The volatility highlighted by the recent crypto slump has had real-world effects, and the lessons gained serve as a reminder of why investors should exercise caution.
- The crypto industry has remained volatile, as seen by the recent meltdown of TerraUSD and Bitcoin losing half of its value in the last six months.
- On the face of it, the entire crypto ecosystem has spiralled out of control downwards.
- In terms of crypto custody and control, the ideal position remains to have both centralised and decentralised systems.
The crypto slump is a reminder of the volatility of digital assets
The crypto industry has remained volatile, as seen by the recent meltdown of TerraUSD and Bitcoin losing half of its value in the last six months. The volatility highlighted by the recent crypto slump has had real-world effects, and the lessons gained serve as a reminder of why investors should exercise caution.
Crypto experts have always advocated for a cautious position all enthusiasts should take in their adoption and use approaches. The “Not your keys, not your coin” adage has remained the common caution approach for those willing to invest in cryptocurrencies.
As the global crypto slump got compounded by the collapse of high-ranking enterprises like Celsius Network, Ledger CEO Pascal Gauthier drove the emphasis even further. Gauthier warned investors against trusting their coins and private keys to anyone.
Many crypto veterans are associated with the adage that if one does not directly retain their private keys (i.e., passwords) in an offline “cold wallet,” they do not own their digital assets. However, analysts view the problem from a broader perspective as the planet transitions from Web2 to Web3.
On the face of it, the entire crypto ecosystem has spiralled out of control downwards. Where many may see risk, I see opportunity if only we learn from the crash. On the face of it, the whole crypto economy seems to be spiralling out of control. Where some see disaster, there is an opportunity if people can learn from the crypto slump.
The power of decentralised custody and control
Customers generally seem unaware of the risks involved in entrusting their private crypto keys to centralised platforms and exchanges. Nonetheless, it has been amply shown that even the most ostensibly trustworthy custodians may make fatal mistakes with user funds.
When users pass up their private keys to any third party, regardless of that third-true party’s purpose, the promise of self-sovereign ownership of one’s money is instantly erased. All cryptocurrency users should understand and be responsible for their coin security by keeping it securely on hardware wallets. However, this is not a popular move. Most cryptocurrency users find it easier to hold their coins on centralised exchanges.
Still, a centralised exchange (CEX) might be beneficial at times, and maybe we can expect to live in a hybrid cryptoverse for a long, with both cold and hot wallets, centralised and decentralised exchanges (DEXs) (DEXs).
There is a rationale for utilising centralised exchanges for transmitting payments to others to not doxx the sender’s crypto addresses. This is because when one makes a transaction with someone else, the recipient will know the sender’s address, balance, history of transactions, and future transactions.
Indeed, the general suggestion today is to maintain many wallets for varied reasons and to finance these wallets utilising centralised exchanges. This works fine, but it is not good enough. Users could opt for controversial and expensive private services to gain complete anonymity for their new wallets. However, having such a choice would assure anonymity and make crypto act more like currency.
One cannot execute as many complicated transactions from a private wallet as in a centralised platform, or at least not as simply and effectively. Significant, sophisticated traders will always require part of their assets on exchanges to maximise profits.
Regulators are still on a learning pathSelf-hosted wallet providers may soon confront rigid operating rules if the proposed regulations take effect. The rules could quickly overturn the idea of taking control of one’s coins and private keys. Philipp Sandner and Agata opine that it effectively amounts to a “de facto” prohibition on self-hosted wallets by requiring personal identities to link to self-hosted wallets.
Mikolaj Barczentewicz, on the other hand, observes the European Union’s Transfer of Funds Regulation (TFR) proposal does not outright prohibit self-custodied wallets. Still, it does encourage service providers to classify them as high risk for money laundering. Therefore, transacting with self-hosted wallets may become quite challenging.
The commitments of non-custodial crypto wallet service suppliers are now uncertain under OFAC’s recent classification, as per data analytics company Chainalysis. An extreme interpretation could mean that non-custodial wallet providers might also need to block transfers to the sanctioned addresses. However, this move would be unprecedented.
At the very least, government decisions like these indicate that cold-wallet methods to assist crypto consumers in regaining control of their private keys may become more challenging – not less – in the near future.
The crypto slump has proven that education remains crucial
Overall, the crypto business has an education issue in explaining the value of cold storage and individual “responsibility” to both people and regulators.
Education may help some people avoid the traps we’ve seen in recent months. Still, most people will not read every article, watch every video, or take the time to educate themselves.” Developers must create solutions that encourage users “into learning by doing.”
Following the crypto slump, it is clear that the crypto community has a lot more work to do to educate lawmakers. But this education cannot remain restricted to only describing how crypto works. It is folly to believe that once policymakers get it, they will automatically develop appropriate policies.
The crypto community must remain proactive. The focus must go to presenting precise technological and legislative ideas for combating crime and malfeasance without giving up significant advantages of crypto, such as self-custody. It is not sufficient to utter phrases like ‘zero knowledge proofs’ and expect politicians to perform the heavy work.
Does crypto control matter?
The recent crypto slump has significant lessons for investors and regulators alike. The more significant lesson is that people have to learn to take responsibility for their digital and otherwise assets. Taking responsibility is how people gain financial freedom.
Crypto is a game changer since it gives consumers complete control over their money without requiring them to rely on a third party. However, some individuals may want to abdicate responsibility and entrust their coins to a third-party custodian better qualified to keep them securely — and that is also allowed.
It is naive to believe that every person and corporation will go full DeFi tomorrow. But it would also be naive to think that the expanding digital world would always be contained inside the Web2 architecture.
In terms of crypto custody and control, the ideal position remains to have both centralised and decentralised systems. That way, the customer base can gradually move to where it perceives the most significant value – however long that takes.