An escrow is a standard financial agreement to add security to transactions. The agreement includes a third party with the responsibility of keeping the funds in custody until the two parties fulfill the terms of the obligation. As you know, bitcoin shares several properties with cash. Therefore, once a buyer and seller exchange funds, it is almost impossible to get them back. Immutability has its advantages; however, they also make transactions with unknown parties difficult.
Why do custodial services offer security?
The pace at which consumers transact with strangers has only increased with the increasing emphasis on digital currencies and e-commerce storefronts. Compared to a user sending money to an unknown party’s address, buyers will send the funds owed to a trusted party. This party will hold the funds while Buyer and Seller determine the terms of their agreement. By not transacting directly with the Seller, both parties should honestly endeavor to honor their agreement to release the funds.
Additional Reasons Custodial Services Are Necessary
Bitcoin has many attractive features, including its anonymity. Unfortunately, this is a double-edged sword. If a scam occurs, the authorities may never locate the owner of the bitcoin, and the funds may be lost forever to a fraudulent party. Since some platforms only require an email and password for users to transact, they have become a popular choice for scammers. The presence of a third party is probably enough to deter scammers from entering into a transaction, as there is no guarantee that they will receive the funds.
There are many different types of escrow services, most traditionally through reputable banks. However, for the first time in history, banks need not be part of the equation. The new offerings include a bitcoin custody service that is based on blockchain technology.
An overview of the bitcoin custody process
The main use of an escrow service is the purchase of a good or service that may require a complex series of steps to fulfill the transaction, such as filing a deed or relying on an inspection. In terms of services, an escrow provider can help ensure that a contractor or self-employed person completes a project to a certain standard. Although these use cases are the most common, an escrow can be contracted for any transaction, regardless of how large or small it is.
How does it work
Buyers locate a product or service that they would like to purchase and initiate the transaction. If the item is on a bitcoin market, the terms of the deal and the price will be included in the description.
After reviewing their agreements, both parties sign up with the custodial service of their choice. The registration process will require users to provide an email, password, and depending on the platform, other details for KYC regulations. Once the account is created, the buyer will receive an address to which to send the funds. Once shipped, the funds will remain in the secure account while the seller prepares the product for shipment.
Escrow providers may require users to submit shipping information for added security. When the item arrives, the Buyer will undergo a short inspection period. At this point, the buyer must decide whether to accept or reject the product. The Buyer may advise the escrow provider of its decision. If the decision is to accept the product, the platform will release the funds into the seller’s wallet.
If a dispute arises at any point in the process, the custodial provider will step in and act as a neutral third party or judge in the decision. The escrow provider will research all available information about the transaction and decide who is the rightful owner of the funds. In most cases, disagreements are rare and a moderator is not necessary.
How to find a bitcoin custody service?
The list of available escrow services continues to grow along with the use of cryptocurrencies. Therefore, users should do their own research to select the platform that offers the necessary features for their transaction. Since an escrow agent must be trusted, it is also important that users do a background assessment of the platform and the support team.
Crypto Exchange is a well-known market, exchange, and custody service for bitcoins. The platform offers extensive functionality, allowing users to shop on its platform and select escrow as an add-on if required. Creating an account and purchasing bitcoins can be done in a matter of minutes. Features include the exchange of additional cryptocurrencies, including Ethereum (ETH), XRP, and Litecoin (LTC).
IBC Group is a blockchain fundraising service with an additional escrow service. The website indicates that they have already optimized their platform for larger transactions. The safety and reputation of the company may be unknown; however, the equipment is visible on various pages of the website for users who want to do a more in-depth review.
Escaroo is a platform that facilitates escrow services through smart contracts. To ensure that each user is trustworthy, the platform also verifies each person who uses the platform.
On the newer side is Bitxoe. The platform promises a lot, but it is still new, with a community of over 16 clients and 78 wallets. The platform allows users to transact for a commission of 0.5% for those who are willing to try a more recent offer.
In the world of cryptocurrencies there is another option of custody services. Users can choose not to use a third party in favor of multi-signature (multi-sig) technology. A multi-wallet will only release held funds if a certain number of users sign it. In the case of custodial services, the wallet could be accessible to three different parties and require the signature of at least two of them. The buyer and seller can agree and release the funds, or the third party can act as moderator to sign if a dispute arises.