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The crypto winter has pumped new life into the adage \u201cNot your keys, not your coins,\u201d particularly after the collapse of some high-profile enterprises like the Celsius Network, whose funds were frozen in June<\/a>. Just last week, Ledger CEO Pascal Gauthier hammered home the point further<\/a>, warning: \u201cDon\u2019t trust your coins and your private keys to anyone because you don\u2019t know what they\u2019re going to do with it.\u201d<\/p>\n The basic idea behind the adage, familiar to many crypto veterans, is that if you don\u2019t personally hold your private keys (i.e., passwords) in an offline \u201ccold wallet,\u201d then you don\u2019t really control your digital assets. But, Gauthier was also framing the issue in a larger context as the world moves from Web2 to Web3:<\/p>\n \u201cA lot of people are still in Web2 […] because they want to stay in the matrix where they\u2019re being controlled, because it\u2019s easier, it\u2019s you know just click yes yes yes and then someone else is going to deal with your problems.\u201d <\/p>\n But, giving away control won\u2019t set you free. \u201cTaking responsibility is how you become free.\u201d <\/p>\n Admittedly, Gauthier has a self-interest here \u2014 Ledger is one of the world\u2019s largest cold-wallet providers. Then, too, he may have been stating the obvious. In May, Coinbase acknowledged<\/a> in an SEC 10-Q filing that if it ever went bankrupt, customers that entrusted their digital assets to the exchange \u201ccould be treated as our general unsecured creditors,\u201d i.e., could find themselves standing at the back of the creditors\u2019 line in bankruptcy proceedings. <\/p>\n \u201cIt doesn\u2019t matter that the exchange\u2019s contract with you says you \u2018own\u2019 the currency,\u201d Georgetown University law professor Adam Levitin told<\/a> Barron’s at the time, \u201cThat\u2019s not determinative of what will happen in bankruptcy.\u201d\u00a0<\/p>\n But, Gauthier\u2019s statement raises other questions, too. This notion of seizing \u201ccontrol\u201d of one\u2019s keys and coins could become more complicated given recent regulatory proposals in Europe, as well as a key government agency interpretation in the United States. Moreover, as the world transitions from Web2 to Web3, is it really so certain that centralized solutions like Coinbase and others might still not have an important role to play with regard to custody and, yes, even privacy?<\/p>\n Generally speaking, it appears that consumers still do not understand the potential risks when they turn their crypto private keys over to centralized platforms and exchanges.<\/p>\n \u201cIt\u2019s been made abundantly clear that even the most seemingly trustworthy custodians can still make grave missteps with user funds,\u201d Nick Saponaro, CEO at the Divi Project, told Cointelegraph. \u201cThe promise of self-sovereign ownership of your money is immediately obliterated when users hand over their private keys to any third-party, regardless of that third-party’s genuine intent.\u201d<\/p>\n \u201cAll crypto users should learn and be responsible for the security of their own coins by storing them securely on hardware wallets,\u201d Bobby Ong, co-founder and chief operating officer at CoinGecko, told Cointelegraph.\u201cHowever, this is not a popular move because for most crypto users, it is probably more convenient to store them on centralized exchanges.\u201d<\/p>\n Recent:\u00a0Blockchain firms fund university research hubs to advance growth<\/a><\/em><\/strong><\/p>\n Still, a centralized exchange (CEX) can be useful at times and maybe we should expect to live in a hybrid cryptoverse for a while, with both cold and hot wallets, centralized and decentralized exchanges (DEXs).<\/p>\n \u201cThere is a case for using centralized exchanges for sending funds to others to not doxx your crypto addresses,\u201d said Ong. \u201cThis is because when you send a transaction to someone else, they will know your address and can see your balance, historical transactions, and all future transactions.\u201d <\/p>\n Indeed, Ong tweeted<\/a> recently: \u201cThe basic advice now is to have multiple wallets for various purposes and to fund these wallets using centralized exchanges. This works well but it\u2019s not good enough. If you use FTX or Binance, Uncle Sam and Changpeng Zao will know all your wallets and they can profile you instead.\u201d<\/p>\n Continued Ong, \u201cTo get full privacy for your new wallet, a service like Tornado Cash is needed. Granted, it\u2019s probably more expensive, slow and tedious,\u201d but having such an option would ensure privacy and make crypto behave more like cash, he added.<\/p>\n Justin d\u2019Anethan, institutional sales director at Amber Group, agreed that trade-offs remain. \u201cYou can\u2019t do as many sophisticated trades from a private wallet as you can on a centralized platform, or at least not as easily and efficiently,\u201d he told Cointelegraph. Large, sophisticated traders will always need to have some of their holdings on exchanges to optimize returns. In his personal case:<\/p>\n \u201cI hold a chunk of my core holdings in private wallets, but I definitely hold some assets on centralized platforms for yield generation, some rebalancing, etc.