Not Your Keys, Not Your Coins #Proofofkeys

The best way to store your crypto keys

Keeping your private keys safe, secure, and under your control is essential to ensure financial independence and autonomy. Financial autonomy is what attracted early crypto adopters, and it remains a highly-valued characteristic in the crypto community.

Proof of Solvency

In addition to offering you monetary sovereignty, controlling your own digital asset keys also serves as a way to hold third-party services accountable by testing them for their solvency.

Some exchanges have been accused of failing to carry sufficient reserves — a risk that is exacerbated during crypto market downturns. There's also the possibility that an exchange or wallet provider becomes insolvent, has its accounts frozen, or pulls a salacious exit scam. If a large enough volume of crypto is moved off of an exchange by a significant portion of asset holders, custodians are challenged to prove they can accommodate users' demands for ownership of their coins.

In recent years, the amount of Bitcoin held by centralized exchange reserves has fallen, according to analysis by CryptoQuant.

Due to understandable uncertainty about whether centralized exchanges actually hold sufficient reserves to protect the crypto that they hold in custody, many exchanges have begun to offer "Proof of Reserves" audits to reassure investors that their crypto is responsibly held for them. However, not all exchanges offer such transparency.

The ability to verify the activity by these entities is the accountability that is built into blockchain technology, one of the greatest aspects of the technology. It is extremely important to pay attention to this due diligence because a huge disparity between the crypto balances and transaction activity can indicate foul play; in fact, 95% of total volume reported is faked according to a report by BitWise Asset Management.

While regulators are getting stricter, there is still a real lack of protection for exchange users whose funds may be exposed to hacks. In the event that a less-than-desirable event like a hack or fraud happens to the service you keep your crypto on, you may have no way of getting it back. Custodians like Coinbase and Bakkt can simply refuse or limit withdrawals. Smaller exchanges have made no commitment to any safety standards.

The Outcome

Crypto holders are reminded to be careful of who truly controls crypto wallet keys. Those who are new investors should also be aware of the importance of moving coins away from the institution where they bought them. When you custody your own crypto, you own the keys, and so you can potentially become a single point of failure. If you delegate the keys to third parties, you can be increasing your risk of loss of access, or loss of funds.

Avoid becoming a single point of failure, and avoid trusting others to protect your crypto keys: make sure that your keys are backed up elsewhere — there are solutions that are far better than paper or custodial services and that offer you reliable, ongoing access to your assets.

Learn more about how you can own your crypto by protecting your private keys with the Vault12 app.

About the Author:

Kyle Graden is a digital native who was born in what's considered the Millennial Generation. Kyle is a nomadic entrepreneur, growth consultant, and QryptoQueer, striving to make a more accountable, transparent, and equitable world. Kyle's experience in the blockchain and cryptocurrency industry spans from marketing a crypto hedge fund to being named to the Top 100 Fintech for UN SDG Influencers list to speaking at conferences and participating in hackathons.