Recently, Coinbase crypto exchange, said in an SEC filing that in the event of a company bankruptcy, people holding crypto assets on its platform could lose direct claims to their ownings. The disclosure from one of world’s largest crypto exchanges sent shockwaves through the community. Well, ‘Not your keys, not your coins’ is a commonly used but rarely followed concept in the crypto world. To put it in simple terms, it means that if you do not have control over your private keys, then you do not actually ‘own’ your crypto.
What Are Crypto Keys & Wallets?
The first thing to know is that cryptocurrencies are very different from other stuff that you invest in.
When you buy gold, you actually get coins (or bricks) of the shiny metal. You can keep these coins safe in…a safe! Similarly, when you buy a house, you actually get its physical ‘possession’.
Crypto is very different in these terms. You don’t really get anything physical. Your crypto journey starts with a ‘wallet’.
This is what a typical Bitcoin wallet looks like:
[private] => fa9af8856397ab2fcd0546cd248791ad9a3046aa3d49fddbdc380ccbce4a5527
[address] => 1Mk13r5uu51F5jQ6yGuBPxkuZw91nM4MeY
The address is similar to your bank account or UPI ID. Anyone can send crypto to your address. If you send crypto to the ‘wrong’ address, it’s gone forever!
Also, remember that the same address doesn’t work for all cryptos. For example, a Bitcoin address won’t work for Dogecoin.
The private key is what you would need to ‘sign’ transactions, that will send crypto to someone else. If someone gets a hold of your private key, they can transfer all your crypto to another address. This is what happens in many ‘crypto hacks’.
A crypto wallet is designed to:-
1) Store your public and private keys
2) Send and receive cryptocurrencies
3) Monitor ‘balances’
4) Interact with supported blockchains
Here are the Types of Crypto Wallets
If your wallet gives you full control over your private keys, it is a non-custodial wallet. Examples: paper wallets, hardware wallets, and software wallets.
If your wallet does not give you full control over your private keys, it is a custodial wallet. For example, wallets operated by centralised crypto exchanges. Binance, Huboi Global, Coinbase (Pro), and Kraken are some popular centralised exchanges, as per CorporateFinanceInstitute.
If you literally write down your address and private key on a piece of paper, it would be called a paper wallet. They are inconvenient to use but are the safest option. Consider using them if you have a large amount of crypto to keep for a long period of time.
Usually, people store their crypto in a mobile or web wallet. That’s a mobile app or web service that stores your keys and addresses. Metamask is a popular browser-based crypto wallet.
A ‘hot wallet’ is one that is connected to the Internet and is considered the most vulnerable to hacking. Examples include mobile wallets and crypto exchanges.
A cold wallet, on the other hand, is not connected to the Internet and is considered more secure. Examples include hardware wallets and paper wallets. There are many free services for generating paper wallets, like the Future Money Wallet.
An example of a seed phrase is: history lumber quote board young dove robust kit invite plastic regular skull
Unintentional FUD Created by Coinbase
Coinbase Global, one of the biggest crypto exchanges in the world, holds $256 billion (roughly Rs. 19,82,195 crore) in fiat currencies and cryptocurrencies on behalf of its customers.
Its recent filing with the SEC said that “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.”
This means that Coinbase users would not have a right to claim any specific property from Coinbase. Their funds would become inaccessible!
I think a lot of crypto investors will start using non-custodial wallets instead of custodial exchange wallets.
Ledger, the France-based hardware crypto wallet company, is taking measures inform people about the uses of private crypto wallets, like the ones it provides. These wallets allow people to self-hold their crypto assets that reduce the risks of losing them to hacks or breaches.
In November last year, Tesla CEO Elon Musk backed the idea of investors keeping custody of their crypto assets like Dogecoin, rather than relying on centralised exchanges like Binance and Robinhood.
These exchanges simplify the selling and purchasing of cryptocurrencies but also hold custody of these assets — something that Musk does not seem to support.
Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect at the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.
Cryptocurrency is an unregulated digital currency, not a legal tender and subject to market risks. The information provided in the article is not intended to be and does not constitute financial advice, trading advice or any other advice or recommendation of any sort offered or endorsed by NDTV. NDTV shall not be responsible for any loss arising from any investment based on any perceived recommendation, forecast or any other information contained in the article.