This publication is a collaboration between Economou & Co LLC and Klidi.io

Introduction

As digital assets gain increasing attention and traction, understanding the fundamental distinction between centralized and decentralized Bitcoin wallets has become increasingly important. While this may seem like a technical issue, the implications are significant for a range of reasons, from security to compliance, liability, and user privacy.

In this joint publication, Economou & Co LLC and Klidi.io provide practical insights into the key features of centralized and decentralized wallets, with a focus on the distinctions between them. Particular attention is given to how these wallet types are treated under the EU’s Markets in Crypto-Assets Regulation (MiCA), including their respective regulatory implications and compliance obligations.

What is a wallet?

The Oxford English Dictionary defines a "wallet" as a physical object used for carrying money and personal items. It is therefore unsurprising that digital wallets are commonly perceived as containers for digital money. In reality, however, this is not the case!

In the digital asset world, a wallet does not store digital assets; rather, it stores the private keys that, in turn, confirm one’s right to access and dispose digital assets.

Therefore, the wallet stores a private key, the possession of which is fundamental to the concepts of control and custody.

Wallets generally fall into two categories: centralized and decentralized. Let’s delve into the key aspects of each category.

1. Centralized (Custodial) Wallets

Custodial wallets are managed by third-party service providers—such as cryptocurrency exchanges or platforms—that hold the private keys on behalf of the user.

These wallets offer several advantageous features, particularly for individual retail users. For instance, they tend to be user-friendly and accessible to those with limited technical knowledge. They often include customer support and account recovery features, enable instant transfers, and integrate easily with exchange services. Additionally, custodial wallets may facilitate compliance with anti-money laundering (AML) and know-your-customer (KYC) requirements.

On the other hand, users of custodial wallets do not have full control over their private keys, meaning they rely entirely on the custodian for access to their assets. This dependence introduces counterparty risk, as users may be exposed to platform-level breaches, insolvency, or mismanagement. Additionally, custodial service providers are often subject to regulatory obligations related to custody, which may lead to compliance-related restrictions or delays.

Finally, an important consideration is that custodial wallet providers fall within the framework of the EU’s Markets in Crypto-Assets Regulation (MiCA) as Virtual Asset Service Providers (VASPs). They are required to implement robust anti-money laundering procedures, ensure data protection, and maintain clear segregation of client assets. Compliance obligations include operational transparency and regulatory licensing.

2. Decentralized (Non-Custodial) Wallets

Non-custodial wallets allow users to control their private keys directly, ensuring full control of their digital assets.

These wallets come in two forms: hot wallets, which are software-based and connected to the internet (such as mobile or desktop wallets), and cold wallets, which are offline storage solutions, commonly implemented as hardware wallets.

This distinction highlights the trade-off between convenience and security, with hot wallets offering easier access to funds and cold wallets providing enhanced protection by keeping keys offline.

Non-custodial wallets offer several advantageous features. Perhaps the most significant benefit is that users maintain full control of their digital assets, minimizing reliance on third parties. For many, this direct control aligns with the decentralization ethos at the heart of the crypto ecosystem.

However, the flip side of complete control is the inherent risk that comes with it: if a user loses their private keys, the resulting loss of assets is both inevitable and irreversible. Additionally, the limited compatibility of non-custodial wallets with AML/KYC obligations may make them less attractive to institutions or organizations with strict compliance requirements.

Non-custodial wallets are generally outside MiCA’s regulatory perimeter. While this may reduce administrative requirements, it also raises challenges regarding accountability, dispute resolution, and integration with regulated financial systems—particularly relevant for professional services firms.

3. Selecting the right wallet

According to Nasos Katsiamides, CEO and Co-Founder of Portfolium Group:

“For professionals assessing wallet options, key considerations include private key control, access and recovery mechanisms, regulatory compliance, and confidentiality.

Klidi.io employs a centralized wallet architecture, enhanced with safeguards designed to meet the requirements of professional users. Its core features include:

• Each invoice issued by klidi.io is tied to a unique, temporary wallet address.

→ Enhances privacy on the blockchain without compromising traceability

• Wallet addresses are unique and are not reused

→ Protects business confidentiality

• Instant conversion to euros

→ No volatility risk or custody burdens

• EU-licensed and fully AML-compliant

→ Built specifically for the MiCA environment”

Further legal assistance

At Economou & Co LLC, we specialize in legal counsel and assistance related to digital assets. Our dedicated team advises both individuals and corporations on best practices and compliance issues related to digital assets, ensuring effective management and regulatory adherence. In addition, we provide expert guidance in resolving disputes and facilitating the recovery of cryptocurrencies and other digital assets.

For a deeper insight into our expertise, please refer to our Lex Digitalis series.

• Valuing Volatility: High Court ruling on breach of ETH loan
• Bitcoin, Property, and Private Keys: Reflections on Howells v Newport City Council
• Service of Court Order Directly to Cryptocurrency Wallets via Tokenisation: Hong Kong Judgment Sets New Precedent
• Interim Injunctions and the Digitized World: Freezing Orders, NFTs, and Cybercrime

This publication is provided for informational purposes only and does not constitute legal, financial, or investment advice. While every effort has been made to ensure the accuracy of the information contained herein, it should not be relied upon as a substitute for professional advice tailored to specific circumstances. Economou & Co LLC and Klidi.io disclaim any liability arising from reliance on the contents of this publication.