\u201d<\/p><\/blockquote>\n Corporate entities, especially, may not want to handle the operational side of a trade, including investment and custody, and they may also want to interact with a recognized and established centralized entity that can perform due diligence. Also, corporations may want to have an identifiable and liquid entity to sue \u201cin the event of an error,\u201d added d\u2019Anethan.<\/p>\n On the retail side, setting up a private wallet can still be daunting, which may explain why so many entrust private keys to CEXs and the like, even if it isn\u2019t always the best way. As d\u2019Anethan told Cointelegraph:<\/p>\n \u201cYou might not know how \u2014 or have the motivation \u2014 to buy a private wallet, set it up to hold your private key and bear the risk of losing it. So, the path of least resistance wins.\u201d\u00a0<\/p><\/blockquote>\n Elsewhere, self-hosted wallet providers may soon face tough regulations in Europe if and when the EU\u2019s Transfer of Funds Regulation (TFR) proposal takes hold. It could overturn this whole notion about taking control of one\u2019s private keys and coins.\u00a0<\/p>\n \u201cEffectively, it would amount to a \u2018de facto\u2019 ban on self-hosted wallets by enforcing to connect personal identities with self-hosted wallets,\u201d wrote<\/a> Philipp Sandner and Agata Ferreira.<\/p>\n Mikolaj Barczentewicz, associate professor at the United Kingdom\u2019s University of Surrey, told Cointelegraph: <\/p>\n \u201cThe TFR proposal doesn\u2019t ban self-custodied wallets, but it does incentivize service providers to treat them as \u2018high risk\u2019 for money laundering.[\u2026] It may become practically very difficult to transact using self-hosted wallets.\u201d<\/p><\/blockquote>\n Defenders of the TFR might respond that it\u2019s not regulators\u2019 fault that businesses are not better at risk-based analysis and at distinguishing situations of genuinely high risk of criminality, but \u201cI don\u2019t think that answer works,\u201d continued Barczentewicz. \u201cIt shows a lack of understanding \u2014 or care \u2014 for the fact that regulations need to be designed to be workable in the real world. The EU is basically saying to businesses: \u2018You figure it out.\u2019\u201d<\/p>\n However, the biggest threat to self-custodied wallets in Barczentewicz\u2019s view \u201cis something like the scenario we\u2019ve been watching in reaction to Tornado Cash being sanctioned by the U.S.: Businesses are afraid and engaging in over-compliance, doing more than the law requires.\u201d<\/p>\n As reported, on Aug. 8, the United States Department of the Treasury\u2019s Office of Foreign Assets Control (OFAC) issued legal sanctions<\/a> against digital currency mixer Tornado Cash for its role in laundering over $455 million worth of cryptocurrency stolen by the North Korean-linked hacking organization Lazarus Group.<\/p>\n According<\/a> to data analytics firm Chainalysis, the obligations of non-custodial crypto wallet providers are now unclear under OFAC\u2019s recent designation: \u201cAn extreme interpretation could mean that non-custodial wallet providers might also need to block transfers to the sanctioned addresses, though this would be unprecedented.\u201d\u00a0<\/p>\n At a minimum, government actions like these suggest that cold-wallet solutions to help crypto users take control of their private keys could become more problematic \u2014 not less \u2014 at least in the immediate future.<\/p>\n Overall, does the crypto industry face an education challenge here i.e., to explain the importance of cold storage and individual \u201cresponsibility\u201d to both individuals and policymakers?\u00a0<\/p>\n \u201cI think we have to be honest with ourselves,\u201d answered Saponaro. \u201cYes, education can help some individuals avoid the pitfalls we\u2019ve witnessed in recent months, but most people will not read every article, watch every video or take the time to educate themselves.\u201d Developers have a responsibility to develop products that guide users \u201cinto learning by doing.\u201d <\/p>\n \u201cThe crypto community, including in the EU, can still do much more to educate policymakers,\u201d added Barczentewicz. \u201cBut this education cannot be limited to just explaining how crypto works. It is a mistake to think that once policymakers \u2018get it,\u2019 they will come up with sensible rules on their own.\u201d <\/p>\n The crypto community needs to be proactive in proposing detailed technical and regulatory notions of how to fight crime and malfeasance without giving up key benefits of crypto, like self-custody, he said. \u201cIt is not enough just to mention buzzwords like \u2018zero knowledge proofs\u2019 and then expect the policymakers to do the hard work.\u201d<\/p>\n What about Gauthier\u2019s larger point that people simply have to learn to take “responsibility” for their assets \u2014 digital and otherwise \u2014 because \u201ctaking responsibility is how you become free?\u201d<\/p>\n \u201cCrypto is a game-changer because we now have full control of our money without the need to trust any third-party,\u201d said Ong. That said, some people \u201cmay choose to pass on the responsibility and trust a third-party custodian who may be better equipped to store their coins safely \u2014 and that is acceptable too,\u201d he told Cointelegraph. <\/p>\nLearning the hard way<\/h2>\n
Do regulators still not \u201cget it?\u201d<\/h2>\n
An education imperative?<\/h2>\n
Is taking \u201ccontrol\u201d really important?<\/h2>\n