The Cost of Custody

Too often we see stories of people losing their funds. Is custody to blame for more than just losing our assets? Are we giving up more than we bargained for?

Kyle Turnbull

February 16, 2022 · 3 min read

The cost of custody

The cost of custody

Custody is often talked about in terms of security. Naturally so, as it’s the obvious risk when offering up control of anything, to someone else. However, self-custody has wide-reaching ramifications that extend beyond the security of users’ funds. Let’s investigate the importance of self-custody, for both individuals, and ecosystems. 

The global movement toward self-custody is in full swing. The result of decades of decreasing trust in institutions that have been shown to simply not have the users’ best interest at heart. Institutions that seem to operate external to the rules the average person is afforded. Self-custody is a movement. Make no mistake. It is a rejection of the status quo, and ultimately the empowerment of the smallest piece of a global network. The individual.

Mike Fay detailed the importance of self custody in his recent Seeking Alpha article:

👉 Bitcoin: The Importance Of Self-Custody

Not all forms of custody are created equal…

There may not be another term in the blockchain industry that has less concrete definitions or expectations than ‘custody’. This not only presents issues for consumers but also regulators. Bitcoin’s core value proposition is also the reason “crypto custodians” are fraught with danger. 

The key to the danger present in the custodian-consumer relationship comes down to the ‘securities investor protection act’. The interpretation of what constitutes a ‘security’, does not include crypto-assets. This definition ultimately means that institutions that provide “custody” for consumers are often left without protection or insurance. 

We need to be careful

Despite advances in distributed ledgers and blockchain technology, some of the most popular crypto-wallets and ecosystems on the planet remain fully custodial. 

And this makes complete sense. 

People are fearful of having complete ownership over their funds. It’s new, it’s unknown, and ultimately, it’s too scary. However, if we’re looking to the future, the cost of using custody may be greater than just the loss of funds when things do go wrong.

Your funds are not yours. 

The most prescient example of the negative effects of custody is the fact that you no longer have control over your funds. As described above, this is particularly devastating for crypto-assets, as quite often the custodian does not possess adequate insurance to ensure the complete replacement of users’ funds, if they are lost or compromised. 

Complete loss of privacy.

If you use a custodian, you relinquish all of the privacy benefits afforded by cryptocurrency. A self-custodial crypto wallet will allow you to interact with the blockchain without completing KYC (Know-your-customer) procedures, which require you to provide identity documents and restrict who can use what services. Privacy is critical to our ability to provide truly borderless and global solutions that empower the individual and create a more equitable financial system. The wide-reaching ramifications of a lack of privacy are nearly unquantifiable. 

Reduced resistance to centralization. 

If we use currencies that rely on custodialized ecosystems, the control we (the user) have, is watered down. A large proportion of people who are invested in crypto are doing so to support transparent and sustainable economics, free from central control. What people don’t understand is this is put at risk when custodians take possession of large sums of these assets.

Self-custody is more important than ever. 

Privacy and centralization resistance are both affected negatively by the use of custodians. Self-custody helps to ensure these qualities are still preserved. By ensuring the user maintains complete control, we’re staying true to Nakamoto’s vision of a network that operates peer-to-peer, not user to custodian. There is a place for custody, and it will be important on our journey toward complete crypto adoption. However, we mustn’t rely on the crutch of this perceived safety, or we risk re-creating the system we are seeking to change. 

Mahesh Vellanki offers some interesting insights in his recent Future article:

👉 The Missing Link Between Web2 and Web3: Custody

DiviWallet is a movement. 

We’re proud to offer industry-leading self-custodial solutions that further the core tenants of crypto every single day. It is our mission to at every possible step, empower you, the user. Despite being an important part of the overall crypto ecosystem, an overreliance on large custodians may present serious long-term issues for the crypto industry as a whole. 

Recommended reads:

👉 What is Web 3.0?

👉 What is a DAO?

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  • Security
  • Inflation

Kyle Turnbull

February 16, 2022 · 3 min read

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  • Security
  • Inflation

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