One day, you will probably tell your grandchildren about the Wild West days of cryptocurrency.
Imagine the feeling (maybe you’ve experienced this before): you’re a regular person, somewhat familiar with cryptocurrency. You’ve heard the phrase “Not your keys, not your crypto,” and sure, that makes sense for some of those sketchier exchanges, but this is Exchange Corp (let’s use this as a hypothetical example). Everybody trusts Exchange Corp. You saw their CEO on cable news the other day, and he sounded very trustworthy. In fact, he even said on his Twitter that your coins always belong to you, even when you hold them on Exchange Corp.
One day, you log onto Exchange Corp and try to withdraw just $50 worth of BTC to move somewhere else, when suddenly you see a strange error message:
“Due to market volatility, withdrawals have been limited.”
That’s odd, what does that even mean?
You log in to Twitter to see if anybody else is experiencing the same thing.
“Exchange Corp. just rugged!”
“RIP to everyone that just got rekt on Exchange Corp. I knew a sinking ship when I saw one.”
“@ExchangeCorpCEO can you help me please? Why can’t I withdraw my money??”
Does the above scenario sound familiar to you? If you’ve paid attention even the slightest amount this year, then chances are you’ve seen this story play out many times for countless cryptocurrency holders. People who didn’t know any better — or who truly thought they found a company that they could trust — woke up to the harsh reality that the crypto cliché of “not your keys, not your crypto” is, in fact, true.
Why does this keep happening? How do people keep getting taken advantage of? Is there a fundamental problem with cryptocurrency itself that horrible breaches of trust like this are able to happen?
To understand the answers to these questions, we first need to take a step back and ask ourselves if cryptocurrency is functioning the way it was originally intended. Were we meant to relinquish custody of our tokens just to be able to trade them? The answer is a resounding no.
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When cryptocurrency was first introduced, the idea was radically simple: You keep custody of your own finances and nobody can take them from you so long as you maintain fundamental information security. Essentially: Keep your keys, keep your crypto.
This was an idea that worked, and it led to a quick proliferation of cryptocurrency and blockchain technology more broadly due to the safety and security that it offered. Unfortunately, as is often the case, safety and security were sacrificed for the sake of convenience.
Centralized exchanges offered a few tempting options for people who were interested in cryptocurrency, but not too concerned with autonomy. Or perhaps they didn’t understand the importance of that autonomy, and they trusted that their cryptocurrency somehow remained in their custody even when stored with a centralized exchange.
The allure of these centralized exchanges is easy to understand. No more worrying about keys; all that you need is a username and password — a system that most people are extremely familiar with. Lose your username or password? Don’t worry, just open a help ticket and the friendly staff at Exchange Corp will help you recover your account.
As appealing as this was, it created a massive vulnerability for everyone interacting with centralized exchanges: If your coins were being held by somebody else, they could be lost by somebody else. Whether through malicious activity, carelessness or simple clerical errors, your coins now have multiple vulnerabilities where previously there were much fewer.
The problem isn’t cryptocurrency itself, but rather the way that we currently have tried to force centralized control onto something that was always meant to be decentralized. The way to fix this is quite simple: Return cryptocurrency to its decentralized roots.
We are quickly approaching the day that the last withdrawal is locked.
To get there, centralized exchanges need to understand that the so-called convenience that they offer is bordering on negligence for consumers. Most people have at least some level of trust in financial institutions; things like FDIC insurance for checking accounts, the watchful eye of the US government and battalions of IRS agents can give consumers the false impression that nothing bad can happen. “My money is safe with them, that’s what regulators are for, right?”
Most people don’t realize how quickly their money could disappear from a centralized exchange, but centralized exchanges know the reality. That’s why we, as industry leaders, need to take the initiative to protect our users by eliminating some of the danger-prone centralized ways. Perhaps a way to accomplish this is to stop requiring users to deposit their cryptocurrency into our platforms just to make a trade.
Cryptocurrency was never meant to be this centralized. People shouldn’t have to sacrifice control of their digital assets just to make a trade. Centralized exchanges that require this are exposing their users to unnecessary, and increasingly dangerous levels of risk. To mitigate this, centralized exchanges can find ways to offer their centralized order books to their users while allowing them to retain complete custody of their crypto. Making this change in 2023 is perhaps one of the most important steps a cryptocurrency company can take to ensure it survives the next wave of attacks, hacks and exchange meltdowns.
One day, you will probably tell your grandchildren about the Wild West days of cryptocurrency. The days when you could be locked out of your account and lose everything in an instant. And because exchanges made the required adaptations in the coming years, your grandkids will roll their eyes, smile and nod their heads, and say “Okay grandpa, let’s get you back to bed.”
They won’t believe you, but that’s okay because at least they never had to see the day the last withdrawal was locked.
Jae Yang is the founder and CEO at Tacen, a company specializing in crypto compliance.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.
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