Technology

I can see that you don't know how this works. That's ok. It's nonsense. No one needs to know about that.

Custodial wallets work just like checking accounts, without the regulation. Crypto victims like to say: Not your keys, not your coins. The custodian owes you the crypto that you have in your account/custodial wallet. You own a debt payable in crypto. If the custodian goes bankrupt and can't pay the debts, you are screwed (as so many crypto victims have found out to their shock). The money in a normal checking account is covered by a mandatory deposit insurance scheme, so you don't have to worry about that.

Because custodial accounts replicate checking accounts, they can be just as fast and efficient, in themselves. Having to pay the upkeep of the blockchain in the background means, that they can't be as cheap as actual checking accounts. If a custodial wallet offers you better conditions than a checking account, they must be gambling with the crypto (that you loaned them) in some way, that a normal bank is prohibited from doing with customer funds.

For the sake of completeness: Exchanges in more regulated jurisdictions work like stock brokerages. They must hold the assets. In case of bankruptcy, they are special assets that belong to the customer and are not used to pay creditors in general.