This week we have seen a lot of news where several governments have suddenly become crypto-friendly.
Russia overturning its earlier bill that proposed 7 year jail term + $7000 penalty for holding cryptocurrencies to approve crypto trading,
Iran legalizing crypto mining activities with 47% subsidy on electricity,
China allowing its state-backed blockchain to be integrated with 6 public blockchains,
India's Prime Minister commented about blockchains as frontier technologies while delivering a keynote address at India Ideas Summit, etc. news are pouring in from all parts of the world.
Not just governments, even Visa announced its plans to support digital currencies and blockchain networks.
But the biggest of these news came from USA:
A letter from Office of the Comptroller of the Currency (OCC) authorized national banks to provide cryptocurrency custodial services.
All these developments are being widely applauded and appreciated by crypto community. Cryptocurrency Exchange like Gemini and digital asset custody services provider Anchorage (Visa is an investor in it) have welcomed this move.
But I always have a concern about all kinds of custodial services including CeFi wallets and soft staking solutions provided by CEXes.
Doesn't all these defy the purpose of trustless transactions?
What will happen to the sanctity of holding your own keys for your own crypto?
Here's what OCC letter specifies about the keys:
“That national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”
For some years, crypto community is running a campaign initiated by Andreas Antonopoulos stating "Not your keys, not your crypto".
When you hand over your keys to any centralized authorities, you basically give away your crypto to them.
So custodial services brings the same problem and vulnerability of banking system to the world of crypto. What if a bank gets bankrupt or deny you your crypto on some pretext?
Banks are controlled by Governments. Every account holder has to undergo KYC verification. So government can track all your crypto assets. Not only the amount you hold but employing sophisticated blockchain analysis tools, they can trace the transaction history of your funds and it can use it to implicate you in any illicit activity. E.g. if the chain of transaction leads to some crime, terrorist funding, illicit usage etc.
When some vehicle is implicated in a road accident, the vehicle itself is confiscated as evidence by the police. Similarly, your crypto can be confiscated until you are proven innocent; and proving innocence may take years in our present legal system.
More importantly, gathering all details about your crypto assets, Government will get in position to exercise more control over you ...that's where they are best at!
- Would you like to giveaway your privacy and let government control you?
- Would you trust Banks for your crypto?
One of the fundamental purpose of Bitcoin was to do away from the centralized banking and fiat currency system and to establish a trustless way of transactions.
In what respect can centralized custodian services help when we already have a flourishing DeFi system in place?