Custody is a financial term that refers to the ability to hold, move and protect assets; digital custody refers to storage and security systems that hold large quantities of coins, tokens or digital assets.
In the traditional banking, a custodian is a financial institution that stores securities and other fungible assets on behalf of mostly institutional investors to minimize the potential risk of loss or theft. Before the tokenization of the financial markets, custodians held piles of physical stock, cash or bond certificates in vaults with expensive security systems.
Today, most securities and commodities are moving to electronic form, which is opening the floodgates for decentralized digital assets. While the exact process differs by custodian and exchange, most investors must register as custodians, undergo Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, then send their digital assets to the custodian.
A common phrase you hear in the Bitcoin world is "not your keys, not your coins." With crypto custodians you are certainly giving up control of your keys. That's the point, and it's not necessarily a bad thing. Crypto custodians hold digital assets for clients in multi-signature cold storage wallets that are insured and audited regularly audited to provide transparency.
Custody providers usually operates as standalone, independently-capitalized businesses to exchanges or banks. Custodians are fiduciaries with state banking charter licenses. All digital assets are segregated and held in a trust fund for the benefit of clients, usually insured up to $100 million or more.
Some examples of leading crypto custodians are Coinbase, BitGo, Gemini, iTrust, Genesis, Galaxy Digital and Kingdom Trust. You can read the Coinbase White Paper or Gemini White Paper to learn more about digital custody infrastructure.