Power of Self-Custody is the Takeaway from FTX
The FTX implosion is a watershed moment in crypto. The upshot is reaffirming the core value in cryptocurrencies — keeping control over your own finances.
With every passing day, more and more details on FTX’s management emerge and everyone is asking, “How did we get here?”
We still have a while to go before the dust settles to fully understand the magnitude, but one thing is for sure, self-custody is a zero sum game.
Moving Beyond ‘Trusted’ Third Parties
This isn’t a death knell for crypto. Just as Bernie Madoff and the subprime mortgage crash did not spell the end of financial markets, cryptocurrency trading will continue. Yet the big difference between those scandals and the FTX fiasco is the role of intermediaries.
In the FTX case, users actually had the ability to take custody of their assets, something not possible in TradFi.
Crypto provides this unique quality. The tools are there. For many,self custody is an indelible principal and function.. If FTX shows us anything, it’s that it’s risky to trust third parties.
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It’s literally unbelievable that there is such a strong pull and attraction to large centralized players whose existence revolves around assets that are meant to embrace decentralization. Maybe this proves that we, as a society, even if we are bullish on the concept of decentralization and decentralized assets, have the tendency to gravitate towards centralization because it’s what most of us have known all our lives.
The bigger, richer, and presumably stronger the player, the more we want to stand behind and support them because that will somehow be better. Whether it’s groupthink, the safety in numbers fallacy, or simply a blind trust in authority, the fact remains that we have cognitive biases and fall into heuristic shortcuts that lead us astray.
Back to the Basics: Your Crypto, Your Responsibility
Hopefully it’s becoming apparent that if you’re going to be involved in crypto, you have to safeguard your own assets without relying on a third party.
As the FTX downfall unfolded in real time, emotions ran the gamut— shock, numbness, bewilderment, anger, grief. This is a good time to go back to basics. The Bitcoin Whitepaper reminds us why we are all here in the first place’. It provides a restoration of hope and a scripture to dutifully implement to rebuild a brighter future.
The white paper reminds individuals why it’s critical to remain sovereign and institutions why it’s critical to help provide tools and products to further individual empowerment. It reminds us that If you allow exchanges and other third parties to hold your private keys, you don’t have control over your crypto.
Self-custody relies on being somewhat proactive and taking matters into one’s hands; however, we, as a society, are accustomed to relying on third parties to safeguard assets for us. We like to gravitate towards easy solutions—not necessarily the best ones.
Use cold storage and you might miss an opportunity to take advantage of favorable market conditions. Leave crypto on an exchange, and you risk being the victim of a hack or, even worse, the value being caught up on an exchange that has declared bankruptcy.
Regulated Exchanges versus Self Custody
Almost immediately, the regulated exchanges started to tout their regulated custodial capabilities. The regulated centralized exchanges in the United States are required to segregate customer funds/assets from the exchange’s own funds to ensure that customer funds/assets are not used for anything other than what the customer explicitly allows the exchange to do with it.
However, even in the regulated exchange scenario, the user is still giving up control of their assets to a third party to safeguard their assets for them.
The fact of the matter is that self-custody is the only way to ensure one has complete control over their crypto. “Not your keys, not your crypto” is a mantra for crypto users, and yet, it’s the one thing that many seem to either have forgotten or ignored.
Cathy Yoon is the chief legal officer of MPCH Labs.