rapid collapse of the FTX cryptocurrency exchange sent shockwaves through the world of digital assets, wiping off billions of dollars off the value of Bitcoin and resulting in hundreds of investors being unable to access their funds.
Once again, older and wiser heads in the crypto space could be seen shaking their heads and uttering that old adage: “Not your keys, not your coins”.
FTX underscored the truth of that argument, which expresses the belief that unless you truly own your cryptocurrency, you cannot be sure that it is yours. You might think that the funds you have stored on an exchange are yours and yours only, but unless you hold the private keys to that wallet, you’re actually entrusting them with someone else.
In the case of FTX, the exchange controlled user’s wallets and retained control of the private keys, meaning that it was in full control of everyone’s funds. User’s ability to withdraw their money was, in other words, fully dependent on the exchange’s willingness to pay out. FTX had always made good on that promise, but the moment it ran into liquidity problems it was suddenly unable to keep its end of the bargain.
When someone says “not your keys, not your coins”, what they’re talking about is the need for users to retain self-custody of their digital assets, which can only be done through a non-custodial wallet that allows the user to generate a private key. The private key is a random string of words, like a passphrase, that provides access to where your funds are stored on the blockchain.
The big advantage of custodial wallets and services is that users can regain access to their funds in the event that they lose access to them. That’s because these services are signed up for in the old fashioned way, using an email address that allows us to reset the password in the event that we need to. But the disadvantage is that it means a middleman controls your private keys, and you have to place your trust entirely in them.
It’s All About Control
Proponents of the “not your keys, not your coins” theory say this is a big no no, because middlemen cannot be trusted. FTX was one of the biggest and most reputable exchanges in the business, and yet thousands of its users have since lost access to their crypto savings.
In the wake of FTX’s collapse a number of prominent crypto exchanges have moved to assure investors that their funds are safe through the release of third-party audits and proof of reserve reports. For instance, Gemini sent a letter to users assuring them that it had no exposure to FTX’s FTT tokens, while Coinsquare told users that its assets and liabilities are matched 1:1.
Despite those reassurances, smart investors would do well to pay heed to the old adage and move their funds to a non-custodial wallet. So long as you apply common sense, i.e. by writing down your passphrase on two pieces of paper and storing them somewhere safe, separately, those assets will be safe.
Some argue that the safest option is to use a so-called hardware wallet such as that allows you to store your coins offline. This adds an extra layer of security, because the only way to lose access to those funds is to lose access to the wallet itself. However, hardware wallets can be quite tricky to use, and there is still that danger that the wallet itself might be lost.
A somewhat less technical option is the so-called “hot wallet”, which is an application such as that runs on a mobile device such as smartphone or tablet. Such wallets are user-friendly and allow users to generate a private key that can be stored somewhere safe. However, hot wallets do carry a minor risk because they’re always online, meaning that if it was somehow hacked, any attacker could easily help themselves to your coins. Plus, there’s the risk of losing your private key and being unable to access your funds.
Fortunately, there is a solution to this problem that doesn’t rely on a custodial wallet. Serenity Shield is a blockchain-based storage service with an ingenious feature known as the StrongBox Vault that provides a way for users to recover their private keys in the event they lose them. With StrongBox, the user creates three NFTs – one stored with them, one with an heir, and one that’s retained in a smart contract. To access the private key held within the StrongBox Vault, the user needs two of those three NFTs. If they ever forget their private key, they can use their NFT and the one held by Serenity to recover it. Alternatively, if they should pass away, a designated heir can later access the private key once the conditions of the activation policy set by the user are met.
Follow The Experts’ Advice
Those who’re still not convinced of the need to control their own private keys would do well to listen to the crypto experts – including a number of prominent exchange executives – who almost universally agree that it’s the smart thing to do.
For instance, BINANCE CEO Chanpeng Zhao has been one of the most vocal proponents of self-custody, repeatedly warning users that it’s far safer than keeping your funds on an exchange. In the wake of FTX’s collapse, Zhao that self-custody of privately-owned cold wallets is a “fundamental human right”, and linked to a two-year old post arguing the point. The Bitcoin maximalist Michael Saylor, chairman of MicroStrategy, recently warned of the dangers of CEXs.
“In systems where there is no self-custody, the custodians accumulate too much power and then they can abuse that power,” he said in an interview with Cointelegraph.
Its advice that’s almost as old as Bitcoin itself. Way back in 2016, the Bitcoin entrepreneur Andreas Antonopolous that it was his “primary goal” to ensure that people are not using custodial exchanges and keeping their funds there.
“It is risky, it is unnecessary and they are the least aware or capable of understanding and managing that risk,” he said. “Hence the slogan: your keys, your Bitcoin. Not your keys, not your Bitcoin.”
And then there’s the most vocal of all crypto proponents, Elon Musk himself, who last year that “Any crypto wallet that won’t give you your private keys should be avoided at all costs.”
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