Elbaite responds to the Twitter trend that’s encouraging people to #selfcustody their crypto assets.
There is a Twitter trend encouraging people to #selfcustody their crypto assets. Today we are discussing what self custody means, the risks associated with leaving your crypto in an exchange and what you can do to keep your crypto safe.
Self custody means that you and only you have possession over your assets. Crypto was originally designed to be censorship-resistant and give people control over their financial assets without reliance on third party organisations like banks or governments.
A disclosure made by the SEC (Securities and Exchange Commission) outlines the importance of having self custody even within the cryptosphere:
“ in the case of bankruptcy, crypto-assets held in custody on behalf of its customers may be “subject to bankruptcy proceedings” and that customers may become “unsecured creditors” in the process.” “https://cointelegraph.com/news/coinbase-chief-legal-officer-responds-to-sec-disclosure-fud
If the whole point of cryptocurrency is to give individuals complete control over their financial assets, how can things like this happen?
It’s all about Custody. Ever heard the phrase “not your keys, not your crypto”? Whoever has custody of the private keys has control over the wallet. Many centralised exchanges have custodial wallets built into their software, where the private keys are held by the exchange. This means the exchange has control over what happens to that crypto. If the exchange were to go bankrupt or get hacked any crypto stored on it would be lost.
If you want complete control of your crypto without relying on a third party, consider a) getting your own crypto wallet and b) using a non-custodial exchange. For more information on the different types of crypto wallets, and to decide which one is best suited to your needs check out our previous blog article.
What about the exchange? Essentially there are three main types of crypto exchange: centralised, decentralised and peer-to-peer:
Centralised exchanges are the most common exchange type, where the exchange holds, monitors and secures all crypto transactions. This means the control over the crypto held in the accounts lies with the exchange, not the user. The issue of security in centralised exchanges isn’t a new one. There have been many widely documented security breaches of centralised crypto exchanges, the largest of which was the 2014 Mt Gox exchange hack where between 650,000 to 850,000 bitcoin (an amount, now worth 27 – 35 Billion AUD) was stolen by hackers between 2011-2014. Once a crypto hack takes place very little can be done to recover the lost assets.
Decentralised exchanges or DEX’s are built purely on the blockchain. They can be accessed globally and do not operate within a single company. The downsides are that they can be complex to use, have no recovery ability for lost, stolen or misplaced funds and limited transaction speeds. They are also completely unregulated.
Peer to Peer (P2P)
Peer to peer exchanges operate in a similar fashion to platforms like eBay or Uber, where they connect people wanting a service/product with those selling that service/product. Elbaite is a non-custodial Peer to Peer Exchange, when you make a transaction the crypto goes straight from the wallet of the seller to the wallet of the buyer. Elbaite does not hold crypto at any point in the transaction process, meaning that in the event of an exchange hack or bankruptcy your crypto will remain with you.
There are many different options when it comes to trading crypto. The type of exchange you use, and whether you decide to use a custodial or non-custodial wallet completely depends on your circumstances and needs. The purpose of this article is to explain the current twitter trend urging people to #selfcustody their crypto and educate users about different wallet and exchange types available.
Disclaimer: The information on this website is purely for information. Elbaite is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.