How crypto self-custody offers better protection for your digital assets?

The crypto industry has recently experienced instability and significant events, such as the collapse of an algorithmic stablecoin, a protocol, and one of the largest exchanges. In addition, the failure of a leading crypto exchange FTX also negatively impacted user sentiments.

Unfortunately, this has also provided traditional finance supporters with another opportunity to claim that the crypto industry is failing. Interestingly, there have been 467 instances of people declaring that Bitcoin is dead.

Crypto believers have always propagated decentralized finance as the way forward for the community to thrive. However, it is important to note that FTX-like incidents happen due to mismanagement of user funds and the inability to run a fintech business with impeccable SOPs and good corporate governance.

In fact, in 2008, Satoshi Nakomoto released Bitcoin to remove intermediaries from finance and thus protect users from bad governance and business practices from intermediaries. It is not the failure of the blockchain industry or decentralized finance but a result of an unregulated centralized exchange mismanaging customer assets, an instance that is beyond imagination.

The FTX incident highlighted the need for a more secure and trustworthy financial infrastructure in the industry. We can take this as an opportunity to build a foundation for innovation and a better future.

Let’s look at some of the initiatives that can be taken to protect the user funds and prevent FTX-like incidents:

Not your keys, not your coins
When you store your money in a safe in your house, you usually lock the safe and keep the keys in a secure place. Similarly, the concept of ‘Not your Keys, Not your Coins’ means that users should always keep control of their private keys to maintain control of their cryptocurrency.

It emphasizes the importance of keeping cryptocurrency in wallets or accounts where you are the only one with access to private keys. This helps to ensure that you remain the sole owner of your cryptocurrency and that you are also not dependent on any third party.

Store your crypto assets in a secure environment (like a digital wallet) and keep your private keys safe. You are in control of your assets and you are responsible for protecting them.

When you store your digital assets on a centralized exchange or with a custodian, it works like a shared custody where the exchange holds the keys to the coins you own. In a pleasant situation, you can withdraw your coins to any wallet address and transfer your assets. Still, in a situation where your centralized exchange is in a financial mess and files for bankruptcy, you lose custody of your assets.

The most secure way to store your digital assets is to store them in a wallet completely under your control, with keys only known to you. This mode of storing digital assets is known as self-custody, and as long as you don’t share your private keys with anyone, your assets are secured and under your control. In addition, the blockchain provides highly secure storage for your digital assets, which is impossible to hack.

Local, Regulated, Licensed, and Compliant
It is important to choose exchange and custodian services after due diligence. Since crypto is unregulated in some countries, user funds do not have consumer protection. Custodian service providers should be regulated and must have secured a license from the regulators to provide virtual asset services.

Some prominent exchanges regularly publish proof of reserves to ensure transparency with their users and maintain trust with the investor community. Publishing such sensitive data in the public domain is a part of continued efforts to create an environment of trust within the crypto industry.

While self-custody is the highest form of security, you can offer your digital assets. Using licensed custodian services is a highly convenient option for storing your digital assets.

DeFi is the way forward
True crypto builders are diligently working towards a decentralized future of finance that gives power to the hands of the people. The so-called centralized crypto banks filed for bankruptcy recently and were run like unregulated banks.

These centralized crypto banks were locking users' digital assets to offer a percentage yield and lending the locked user funds to institutional borrowers. The interest charged from the borrowers was distributed among the users.

Since these entities were not regulated like traditional banks, the trade practices were not transparent, and they didn't follow any standard operating procedures. The long crypto winter disturbed the homeostasis of such unregulated centralized crypto banks resulting in a total loss of user funds.

Defi platforms also offer yield products where loans have to be over-collateralized, and all position and liquidation rules are transparent. In case a borrower faces liquidation he/she can not mingle with the operator to keep running under the collateralized loan.

We have seen again and again, in the case of margin calls, the so-called centralized landing products had to pay their Defi loans first compared to their positions on other centralized landers. Defi protocols are still operating successfully as they offer a transparent view of positions without involving any third party to hold customer funds.
However, there are still risks involved in smart contract security and other forms of financial attacks. So please choose your Defi platform carefully.

Digital asset insurance
Insurance coverage and asset custody are two different things. Asset insurance providers like Nexus Mutual, Canopius, Munich Re, Zurich Arch, etc., are now underwriting crypto risks to provide insurance for various crypto companies.

For example, Defi Insurance Firm Nexus Mutual approved 9/10 claims for Custody Cover to those locked out of CeFi funds for >90 days in Hodlnaut (members who held active FTX Custody Cover when withdrawals were first halted).

The company, in their newsletter, also mentioned that if withdrawals were halted on 6 February 2023 at 10:54 pm UTC, members who held active FTX Custody Cover when withdrawals were first halted can begin filing claims. Nexus Mutual also settled many claims during the Teraa Luna fiasco and the box flash loan attack.

In addition, companies in asset custody take responsibility for securely storing investors' assets. However, what sets them apart is that they don't hold the keys of users. They also help customers to get insurance for their assets.

While insurance cover does provide an extra layer of protection to digital assets, it is equally important to ensure the security of digital assets by using hardware wallets to store cryptocurrency and tokens offline, like Ledger or Trezor, and opt for self-custody to have full control over your keys.

The recent FTX incident highlighted the importance of secure storage of digital assets and the need for a more robust infrastructure. Users need to understand the importance of self-custody and storing digital assets in a secure wallet.

It is also important to use services from licensed custodians and exchanges and opt for digital asset insurance from trusted insurance providers. All of these steps will help to protect user assets and prevent incidents of mismanagement of user funds.