Many users around the world onboard into crypto for the first time through exchanges. These users end up leaving their crypto holdings on various exchanges who act as custodians over their assets. This is natural for many who are used to leaving fiat assets with third parties who have developed best practices, have strong regulatory oversight, and mature insurance schemes that have evolved over time.
The crypto industry is still young. Many of the protections consumers have in their country’s legacy financial system are non-existent or are much less mature. In addition, many of the attributes that attract people to crypto are reduced when holding these assets on an exchange.
Privacy, censorship resistance, inflation resistance, and usability are all affected negatively by custodians. Taking self-custody helps to ensure these qualities are still preserved.
Our current financial system is under heavy surveillance and many in crypto want to reclaim their financial privacy. However, when leaving crypto-assets on an exchange users are giving up any chance of financial privacy.
Self-custody of crypto-assets doesn’t automatically imply privacy, it depends on the solution, but you generally have a better chance of reclaiming financial privacy by taking custody of your crypto-assets. Many self custody solutions don’t collect personal information and have no ability to track transactions made by the users they support.
Many in the crypto space value an attribute known as censorship resistance. In the traditional financial system, banks, payment processors, and governments can limit a user’s ability to transact. Within crypto networks it’s close to impossible to stop a user from transacting freely. However, when a user gives up their crypto-assets to a third party, this quality goes away.
Custodians come under the purview of national and international regulators. Government agencies often make determinations on what transactions can and cannot be made. The custodians might not want to censor or freeze the assets of its customers but they have to comply with court orders or international sanctions if they want to continue operating in the countries they do business in.
Self custody solutions help preserve this quality because the provider of the solution typically has no ability to limit a user’s ability to transact. Even if regulators wanted to go after businesses that offer self custody solutions their energies would be wasted. These businesses wouldn’t be able to comply for technical reasons.
Usability & Accessibility
When leaving assets with a third party users are much more vulnerable to that entity’s infrastructure being up and running as well as them being able to manage their supply of assets. When using a custodian you’re usually logging into their servers and they are sending and receiving assets on your behalf.
They also secure assets in a mix of hot and cold storage. Assets in hot storage are inherently more vulnerable, but easier to access quickly for the custodian. Cold storage assets are less vulnerable, but are hard to access. Custodians are motivated to keep much of the assets they take possession of in cold storage. As a result a common ratio of assets custodians hold in cold storage relative to hot storage is 49:1.
For example, if 100 exchange customers each gave a custodian one Bitcoin, the exchange would collect 100 BTC, keep 98 BTC in cold storage and 2 BTC in hot storage. If only 3 or more customers elect to move more than 2 BTC out of the custodian’s possession simultaneously, the custodian will have to access their cold storage to honor the wishes of these customers. Moving assets out of cold storage is a slow, manual process that can take some time. Too many customers moving too many assets out of the custodian’s possession in too short of a time period could negatively impact the customer’s ability to transact in a timely manner.
This isn’t the case when using a self-custody solution. There is much less infrastructure that has to be relied upon and users have near instant access to their assets to transact as they please.
Sound Money and Inflation Resistance
Many were attracted to crypto because of the promise of sound money. What many fail to understand is this is put at risk when custodians take possession of large sums of these assets.
When custodians hold assets it becomes close to impossible to know the true supply of what they hold until customers take possession.
It’s been well documented how gold markets are strong-armed by Central Banks and Bullion Banks to suppress the price of gold. According to Chris Powell of the Gold Anti-Trust Action Committee (GATA) international financial institutions are able to do this through gold futures contracts which are settled in cash not gold. Participants in these markets never actually take delivery of the underlying gold held by custodians. By never taking possession a massive supply of imaginary supply can be produced in the form of financial contracts. According to GATA the amount of claims on gold are far greater than the actual supply held by custodians of it. The difference between actual supply and the claims on that supply is unknown because hardly anyone actually takes possession.
US Equities have also come under similar scrutiny. Former CEO of Overstock, Patrick Byrne, has alleged for years that the number of claims on corporate shares far exceeds the actual number of shares. His investigations into the inner workings of Wall St as the CEO of a public company led him to the obscure Depository Trust & Clearing Corporation(DTCC) and its legal subsidiaries.
The DTCC is responsible for clearance, settlement, and custody of almost all of the publicly traded securities in the United States. The DTCC represents a large central point of failure for public financial markets. In addition, there is a long chain of middle men between the DTCC and the actual owners of these securities. Hardly anyone actually takes possession of their securities. Transfers of these securities are just accounting entries that are eventually settled by the DTCC. Byrne’s investigations were a big influence on his attraction to Bitcoin and the promise of public blockchains.
Although crypto custodians cannot actually affect the issuance schedule of a crypto asset, they can engage in behaviors that create artificial supply in the market like lending their customer’s deposits out without their knowledge or having more claims on deposits than they can actually redeem. This behavior creates a gap between expectations and reality concerning the actual supply of assets in the market. Only by taking possession can we be sure that our expectations about supply are in line with reality.
We’re proud to offer a secure and easy to use self-custody solution that helps keep the key attributes of crypto-assets alive. Third party custody has its place, but large custodians can represent a threat to some of the very qualities that drew many to crypto-assets in the first place.
Edge doesn’t collect any personal information from our users. No name, no phone number, no ID, and no email is required to use our solution. We connect you directly to public blockchains so you can freely transact as you wish as soon as you need to.
Privacy, censorship resistance, accessibility, and access to sound money are preserved all in one application.