A custodial exchange is a platform that allows users to trade cryptocurrencies while holding their funds on behalf of those users. In this setup, the exchange acts as a custodian, managing the private keys necessary to access and control the funds.When users deposit their cryptocurrency into a custodial exchange, they relinquish direct control over their assets. Instead, the exchange takes responsibility for security, storage, and management. This can simplify trading for many users since the exchange handles the technical aspects.However, there are risks involved. If the exchange suffers a hack or financial collapse, users may lose their funds. Additionally, users must trust the exchange to act in good faith and manage their assets responsibly. For those seeking more control over their funds, non-custodial wallets or exchanges may be preferred options, as they allow users to retain possession of their private keys.