Blockchain Monitoring & Security — The Importance of Self-Custody
For most, a user’s first foray into crypto is a confusing and perplexing, to say the least. Even users who are familiar with the intricacies of online banking and stock trading are initially at a loss in terms of where to begin. Unlike buying a product from an online retailer like Amazon, purchasing cryptocurrency involves a myriad of steps — each with increasing friction and a sense of nervousness, as these steps often include identification of identity (Know Your Customer / KYC), and the eventual transfer of fiat funds to exchanges that (in the minds of the newcomer) are not household names (and thereby, potentially untrustworthy institutions).
Many individuals obtain their first cryptocurrency through a centralized exchange (like Coinbase). Through this means, users at a minimum must go through the aforementioned process — proving their real identify, and transferring fiat currencies into their new account. From there, an exchange of fiat to crypto can finally begin.
Unfortunately, many newcomers to the space begin treating their cryptocurrencies like they would their stock portfolio. With users buying and selling short term (sometimes in a matter of hours, if not less), users are not incentivized to move their funds off the exchange, as such a move would not only be cumbersome, but would also incur transaction fees (from/to the exchange). As a result, individuals may even start keeping their long-term holdings on the exchange, comforted by the fact that their funds can be “easily accessed” by just logging into their exchange account, similar to a stock portfolio account.
This is far from ideal.
Significantly different than storing funds with a local bank or holding stock with a trading institution, the trust of a third party holding on to a user’s cryptocurrency can be a dangerous one, even if “nothing” has happened yet. Of course, the general issue with trusting a third party is that they are holding a user’s funds in their custody. Which means, should the third party be breached (internally or externally), and crypto is stolen, there is a real probability that the users who didn’t take their assets off the exchange would stand to absorb those losses.
Unlike in traditional financial institutions, where the bank and trading institution acts as a guarantor of a depositor’s funds, exchanges do not follow these same protocols, thereby leading to some potential real risks that could materialize for the user.
Taking Assets Off Exchanges — Not a Frictionless Experience
One of the major challenges that newcomers (and even existing users) face when dealing with on-exchange assets is the clumsiness that comes with moving their assets off of the exchange. The process, comes with all sorts of hiccups, including identifying the best wallet to use. Even after users learn the differences and sift through the options between hot and cold wallets (among others), another barrier emerges — does the chosen wallet support all of the tokens purchased from the exchange? One can only guess how many BTC may be stuck in Neverland while being transferred to Metamask.
The anxiety with sending a transaction off the exchange and into one’s own wallet doesn’t stop there though. Once breathing a sigh of relief that the funds have arrived, users now have to take care of their wallet — safely storing their seed phrases, locking up hardware wallets, and more.
Compound these efforts by all of the different exchanges and wallets available (e.g. Binance, Coinbase, Ledger, Metamask, Phantom, and much, much more), and it makes for an anxiety-ridden experience that often introduces far too much friction for individuals to pull their assets off exchange. After all, exchanges seem pretty safe — and users save transaction fees by not moving their crypto, and any forgotten passwords can just be reset, right?
It Can’t Be Stated Enough — “Not Your Keys, Not Your Coins”
Political positions and beliefs aside, recent events have shown the world that centralized parties can limit the onboarding and off-boarding of money from certain parts of the world. Removing the aspect of why this should or should not be done, it further enhances and exemplifies why users should generally remove all of their digital assets off of exchanges and centralized platforms. In the end, these platforms can block a user from reaching assets stored on the exchange, even if those assets have been laid claim to by the owner.
New entrants into the crypto space may be confused by this concept. After all, many parts of the world are accustomed to accessing their financial assets via banking apps or stock trading platforms. On rare occasions do these assets become inaccessible — and even if so, rarely for a long period of time. Further, newcomers to crypto may also confuse the decentralization aspect of the industry (which regularly touts that this is the huge benefit of blockchain) with reality. In reality, many players in the blockchain space are not decentralized. In particular, the most popular exchanges currently are highly centralized organizations — able to change the rules of the platform at any given time. While users enjoy some benefits associated with that (e.g. customer service emails/numbers to call, a greater sense of security by having a company to reach out to, etc.), an over-reliance on these centralized parties can lead to serious consequences for the user if they do not manage their crypto appropriately.
Therefore, it goes without saying that time and time again, if users are not performing self-custody of their own digital assets, they will always be at an increased risk of losing access to their own crypto.
Benefits of Self-Custody — Self-Banking, Transacting, and Crypto Monitoring
Besides being one of the most appealing and empowering aspects of crypto, self-custody has many benefits to the Web2 methods of managing financial assets. Building off of the previous section, self-custody essentially allows users to be their own bank, and remove reliance on financial institutions which may freeze or seize account funds at any time.
Further, as crypto continues to evolve and achieve mainstream acceptance, the ability to be able to access crypto from a wallet (through a phone app or otherwise) to be able to pay for goods becomes increasingly convenient. Using an exchange account or other intermediary would likely prove to be more difficult, adding at least an additional step of transferring funds to a personal account before being able to deploy the capital.
Lastly, limiting crypto funds to a small set of wallet addresses allows for more efficient crypto monitoring of one’s own coins and tokens. With blockchain monitors or crypto monitors, users can set alerts for their wallets to inform them of when inbound and outbound transfers may be occurring. Given the continued occurrences of crypto related crimes, establishing a blockchain monitor which monitors crypto on certain addresses will provide users an additional layer of comfort and security. Knowing that a crypto monitor is in place to monitor their funds will allow individuals to rest more easily knowing that their crypto continues to remain in their wallets.
Looking Ahead
Crypto adoption is on the rise. El Salvador was the first to adopt Bitcoin as legal tender in 2021, but it likely will not be the last. This adoption has paved way for well known businesses (like McDonalds) to accept crypto at their physical locations. Users who have their crypto stored in wallets are then able to transact via crypto to pay and receive for various goods and services. As the industry grows and expands, it is likely that this becomes increasingly more common and an everyday occurrence.
The benefits of self-custody cannot be overstated. Becoming one’s own bank, having unquestioned access to their funds at all times, and the ability to deploy crypto monitoring on their own accounts is a value that simply cannot be provided by banking institutions and financial rails today. These benefits, as well as the risks in not performing self-custody, should give all crypto participants pause and consideration in taking control of their own digital assets.
