Hands Off Our Self-custody

The anti-self-custody regulatory noises coming after the banking crises will hurt consumers, not help them

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In the wake of the triple bank collapses and last year’s creeping crypto contagion (the bankruptcies of FTX, Celsius, Voyager, the list goes on), politicians on both ends of the spectrum are discussing how crypto should now be governed — and not everyone agrees on what that looks like. 

Some of the calls for general oversight seem to think that being able to privately store personal assets shouldn’t be allowed in this new risky financial reality.  

And while these regulatory efforts are inevitable in the face of so many financial failures, this  proposed solution will not eliminate all risks. Even with the soundest rules in place, institutions fail, and bad actors will always find ways to exploit loopholes. 

Instead, a powerful case should now be made for personal responsibility through self-custody. 

Self-custody is cited as risky, with Senator Elizabeth Warren emphasizing the danger in how users could obscure the use of their self-held funds to cover up criminality.

Read more: Elizabeth Warren Has a Lot to Say About Crypto — Try Listening for Once

This argument is not strong enough to justify eliminating the right to personal custody. In fact, self-custody will help investors regain control over their money and prevent future financial disasters from occurring.

Limitations of centralized exchanges, limitations of regulations

Storing funds in a centralized exchange or other third-party platforms exposes customers to considerable risk, including hacks, negligence and corruption. While not all centralized crypto businesses are mishandling funds, it can be difficult to know who is until it’s too late

People are beginning to wise up to the fact that trusting anyone else with their money undermines one of the core principles that cryptocurrency was actually founded on.

A current lack of any form of regulatory protection exacerbates the problem. 

With most traditional financial firms, there is some form of state-backed “safety net” to protect customer funds in the face of insolvency — like how the FDIC and the Federal Reserve stepped in to backstop the banks’ depositors and stop the bank runs after the failures of Silicon Valley Bank, Silvergate and Signature earlier this year.

Read more: After Bank Failures, Where Will Crypto Firms Turn?

In the crypto industry, there are no such guarantees. Centralized exchanges custody user funds without regulatory oversight. This means there is no one even attempting to check their custody practices and solvency — meaning consumers are largely unprotected when things go wrong. 

In response to the many exchanges failing, Sen. Warren proposed one of the more far-reaching attempts at regulation, which would require private wallets to adhere to strict anti-money laundering (AML) practices. 

While AML policy can be implemented at centralized financial platforms, (which doesn’t speak for its actual effectiveness at preventing money laundering), it’s impossible to apply the same rules to self-custody and DeFi platforms, which primarily exist as code that anyone can use, without asking permission. 

If this legislation passes, any service that will not or can not comply could become blacklisted in the US, severely limiting the ability of the industry to evolve in this region. 

Read more: Sens. Warren, Marshall Delay Reintroducing Crypto Bill Due to Lack of Sponsors

An unnecessary overreaction

Misguided, overly strict policy proposals are a considerable overstep in personal rights and would be a crippling blow to the cryptocurrency industry in America. Services would be largely pushed overseas, which would have a ripple effect of offering legitimate users fewer and fewer points of access or means to personally store their assets. 

Combined with honest exchanges moving to other jurisdictions, eliminating private storage solutions would not make users safer and would only encourage them to find unvetted or illicit ways to circumvent these restrictions. Consumers would be stuck between using government-sanctioned fiat, or engaging in high-risk financial behavior, neither of which is a step in the right direction. 

This is especially problematic because of why regulators claim it’s necessary to start controlling self-custodied assets: The proposed legislation claims that this is necessary to deter financial crimes like money laundering. 

There is some validity to the concerns, as cryptocurrency is used for money laundering (although not as much as fear mongers would have you think). However, introducing such restrictive legislation under the guise of protecting users makes little sense. Keeping people from securing their own money doesn’t protect them in instances where financial institutions themselves fail.

Perhaps most importantly, this legislative overreach into self-custody is an unnecessary step because there are already tools available that can keep control in the user’s hands while protecting against the risk of loss due to mistakes or theft. Several wallet applications and services are already available that easily walk a user through the process of generating, storing and accessing multiple keys — removing the risk that losing a single key results in losing funds. Most importantly, they allow users to control their own keys, eliminating issues with third party storage. Bills like the one being proposed by Sen. Warren, could potentially cut the public off from access to these platforms.

When events like FTX’s collapse happen, many users get wary and begin moving their funds off of centralized exchanges and into personal wallets, and they should have every right to continue to do so.

The absolute safest way to store the majority of funds will continue to be self-custody, and that simply isn’t going to change. Remember, sovereign control over a person’s own money was a major reason Bitcoin was created in the first place. 



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