Custodial Wallets vs. Self-Custodial Wallets

Crypto investors were fond of entrusting their funds to crypto exchanges, particularly centralized exchanges. However, there has been a major change in this which came soon after the collapse of the centralized crypto exchange, FTX.

The debate as to which one of the two namely custodial wallet or self-custodial wallet is better is taking rise once again. Considering what has happened to FTX, the majority are of the view that self-custodial wallets are better.

Self-custodial wallets not only safeguards the interests and funds of wallet holder but also give absolute control to their holders. Hence, the call for regulation seems genuine and authentic mainly for protecting investors’ interests.

Crypto Regulation A Worldwide Dilemma

On the topic of ‘crypto regulation,’ an editorial has been authored by Joseph Collement who is the lead editor at Bitcoin.com.

In the opinion of Collement, crypto regulation is necessary but it is not the ultimate solution to all problems in the industry.

Collement gave an example of a popular centralized exchange called “Gemini”. This firm is highly regulated yet it continues to lose investors’ money.

Crypto Town

He says that the crypto industry is like a town and there is only one sheriff in the town which is the US. He claims that even for the sheriff, the crypto town is a new frontier to which the sheriff is not used.

So in an effort to derive a sense of understanding the sheriff is inadvertently interfering instead of helping the town.

The lead author at Bitcoin.com opines that he has been part of the crypto industry as an attorney for more than 5 years. However, during his experience, he never felt at once that ‘regulation’ is the ultimate or the only solution.

Problem Lies in Business Models of Centralized Exchanges

He also rejects the assumption that non-compliance on the part of centralized exchanges is the main cause of why investors lose money.

Instead, Collement opines that it is basically the business model of a centralized exchange that causes such problems.

Collement gives an example that the business models of centralized exchanges are like that they first require customers to entrust their funds.

Then, these exchanges act like a stockbroker who starts gambling with investors’ money. If the gamble wins, the investor is given his share and if things go south, the investor’s bag is left empty.

He emphasized that it is this business model which needs correction and regulation that has got nothing to do with it.

He then questioned centralized exchanges’ business models, particularly with regard to market making and trading. Collement argues that instead of going after stock trading, the exchanges focus on market making and other trading.

Regulation Is Not an Antidote to Crypto Hacks

At the end of his editorial, Collement then draws readers’ attention toward investors’ money lost due to hacks.

At first, he gave figures to raise a point that over $5 Billion was stolen in hacks from investors in the last three years. He then referred to over $3 Billion loss caused due to hacks in 2022 alone.

Collement then raises an argument that when it comes to losses caused due to hacks, the regulation simply cannot prevent them. He opined that regulation would not be an antidote against stealing and hacking.

The author then mocked the US Department of Justice DOJ claims itself to be a ‘guardian angel’ for the global crypto community.

In the end, Collement argued that ensuring compliance by centralized exchanges is quite costly.

Compliance by centralized exchanges would mean to customers that if an exchange gets into financial trouble, their funds would be at stake.

Most importantly, exchanges do not pay for compliance out of their pockets but instead, the burden is shifted upon investors, said Collement.

Each Problem Should Be Dealt with Separately

He advises that while crypto regulation is essential however regulation cannot rule out a number of problems in the crypto industry.

He suggests that each problem is unique and is to be dealt with separately.

On the other hand, worldwide regulators would need to understand that regulation is meant for regulation and compliance only.

However, what needs to be changed in the meantime, is the business model of exchanges, advised Collement.