Crypto winter teaches hard lessons about growth and control.

Crypto winter has breathed new life into the adage that “your keys are not your coins.” Especially after some high-profile organizations like the Celsius Network had their funds suspended in June. Just last week, Ledger CEO Pascal Gauthier hammered home the point, saying, “Don’t trust anyone with your coins and private keys because you never know what they’re going to do with them.”

The basic idea behind it, familiar to many crypto veterans, is that if you don’t store your private keys (ie passwords) in an offline “cold wallet”, you don’t really control your digital assets. But as the world transitions from Web2 to Web3, Gauthier is framing the issue in a larger context:

“A lot of people are still on Web2. […] Because they want to stay in the matrix that they control, because it’s easy, you just click yes yes yes and then you know someone else will solve your problems.

But giving up control doesn’t set you free. “Taking responsibility is how to be free.”

Admittedly, Gauthier has an advantage here – Ledger is one of the world’s largest providers of cold wallets. Then he might be stating the obvious. In May, Coinbase Acknowledged In an SEC 10-Q filing, he said, customers who entrusted their digital assets to the exchange “may be treated as general unsecured creditors,” meaning they could be at the back of the line of creditors in bankruptcy. Procedures.

Georgetown University law professor Adam Levitin told Barron’s: “It doesn’t matter if the exchange contract with you says you own the currency, that doesn’t determine what happens in bankruptcy.”

But Gauthier’s statement also raises other questions. This notion of “controlling” one’s keys and coins may be further complicated by recent regulatory proposals in Europe, as well as the interpretation of a key government agency in the United States. Moreover, as the world moves from Web2 to Web3, is it really certain that centralized solutions like Coinbase and others may not still have an important role to play when it comes to regulation and privacy?

Learning the hard way

Overall, it seems consumers still don’t understand the risks involved in turning over their crypto private keys to centralized platforms and exchanges.

“It’s been made clear that even the most credible custodians can still make serious mistakes with users’ money,” DV Project CEO Nick Saponaro told Cointelegraph. “

“All crypto users need to learn and take responsibility for the security of their own coins by storing them in hardware wallets,” Bobby Ong, co-founder and chief operating officer at CoinGecko, told Cointelegraph. Because for most crypto users, it may be more convenient to store them on centralized exchanges.

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Still, a centralized exchange (CEX) can be useful at times and we should probably expect to live in a hybrid cryptocurrency for some time, with both cold and hot wallets, centralized and decentralized exchanges (DEXs).

“There’s a case for using a centralized exchange to send money to others so as not to compromise your crypto addresses,” Ong said. “This is because when you send a transaction to someone else, they know your address and can see your balance, historical transactions and all future transactions.”

Of course, ONL He tweeted. Recently: “The current basic advice is to have multiple wallets for different purposes and fund these wallets using a central exchange. This works well but not enough. If you use FTX or Binance, Uncle Sam and Changpeng Zhao know all the wallets and can profile you instead.

Ong continued, “To achieve full privacy for the new wallet, a service like Tornado Cash is needed. Sure, it’s probably more expensive, slower and tedious, but having such an option ensures privacy and makes crypto behave more like money, he added.

Justin D’Anetan, director of institutional sales at Amber Group, agrees that there is a trade-off. “You can’t do as many sophisticated trades from a private wallet as you can on a centralized platform, or at least not as easily and efficiently,” he told Cointelegraph. Large, sophisticated traders should always get some of their holdings on exchanges to optimize returns. In his personal case:

“I keep my main holdings in private wallets, but definitely some assets on central platforms for generating, some rebalancing, etc.”

Corporate entities, in particular, may not want to handle the operational side of business, including investment and protection, and may also want to deal with a recognized and established centralized entity that can perform due diligence. Also, corporations may want to have an identifiable and liquid body to sue “if something goes wrong,” D’Anettan added.

