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The shockwaves of FTX’s collapse in November 2022 is still being felt. In the crypto world, one saying was uttered again and again: “Not your keys, not your coins.” The repercussions and lessons learnt are not over: The dispute over whether or not to reveal the names of customers at collapsed crypto exchange FTX continues. In June 2023, Kevin Cofsky—partner at investment bank Perella Weinberg Partners, tasked with selling FTX—said that releasing the names of the customers would hurt the sales process of the shuttered exchange, which is attempting to recover and sell assets to repay creditors.
The popular adage about keys and coins is making the rounds in the wake of the latest exchange meltdown. But what does it actually mean?
“Not your keys, not your coins” or “not your keys, not your crypto” expresses the belief that investors cannot be certain of their crypto holdings unless they are stored in a wallet for which they personally have the keys. FTX held onto users’ wallets and keys for them, meaning access to funds depended on the exchange’s ability to send it — which became problematic once FTX ran into its “liquidity crisis”.
This is known as self-custody, and it could involve using a web or mobile wallet for small amounts, or a physical hardware wallet for larger holdings.
The “key” in question is your private key, which acts as a kind of password to access the funds.
Of course, as adoption of cryptocurrency has become more mainstream, many people who do not want the technical hassle of looking after their own wallet are turning to custodial solutions.
In other words, they use third parties such as exchanges or investment managers which allow you to invest in crypto without needing to learn how to use a self-custody wallet. But this means the middle man is in control of the keys to your holdings.
According to proponents of the “not your keys” philosophy, a wallet on a centralized exchange does not truly belong to the account-holder. When withdrawals are paused, as they were by FTX in November, users lose access to their crypto. And if the worst happens, whether it’s the collapse of an exchange or a cyber-attack, those holdings could be lost altogether.
There is even legal support for “not your keys” In 2020, the verdict of California court case Archer v. Coinbase, concerning the 2017 Bitcoin fork, found that the exchange had no obligation to pay out Bitcoin Gold that could have been generated by a user’s Bitcoin holdings.
But there are those who argue that “not your keys, not your coins” is counterproductive in the mission for wider crypto adoption.