Pillars of Bitcoin: Self Custody
Day 3: Rubin's Bitcoin Advent CalendarTweet
Not your keys, not your coin. A simple maxim often repeated by Bitcoiners, but an important one. Why?
That thing about the gold standard you probably heard before:
In the existing financial system, your assets aren’t really your assets. Let’s suppose you own a share of Google. You don’t really own that share, you own a virtual claim and the actual certificate sits somewhere with a corporation like The Depository Trust & Clearing Corporation (DTCC). So what? Why does it matter who holds the paper?
The U.S. Dollar is a great example of why you should care. One dollar used to represent an amount of Gold you could redeem for real physical bite-it-to-see-its-pure gold. This was a promise of course, the paper dollar did not have the actual gold in it. This was all good and dandy until in 1933, Executive Order 6102 was put in place which made the holding of physical gold illegal. Get arrested and go to jail illegal. EO 6102 mandated that all Gold be turned in to the Federal Reserve. This was quickly followed by a devaluing of the redemptive value of the dollar in Gold by the government from $20.67 per troy ounce to $35 as a “one time” move1. Today a troy ounce costs around $1,800. This is because in 1971 an Executive Order was put through that ended the dollar’s gold backing entirely.
What’s this got to do with Bitcoin?
If Bitcoin is held in accounts at regulated entities like exchanges a similar act to 6102 could make redeeming actual bitcoin impossible for users of those services. Suppose those users are forced to receive in place of their exchange Bitcoin a Bitcoin Note that is backed by bitcoin. And then one day, the amount of Bitcoin per Bitcoin Note can be reduced – or worse, completely unlinked.
If this happens, all is lost. Bitcoin is fundamentally about a monetary standard for the world where no self-important rulers can manipulate the currency. Self custody is a requirement for Bitcoin to avoid these sorts of takeovers.
OK, OK, I’ll keep my coins off exchange…
Just fixing your behavior isn’t enough, to keep Bitcoin functional you need most users to follow suit. Yet many users today do choose to keep some or all of their Bitcoin on centralized services (yours truly included!).
This is for two main reasons:
- Game Theory: we can’t do anything about this. As long as not too many other people are using an exchange for custody, it doesn’t matter if you are since a regulatory takeover won’t be too effective. So selfishly, you may as well benefit from the ease of keeping your coin on a service (assuming it is easier) rather than taking responsibility for your own assets. Likewise if no-one else is self custodying there’s not much advantage for you to be either.
- Software freakin’ sucks for self custody! We can fix this. Although the quality of wallets has improved dramatically from Bitcoin’s early days, it’s still incredibly difficult to do well. Further, self-custody solutions don’t have solid options for handling many common needs such as inheritance, spending limits, and more.
If we work on strengthening the fully self-sovereign self-custody options that Bitcoin users have at their disposal, we can help more Bitcoin users to choose to keep their funds themselves and achieve “herd immunity” against future executive order 6102s. If we self custody in great number, we don’t permit them the immediate victory over most users. You can’t arrest everyone, not easily at least.
A troy ounce of gold is about a 1 inch by 1 inch square that is 0.1 inches high. ↩