On the retail side, setting up a private wallet can still be very difficult, which explains why many entrust private keys to CEXs and the like, although it’s not always the best way. As D’Anetane told Cointelegraph:

“You may not know how — or the motivation — to buy a private wallet, set it up to hold your private key, and bear the risk of losing it. So the path of least resistance prevails.

Controllers still “don’t get it?”

Elsewhere, self-hosted wallet providers may soon face tougher rules in Europe if the EU’s Transfer of Funds Regulation (TFR) takes hold and kicks in. It can override this whole idea of ​​controlling private keys and coins.

Philip Sandner and Agatha Ferreira “Effectively, it would be a ‘de facto’ ban on self-hosted wallets, forcing them to link personal identities to self-hosted wallets.

Mikolaj Barcentewicz, an associate professor at the University of Surrey in the United Kingdom, told Cointelegraph:

“The TFR proposal does not ban self-managed wallets, but encourages carriers to view them as ‘high risk’ for money laundering.[…] Transactions using self-hosted wallets can be overwhelming.

Defenders of the TFR may respond that it’s not regulators’ fault that businesses aren’t better at risk-based analysis and identifying high-risk situations for crime, but “I don’t think the answer works,” Barcentevich continued. “It shows a lack of awareness – or care – that rules need to be designed to work in the real world. The EU is basically saying to businesses: ‘You know.’

However, the biggest threat to self-contained wallets, in Barcentevich’s view, is “something like what we saw when we saw Tornado Cash being dropped by the US sanctions: businesses get scared and engage in over-compliance, over-regulation.” asks”

As reported in the year On August 8, the US Treasury’s Office of Foreign Assets Control (OFAC) issued legal sanctions against digital currency Tornado Cash for allegedly laundering more than $455 million worth of cryptocurrency linked to North Korea. Hacking organization Lazar Group.

According to data analytics company Chinalysis, the obligations of non-custodial crypto wallet providers are now unclear under OFCO’s recent designation: “The strictest definition means that non-custodial wallet providers may need to block transfers to sanctioned addresses, however unprecedented.” .

At the very least, government actions like these suggest that cold wallet solutions to help crypto users keep control of their private keys may be more of a problem — less so — at least in the near term.

Is education necessary?

In general, the crypto industry faces an educational challenge here, that is, the importance of cold storage and individual “responsibility” for both individuals and policy makers?

“I think we have to be honest with ourselves,” Saponaro replied. “Yes, education can help some individuals recover from the problems we’ve seen in recent months, but most people don’t read every article, watch every video, or take the time to educate themselves. Developers are responsible for developing products that guide users to “learn by doing.”

“The crypto community, including in the European Union, can still do a lot to educate policymakers,” added Barsentewicz. “However, this lesson cannot be limited to explaining how crypto works. It would be a mistake to think that policymakers will make rational laws on their own once they ‘get it.’

The crypto community needs to be proactive in coming up with detailed technical and regulatory ideas on how to fight crime and corruption without giving up crypto’s key benefits such as self-preservation. “It’s not enough to just mention buzzwords like ‘zero knowledge proofs’ and expect policymakers to do the hard work.”

Is “control” really important?

What about Gautier’s big point that people simply need to learn to take “responsibility” for their possessions — digital and otherwise — because “taking responsibility is how you become free?”

“Crypto is a game changer because now we have complete control over our money without having to trust any third party,” Ong said. That said, some people “may choose to delegate responsibility and trust a third-party custodian better equipped to safely store their coins — and that’s acceptable,” Cointelegraph said.

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“In the crypto space, you have very binary opinions on how things can grow from here. I think the truth is somewhat in the middle,” Diannethan added.

“One would be deluded to think that every individual and corporation will be fully DeFi tomorrow. But one would also be deluded to think that the burgeoning digital world will remain in Web2 infrastructure forever.

What would be best would be to have both centralized and decentralized platforms, he said, “so that the user base gradually shifts to where it sees the most value — however long it takes.”