crypto for you after you buy it. You do not need a Coinbase.com account to use Coinbase Wallet.
Coinbase Wallet is a self-custody wallet. The private keys (that represent ownership of the crypto) are stored directly on your device and not within a centralized exchange like Coinbase.com. Think of your Coinbase.com account as a brokerage that can store your crypto for you, and Wallet like a traditional cash wallet that gives you direct and complete control over your own crypto assets.
A custodial wallet is a wallet where private keys are held by a third party in order to manage funds on your behalf. Using a custodial wallet typically means you have to go through a KYC (Know Your Customer) process and submit various documents to complete onboarding. KYC is a way to identify and confirm that a customer is who they say they are.
In the case of your Coinbase.com account, Coinbase is the custodian.
A self-custody wallet is a wallet where your private keys are stored locally on your device, giving you full control over your funds. It’s also known as a self-custody wallet because you are the sole owner. Typically, your 12-word recovery phrase allows you to access and manage your funds and wallet. This should be backed up safely and never shown to anyone.
Anyone can sign up for a self-custody wallet, even if you don’t have an email address or a bank account.
These are the three key differences between these types of wallets:
1. Control of funds
Your private keys and funds are managed on your behalf by a third party for custodial wallets. With self-custody wallets, you manage your own private keys and funds typically via a 12-word recovery phrase.
For custodial wallets, your trades are managed and executed over a third-party exchange. You can also send your money from a custodial wallet to a self-custody wallet to conduct further activities.
Self-custody wallets allow you to directly interact with decentralized applications, such as DEX trading, lending, liquidity pools, etc. When you conduct a transaction, they are usually done in real-time and on-chain.
With self-custody wallets like Coinbase Wallet, all of the wallet’s information is held by you—you are the wallet owner. You can sign up for Coinbase Wallet without an email address or bank account.
Your wallet is secured via a 12-word recovery phrase, which must be kept private and backed up securely. If you lose your private keys, Coinbase Wallet cannot help recover your account. Never share your recovery phrase with anyone and back it up in a safe location.