Over the years, the “not your keys, not your coins” message has been prevalent throughout the crypto community. In the wake of many recent high-profile centralized exchanges and crypto banking collapses, insolvencies and acquisitions, that phrase is emerging with a newfound vigor in the crypto community.
To understand the importance of this phrase, we first have to dissect what it means.
“Not your keys, not your coins” refers to the importance of digital asset investors having control and sovereignty over the private keys to their crypto wallet(s). The private key is essentially like your “seed phrase”; a random string of characters is your wallet’s single point of access. As a user, to send funds, sign messages or recover access to your wallet, you must use the private key in one way or another.
With non-custodial wallets like Metamask, Coinbase Wallet and Trust Wallet, or hardware wallet providers such as Ledger or Trezor, you are the only individual able to access your private keys upon the creation of your account.
These features are not the case with custodial wallets. Instead, custodial wallets are services where a centralized entity, such as an exchange, acts as the custodian for one or more sets of private keys on your behalf. Essentially, these entities operate similarly to banks that offer to manage your private keys securely.
As a user, you make a deposit, and the exchange or entity keeps track of your balance(s) on an internal ledger. The risks in this are obvious; unlike banks, crypto exchanges are often subject to far less regulation as it relates to the amount of collateral they need to keep, deposit minimums, audits, and what they do with the capital once it has been deposited.
Additionally, many of these exchanges/entities have offered outlandish interest rates on the deposits they receive to entice deposits out of customers. As we have seen, this has not panned out very well for many of these major centralized providers, with an estimated $40 billion in investor money lost. And there are many more similar stories.
On top of that, the major players that have managed to operate without having issues, such as Coinbase, Binance and Crypto.com, carry similar risks. Although these entities are far more regulated, they still operate under a custodial system. The glaring issue here is that these entities are not federally insured by the FDIC the way traditional banks are. This means that should any of these entities go insolvent, the uninsured creditors (meaning you) could potentially lose all of the money you have deposited.
Well, how does one protect themselves from these risks? The answer is to set up a secure, non-custodial wallet for your assets.
With a non-custodial wallet, you can securely manage the ownership of your private keys, reducing any potential counter-party risks. The single point of failure is you, the user. While this may be scary and feel like a lot of pressure for many users, there are protections you can take to store and manage your private keys securely to mitigate risk as much as possible.
