A custodial wallet means a third party, like an exchange, holds your private keys on your behalf. A non-custodial wallet means you hold your own keys directly. The difference determines who's actually in control of your funds, building on \[pillar hyperlink: What Is a Crypto Wallet\].
Who holds the keys
With a custodial wallet, an exchange or service manages the private keys and your account works more like a bank login. With a non-custodial wallet, you generate and store the keys yourself, typically backed by a seed phrase you alone control.
Pros and cons
Custodial wallets are easier for beginners, offer password resets, and often integrate directly with trading. Non-custodial wallets require more personal responsibility but remove reliance on a third party's solvency or policies.
"Not your keys, not your coins"
This common phrase captures the core trade-off: with a custodial wallet, you're trusting the provider to honor withdrawals; if it fails or restricts access, your funds can be affected. Non-custodial wallets remove that dependency entirely, at the cost of full personal responsibility for security. See Private Keys vs Public Keys for how the underlying key system works.
Examples
Funds held on a typical exchange account are custodial. A wallet where you personally wrote down and stored a seed phrase is non-custodial.