Not Your Keys, Not Your Crypto: What to Know Before the Next FTX-type Meltdown

The shockwaves of FTX’s collapse in November 2022 remains to be being felt. Within the crypto world, one saying was uttered repeatedly: “Not your keys, not your cash.” The repercussions and classes learnt should not over: The dispute over whether or not or to not reveal the names of shoppers at collapsed crypto alternate FTX continues. In June 2023, Kevin Cofsky—companion at funding financial institution Perella Weinberg Companions, tasked with promoting FTX—mentioned that releasing the names of the purchasers would harm the gross sales technique of the shuttered alternate, which is making an attempt to get better and promote property to repay collectors.

The favored adage about keys and cash is making the rounds within the wake of the newest alternate meltdown. However what does it really imply?

“Not your keys, not your cash” or “not your keys, not your crypto” expresses the assumption that traders can’t be sure of their crypto holdings until they’re saved in a pockets for which they personally have the keys. FTX held onto customers’ wallets and keys for them, that means entry to funds trusted the alternate’s skill to ship it — which turned problematic as soon as FTX bumped into its “liquidity disaster”.

This is called self-custody, and it may contain utilizing an internet or cellular pockets for small quantities, or a bodily {hardware} pockets for bigger holdings.

The “key” in query is your non-public key, which acts as a type of password to entry the funds.

In fact, as adoption of cryptocurrency has develop into extra mainstream, many individuals who don’t need the technical trouble of taking care of their very own pockets are turning to custodial options. 

In different phrases, they use third events resembling exchanges or funding managers which let you put money into crypto without having to learn to use a self-custody pockets. However this implies the center man is in command of the keys to your holdings.

Based on proponents of the “not your keys” philosophy, a pockets on a centralized alternate doesn’t actually belong to the account-holder. When withdrawals are paused, as they have been by FTX in November, customers lose entry to their crypto. And if the worst occurs, whether or not it’s the collapse of an alternate or a cyber-attack, these holdings might be misplaced altogether.

There may be even authorized assist for “not your keys” In 2020, the decision of California courtroom case Archer v. Coinbase, regarding the 2017 Bitcoin fork, discovered that the alternate had no obligation to pay out Bitcoin Gold that would have been generated by a consumer’s Bitcoin holdings.

However there are those that argue that “not your keys, not your cash” is counterproductive within the mission for wider crypto adoption.