The bankruptcy of the FTX cryptocurrency exchange is obviously not the first such case in history. Obviously, it is not the first time that a financial institution loses its clients’ money due to imprudence. What usually happens is that the debts accumulate and the assets become too toxic. After a certain point, the entity is in danger of insolvency. The rumor spreads and there is a “bank run”. But there is not enough liquidity to serve all customers. The being, then, closes its doors. And many lose their savings tragically. This song is not new. The world did not begin the day that satoshi nakamoto published his white paper. In fact, apparently, he is much older.
In the USA of the 19th century, the bankruptcy of a bank was our daily bread. I mean the era ofwildcat banking”. This Wild West, in fact, looks a lot like the libertarian utopia that is so widely promoted in the crypto space. Back then, the problem of wildcat banking I had two solutions. A current defended self-protection, the Prayed, the Yeoman farmer and Jeffersonian democracy as a solution. this is uA solution based on individualism, self-sufficiency and anti-statism. Very much in the tradition of the Protestant ethic of the reforming Puritans. “This land is my land.” “Grow your own food.” “My gold, with me.” Pro-life. Pro-family. Pro-God. Pro-weapons.
That is the conservative trend. The red, rural, white, working, Protestant and aged United States. Conservatives want to conserve. Keep what? Last. Conservatives are essentially “older was better” reactionaries.. What is wanted is to restore traditional values. Words more, words less, we’re talking about the ideas of classical liberalism, enlightenment and reform, so popular in the Victorian era.
When was paradise lost? With the arrival of the administration of Franklin Delano Roosevelt and with the implementation of the economic theories of John Maynard Keynes. The solution to the Great Depression. Here arises the archenemy of the conservative: The progressive. The conservative wants to preserve the past with the individual at the center. The progressive wants to change the future with the State at the center.
What is the progressives’ solution to the problem of “wildcat banking”? Contrary to the self-protection of conservatives, progressives have opted for regulation, insurance and the creation of a “lender of last resort”. And I am afraid that this is the solution that has prevailed after the end of the Second World War. This is the established solution. But the conservative solution is still alive in many circles. It still lives on, for example, in many libertarians, many gold bugs, and many bitcoiners. We cannot say, however, that all conservatives today defend self-custody as the only solution, because that is not true. Over time, most have adapted. And they have taken more moderate stances in this regard. In other words, they already accept many “progressive” solutions as their own.
The handling of the 2008 financial crisis is an example of this “restraint” on the part of more modern conservatives. We must remember that the bailout measures implemented were carried out by conservative agents during a conservative administration (that of the second Bush). This pragmatism arose out of necessity. In other words, what was necessary was done to avoid a financial catastrophe. And the lessons learned from the Great Depression were used to make the necessary solutions. By the way, these measures were approved by both sides (conservatives and progressives). And it should be noted that Ben Bernanke, the director of the Federal Reserve of the United States for the period, won this year’s Nobel Prize in Economics for his scholarly contributions to the issue of financial crises.
Now, the debate around self-custody in the crypto space is not just a practical matter. If it were just a practical matter, the option would be presented, without much passion, with its cons and cons, and that’s it. This is not the case. In this space, the subject arouses many passions. Because it touches old wounds from old rivalries.
Of course self-care is not a panacea. And it’s not for everyone. The phrase “Not your keys, not your coins” is a rather misleading paranoid exaggeration. Because “custody” is not a synonym for “property”. Equating both concepts as identical in the same sentence is a fallacy. It’s propaganda. And an abuse of language.
It does not take a genius to know that we can lend our assets to a third party with the intention of obtaining additional income, products and services. This loan is an asset for the creditor and a liability for the debtor. In this lender-borrower dynamic, the custodian is not the owner. And the owner is not the custodian.
Suppose I loan a book to a friend. I remain the owner of the book. Nope? However, the book is not in my hands. Custody is not mine. This relationship obviously involves great risk. The risk of non-payment or property damage. Goodbye book! But the existence of that risk is not a waiver of the right to property.
This risk occurs in any lender-borrower relationship. Applies to the tenant who uses a property. Applies to owners of a gift cards from Amazon. Applies for miles in an airline’s loyalty program. Applies to the person who rents a car for a few days. And it applies to the person who paid for dinner today with the hope that their friend will pay for dinner next time. Does the existence of such a risk warrant completely abolishing the lender-borrower relationship?
Which is the solution then? Never lend books? Never lending anything to anyone until the end of the world is certainly an option. But what happens if I have a moth problem in my library? Namely, Self-guarding is not free of risks. Self-custody does not protect us from price fluctuations, for example. The price of the Luna token and the FTT token is now the same for self-custodial holders as it is for non-self-custodial holders. Self-custody does not always protect us from theft or hacking, for example. And, in an emergency, there isn’t much help on the way for the self-guarded. Forgot your key? Did a technical problem arise? Ouch. Goodbye to your coins. Do you want to issue a conventional loan to obtain additional income or to benefit from certain products and services offered by a third party? Nope, money should be placed under the mattress. Self-guarding is quiet, but lonely.
What about advanced cryptography, decentralization, multi-signature, etc? Well, these are workarounds for many. Ahead. However, many guilds, funds or organizations are required by their statutes to use independent, regulated and certified escrow services. And this why? Because, in a regulated system, the risks associated with custody services have a system of guarantees, insurance and coverage. Stole? There are insurances and coverages for that. Bankruptcy? There are insurances and coverages for that. illiquidity? There are insurances and coverages for that.
FTX case. In this case, we are talking about an unregulated non-bank. You could say it’s about a wildcat bank Wild West style. Stole? Bankruptcy? illiquidity? In this case, there is no insurance or coverage. How do conservatives react? They react by highlighting the virtues of self-custody, because it is the conservative solution by default.
And the regulation? Why not encourage better custody services (with guarantees, coverage and insurance)? It is not easy for a radical conservative to accept the “progressive solution.” I mean, idiosyncrasy becomes a wall. So it’s not just a matter of the different options, with their pros and cons. This topic becomes political very easily. What you normally want to say becomes irrational and visceral very easily.
I personally support mixed and plural solutions. Self-custody is a valid option. But escrow services are also valid options. Both with their pros and cons. The individual, having several options at his disposal, can judge the option (or mix of options) that best suits him in his particular case.
Fanaticism, with its unique and absolute solutions, is not very practical. whatwildcat banking or self-custody? This is a false dilemma that presents self-custody as the only viable option due to ideological bias. The truth is Every problem has more than one solution.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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The pros and cons of self-custody. The only sensible solution?