Self Custody is Great, But it Has its Limits

Self custody is great — it is one of the founding principles that cryptocurrency was built on. The ability to hold our own keys and manage our own funds on a level playing field with banks and traditional financial service providers has been groundbreaking. Binance’s Changpeng Zhao (CZ) calls this a “fundamental human right.” For many crypto investors and users, the FTX bankruptcy served as a stark reminder of the importance of safeguarding one’s crypto assets and not being complacent about leaving large amounts of holdings on exchanges.

The origin of “not your keys not your coins”

When Bitcoin was first starting out, self custody was the only option that users had, and Bitcoiners took personal responsibility for maintaining their own public and private keys, making some Bitcoin veterans ardent proponents of self custody. Getting rid of intermediaries and middlemen was a large part of the ethos of Bitcoin, and thus giving an intermediary or a middle man like an exchange control of one’s keys seemed antithetical to crypto’s core values. This gave rise to the old crypto adage “not your keys, not your coins,” and the loss of investor assets in the FTX bankruptcy (and others) certainly gives this sentiment credence. Because FTX controlled users’ wallets and keys for them, users depended on FTX to access their holdings and were unable to access or withdraw their own assets once FTX began to experience liquidity issues.

However, it’s also clear that self custody comes with its own risks and limitations. But don’t just take our word for it — even Vitalik Buterin thinks so, tweeting that self custody and DeFi also have inherent risks of their own such as “Bugs in smart contract code,” and that, to guard against this, code should be kept simple and that audits and formal verification should be utilized. After calling self custody a basic human right, CZ added the stipulation, “just make sure you do it right,” recommending that users should start by moving small amounts of crypto to self custodial wallets at first.

The shortfalls of self custody

The limitations of self custody are laid bare particularly when it comes to transferring crypto assets to next of kin in the event of a death. While crypto natives and those deeply involved in digital assets may feel comfortable navigating through all corners of the crypto ecosystem, most of the non-crypto natives in our families likely lack the know-how to access our crypto holdings in the event of an unexpected death.

Bruce Fenton, the managing director at Watchdog Capital and a longtime proponent of cryptocurrency, illustrates this point by challenging crypto users to “test” self custody by telling “…your next of kin to retrieve your coins as if you had died. They are only allowed to use the info they have now. No new note or instructions allowed — if you died today they wouldn’t have those instructions either. See how the test works.”

And it doesn’t just have to be an unexpected death; Fenton outlined a number of other situations where self custody could be problematic, such as your phone, computer, or other physical device where seed phrases and passwords are stored being lost or destroyed, or even one’s home being destroyed in a fire. Would you be able to access your crypto assets without the use of your phone or the aid of written notes that you have stored away if these solutions were no longer available?

Because there is a lack of support or backup, self custody users have sole responsibility for the safekeeping of their assets, and even more mundane events like losing a password or access to a wallet can separate a user and their crypto holdings permanently. Even actions like updating a mobile device without backing up its data or losing a hard drive could separate you and your crypto. We all know that there is a maximum supply of twenty-one million Bitcoin — but three million or more of these Bitcoin may be lost permanently as their owners have lost access to them. Many crypto enthusiasts are familiar with the story of an individual in the UK who accidentally discarded a hard drive with 7,500 Bitcoin on it.

While some crypto enthusiasts are passionate about self custody, as crypto reaches mass adoption and becomes widely used, other crypto users will want some of the safeguards and support that they find in the traditional financial system. Forbes’ David G.W. Birch wrote that “No normal person wants to be their own bank.” Messari’s Tom Dunleavy says that 95% of the general population will not find self custody desirable, tweeting that “Bankless is a meme not a reality. Dad, grandma, and your friend Joe don’t [want] to be their own bank. They want some level of safeguards and backup. We need to find a way to provide those if we want people to use crypto.” As more people are onboarded into cryptocurrency, self custody isn’t going to be feasible for everyone.

Additionally, self custody may not be a suitable solution for hedge funds, institutional investors, individuals with a large percentage of their net worth in crypto assets, and other large investors who require a level of institutional-grade service.

You don’t have to go it alone when it comes to custody

The good news is that this isn’t a binary decision between going it alone in the wild west of self custody or leaving your coins on an untrusted exchange. There is a compliant, regulated custodial solution that people can trust. BitGo offers another way as a trusted, battle-tested crypto custodian offering a full suite of custody solutions and, unlike many of the others out there, we are crypto natives. At the same time, BitGo has adopted the best practices of traditional financial institutions, and we have a fiduciary responsibility to our clients. We are the only qualified custodian purpose-built for digital assets. BitGo has a long track record of securing digital assets for some of the largest and most prominent exchanges, liquidity providers and investors in the world.

BitGo offers an array of custody solutions to meet client needs, enabling clients to find the right balance of utility and security by offering different types of wallets. Hot wallets are ideal for clients looking to maintain liquidity while custodial wallets mean BitGo holds all three keys offline in cold storage, making it exponentially more difficult for a bad actor to access your keys. Self-managed cold wallets enable customers to take control of their own cold storage while leveraging BitGo’s technology and processes.

BitGo’s first-in-class multi-signature technology eliminates the single-point-of-failure risks that come with single-key, self custody systems. We offer a state-of-the-art security, encryption and authentication platform for online and offline key management, sharding, and transactions signing. Other advantages of working with BitGo include having a dedicated relationship manager, on-site setup assistance with a BitGo engineer, ongoing technical support, and customization that allows you to configure financial policy, controls, and reporting to your needs. BitGo will also be supporting TSS and MPC solutions for newer coins.

BitGo’s keyed recovery service (KRS) insurance for self custodied keys protects self custodying crypto users from the pitfalls outlined above. Your organization holds your keys and we hold a key. We can never move any of your money on your own with our key but if you lose one of your keys we can help replace it for you, giving you peace of mind about the permanence and security of your holdings.

BitGo is a regulated trust dedicated to the simple idea of providing safekeeping for your digital assets. Unlike a bank, which can lend out assets, as a trust by charter, we cannot lend out client assets. We further safeguard your funds by maintaining segregated accounts. Your funds are separate from our funds, and separate from the funds of other customers. A trust like BitGo offers additional safeguarding by providing bankruptcy protection. Your funds are returnable to you quickly in the event of a bankruptcy. Ultimately, our number one priority is to hold your digital assets, and to give them back to you when you want them.

To learn more about how BitGo can help you safely and seamlessly secure your digital assets, connect with us.