Unhosted Wallet

An unhosted wallet, also termed self-hosted or self-custodial wallet, is a cryptocurrency wallet where the user maintains exclusive control over private keys without relying on a third-party custodian or service provider to hold, manage, or authorize access to their digital assets.

Users of unhosted wallets bear full responsibility for private key security, backup, and recovery without institutional safeguards. Examples include hardware wallets like Ledger or Trezor, software wallets like MetaMask or Exodus when used with user-controlled seed phrases, and paper wallets. Unhosted wallets provide maximum autonomy, censorship resistance, and elimination of counterparty risk from exchange insolvency or account freezes.

Regulatory frameworks struggle with unhosted wallets because they operate outside financial intermediary supervision. FATF guidance and proposed EU Transfer of Funds Regulation amendments sought to impose customer identification requirements on VASPs when customers withdraw to unhosted wallets, creating friction between regulatory objectives and crypto's permissionless architecture. The EU initially considered restricting transactions between VASPs and unhosted wallets above certain thresholds, though final MiCA implementation maintained permissions with enhanced due diligence requirements. Regulators view unhosted wallets as AML risks because transactions occur peer-to-peer without intermediary monitoring, though blockchain analytics can still trace flows. The tension between financial sovereignty through self-custody and regulatory demands for transaction visibility remains a central crypto policy debate.