What Is a Self-hosted Wallet?

A self-hosted wallet refers to a type of digital wallet that is hosted and controlled by the user, as opposed to being hosted by a third-party service, like a VASP. It provides individuals with direct control over their private keys and, consequently, the security and management of their digital assets. A custodial wallet is the opposite. The wallet owner does not have access to the key; the users’ VASP does.

Self-hosted wallets offer the advantage of increased security because the private keys are stored locally on the user's device rather than on a centralised server. This reduces the risk of a single point of failure or hacking attacks on a centralised service.

Types of Self-hosted Wallets

A self-hosted wallet can be in the form of software or hardware. With software applications are installed on users’ computers or mobile devices, for example Electrum. Hardware wallets are physical devices specifically designed for securely storing private keys offline, like BitBox02.

Hardware wallets, in particular, are known for providing a secure form of offline storage. Since these devices are not continuously connected to the internet, they are less susceptible to online threats such as hacking or malware.

Users are responsible for securely backing up their private keys or wallet seed phrases.

Some self-hosted wallets allow users to run a full node for the respective cryptocurrency network. Running a full node means storing a complete copy of the blockchain, contributing to network security, and enhancing privacy.

Depending on the jurisdiction, self-hosted wallets may fall under the scope of the Travel Rule.

The below list of terms all carry similar meanings but are used in different jurisdictions.

1. Self-custodial Wallet;
2. Non-custodial Wallet;
3. Unhosted Wallet;
4. External Wallet;
5. Private Wallet;
6. Crypto Wallet.

Check out these posts to learn more about self-hosted wallets;

• Self-hosted wallet verification methods.
• The updated Travel Rule guidance’s impact on unhosted wallets.

Why Would a Cryptocurrency User Need to Prove Wallet Ownership?

Requesting a customer’s wallet ownership proof is a compliance requirement for VASPs in many countries. As self-hosted wallets are not regulated entities, the Travel Rule is an obligation for VASPs, primarily when transacting with other VASPs, as both sides of a transfer have their obligations. However, transfers involving VASPs and self-hosted wallets are often included in countries’ Travel Rule regulations, since allowing such unidentified transfers would create a loophole and make Travel Rule ineffective otherwise.

The Financial Action Task Force’s (FATF's) Recommendation 16 proposed that cryptocurrency exchanges and virtual asset businesses within FATF member countries adhere to country-specific rules when transacting with self-hosted wallets as part of their anti-money laundering (AML) efforts. Recommendation 16 stipulates that when a virtual asset transfer involves only one obliged entity (a VASP) on either end of the transfer, countries should still ensure that the obliged entity (the VASP) adheres to the requirements of Recommendation 16 concerning their customer. This means VASPs need to collect and store information. For example, when an ordering VASP, or other obligated entity, sends virtual assets on behalf of its customer (the originator) to a beneficiary that is not a customer of a beneficiary institution, but rather an individual who receives the virtual asset transfer to a self-hosted wallet.

Self-hosted Wallet Ownership Methods