Self Custody & Digital Assets
A lesson in custody
Aaron Edelheit had his accounts frozen by banks because he invested in cannabis companies. If cannabis is legal in many states and cannabis stocks are openly traded on public stock markets, how can assets be frozen? If it’s Aaron’s money, so how can the bank freeze his assets at all?
https://x.com/aaronvalue/status/1975690846478737506
Because they stopped being Aaron’s assets when he let the bank have custody over them. Since 2022, over 8,000 people have been “debanked” and experienced the same thing as Aaron for a variety of reasons.
https://www.banking.senate.gov/imo/media/doc/debanking_complaints_analysis.pdf
Asset freezes and account closures have escalated globally in recent years, and they can be for anything from political beliefs, religious affiliations, clerical errors, or perceived criminal activity.
All of this can be done because in traditional finance, you must let someone else take custody of your assets in order to participate in online commerce.
What is asset custody?
Digital asset custody refers to how digital assets are stored, protected, and managed by owners or on behalf of owners.
Historically, self-custody of assets has meant keeping gold, cash, (stock slips), or physical assets in a secured location. If the assets are stolen, destroyed, or misplaced; there’s little recourse.
As a result, the majority of assets were held in custody by a trusted third party. Banks, brokerages, and other institutions held assets and took responsibility for their safekeeping, often guaranteeing restoration in the event of a loss.
Until recently, digital assets have required custody. For a stock portfolio, checking account, or mortgage to be digital, the assets had to be on a centralized database. Centralized databases can often be edited or altered by a single entity. Therefore, significant (and expensive) infrastructure was required to ensure that these databases weren’t being manipulated. Financial institutions, government agencies, payment processors, compliance organizations, accounting firms, and more all audit and oversee these databases to ensure their accuracy.
Cryptocurrency allows digital assets to be stored, secured, and managed by individuals. The nature of blockchain technology ensures that no single entity can edit the ledger, double-spend currency, or otherwise manipulate the database. Without going into the details, this is the breakthrough of blockchain and why cryptocurrency has captured the attention of technologists, futurists, politicians, and economists alike.
Self custody
A public, secure, immutable ledger creates new opportunities. Among them is the ability for individuals to self-custody their assets without sacrificing the convenience and advantages of digital infrastructure.
Simply put, self-custody means that an individual holds cryptocurrency on a wallet with the private keys in their possession. Private Keys are crypto-speak for “passwords.” While other articles will expand upon these concepts more, it’s important to touch on a few high-level concepts:
Cryptocurrency is not stored on any device. It’s an online ledger, and your private keys give you access to the coins associated with your wallet. A wallet is more like an account, not a physical wallet.
A private key can be stored in a complex, long password. A person with this password can unlock a cryptocurrency wallet from any internet-connected device.
If private keys are lost, nobody can recover the wallet. There is no blockchain customer support. There is no manager. There is no CEO. There’s a common phrase in cryptocurrency communities, “not your keys, not your crypto.”
Opportunities
People cannot be unbanked if they are their own bank. Whether it’s government seizure of savings like in Cyprus in the 2010s, freezes due to political affiliations in the 2020s, or ponzi schemes & bank failures like we saw in 2022-2023 with FTX, Celsius, Silicon Valley Bank, and more; it’s clear why many would prefer the responsibility of managing their own assets versus the vulnerability of trusting someone else.
Digital assets and cryptocurrencies are the only way to enjoy the convenience of digital commerce, the control of holding physical gold or cash, and protection that can endure house fires, home break-ins, and natural disasters.
As Balaji Srinivasan said about the crypto economy, “you must be sovereign” to participate. Meaning that there are many advantages in self custody, but they all require the individual to bear full responsibility over securing and maintaining their assets. Self-custody isn’t for everyone, but it’s clear why some choose to take on this responsibility.
Challenges
With new opportunities come new challenges. For instance, if a criminal steals cryptocurrency, there is no third party to make the victim whole. While the stereotype that cryptocurrency is the preferred tool of criminals is factually inaccurate; it is true that cryptocurrency transactions cannot be reversed like those in traditional finance. Meaning if someone pulls off a crypto heist, the victim has no recourse.
This even goes into civil courts. Self-custody assets can be identified and included in judgments, but without the private key to a wallet, courts & law enforcement cannot compel a transfer.
Simply put, if that person refuses to enter their password and make a transaction, it’s nearly impossible to compel a transaction. The very same thing that protects individuals against tyrannical governments also protects criminals and negligent parents behind on child support.
Conclusion
Self custody of digital assets is a new concept. There are plenty of valid reasons why some prefer the convenience of custodial accounts while others prefer the enhanced functionality of self-custody. Your preference is yours to decide, but we simply advise you be aware of all of the risks, advantages, and opportunities on each path.
Contact us if you want to more about self-custody digital assets in your specific environment.
