The crypto winter has pumped new life into the adage “Not your keys, not your coins,” particularly after the collapse of some high-profile enterprises like the Celsius Network, whose funds were frozen in June. Just last week, Ledger CEO Pascal Gauthier hammered home the point further, warning: “Don’t trust your coins and your private keys to anyone because you don’t know what they’re going to do with it.”
The basic idea behind the adage, familiar to many crypto veterans, is that if you don’t personally hold your private keys (i.e., passwords) in an offline “cold wallet,” then you don’t really control your digital assets. But, Gauthier was also framing the issue in a larger context as the world moves from Web2 to Web3:
“A lot of people are still in Web2 […] because they want to stay in the matrix where they’re being controlled, because it’s easier, it’s you know just click yes yes yes and then someone else is going to deal with your problems.”
But, giving away control won’t set you free. “Taking responsibility is how you become free.”
Admittedly, Gauthier has a self-interest here — Ledger is one of the world’s largest cold-wallet providers. Then, too, he may have been stating the obvious. In May, Coinbase acknowledged in an SEC 10-Q filing that if it ever went bankrupt, customers that entrusted their digital assets to the exchange “could be treated as our general unsecured creditors,” i.e., could find themselves standing at the back of the creditors’ line in bankruptcy proceedings.
“It doesn’t matter that the exchange’s contract with you says you ‘own’ the currency,” Georgetown University law professor Adam Levitin told Barron’s at the time, “That’s not determinative of what will happen in bankruptcy.”
But, Gauthier’s statement raises other questions, too. This notion of seizing “control” of one’s 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?
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Learning the hard way
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.
“It’s been made abundantly clear that even the most seemingly trustworthy custodians can still make grave missteps with user funds,” Nick Saponaro, CEO at the Divi Project, told Cointelegraph. “The 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.”
“All crypto users should learn and be responsible for the security of their own coins by storing them securely on hardware wallets,” Bobby Ong, co-founder and chief operating officer at CoinGecko, told Cointelegraph.“However, this is not a popular move because for most crypto users, it is probably more convenient to store them on centralized exchanges.”
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).
“There is a case for using centralized exchanges for sending funds to others to not doxx your crypto addresses,” said Ong. “This 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.”
Indeed, Ong tweeted recently: “The basic advice now is to have multiple wallets for various purposes and to fund these wallets using centralized exchanges. This works well but it’s 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.”
Continued Ong, “To get full privacy for your new wallet, a service like Tornado Cash is needed. Granted, it’s probably more expensive, slow and tedious,” but having such an option would ensure privacy and make crypto behave more like cash, he added.
Justin d’Anethan, institutional sales director at Amber Group, agreed that trade-offs remain. “You can’t do as many sophisticated trades from a private wallet as you can on a centralized platform, or at least not as easily and efficiently,” he told Cointelegraph. Large, sophisticated traders will always need to have some of their holdings on exchanges to optimize returns. In his personal case:
“I 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.”
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 “in the event of an error,” added d’Anethan.
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