Consumers have long trusted their banks to look after their money because they know that they’re insured against theft and loss. Simply put, if the bank goes out of business and loses the money of its account holders, those people can still get their money back. It’s because of this trust that banks have come to dominate the financial system and are, in fact, a necessity of modern life.
However, this level of trust in banks appears to have created a mirage in the alternative financial system known as crypto. For too long, millions of crypto users have placed their faith in the “banks,” otherwise known as exchanges, which are the go-to platform for most people looking to buy and sell cryptocurrency.
When you open an account with a crypto exchange, they provide you with your very own wallet that specifies exactly how many funds you have. Just like a bank, you can withdraw those funds anytime by exchanging them for crypto. Some exchanges even offer debit cards that can be used to buy things in physical stores using crypto, just like a bank. People could be forgiven for thinking that their crypto exchange is, indeed, just like a bank.
Alas, the one thing that crypto exchanges do not have, or rather, should not have, is user trust. That’s because exchanges aren’t insured against theft or loss. If the exchange goes bust, your funds can very quickly disappear, as hundreds of thousands of FTX’s customers recently found out.
Previously considered to be the world’s second-largest crypto exchange, FTX spectacularly went bust in early November, halting all customer withdrawals from its platform because of what was described as a “liquidity crisis.” With more than $8 billion reportedly owed to depositors, many of its customers have been left short-changed with little hope of ever recovering their funds.
The Guardian reported on the story of “William,” a construction site manager based in California who awoke to a text message warning him of potential trouble at FTX on November 8. The 40-year-old told The Guardian that he had around $85,000 worth of fiat stored in the exchange’s wallets, in addition to 3 Bitcoins – worth around $55,000 – and $10,000 in various other tokens. Unfortunately, he was warned too late to be able to withdraw his money. With fiat withdrawals limited to just $25,000, he could withdraw that much before being told to wait 24 hours.
“When I tried to withdraw the bitcoins, I got an error message,” he said.
All told, William is still owed more than $60,000 from FTX but has had no luck in being able to recover it. It’s a nightmare scenario that could have been avoided so easily had he just done his homework and stored his funds properly in a non-custodial wallet.
A non-custodial wallet is one that the user controls. Every crypto wallet is associated with something called a “private key,” which is a string of letters and numbers that provide access to the funds held within it. With a non-custodial wallet, the user is tasked with storing this private key by themselves. However, exchanges like FTX keep users’ funds in what’s known as a “custodial wallet,” where they retain control of the private key. In reality, the user is entrusting FTX with control of their funds. But remember, FTX is not a bank, and it isn’t insured.
The reasons so many people continue to use exchange wallets are manifold. Some are probably unaware of the difference between custodial and non-custodial wallets, while others likely don’t want the hassle of managing their own private keys. The exchanges, with their slick interfaces and marketing campaigns, and sponsorship deals, do a great job of lulling users into a false sense of security. They earn their user’s trust, despite not actually meriting it.
Users don’t want the hassle of managing their private keys because of the horror stories they’ve read. Like the guy who accidentally threw away a hard drive containing over $2 million worth of Bitcoin into the trash or the Bitcoin millionaires who lost their passwords. Losing your password isn’t a problem with a crypto exchange, after all, because you can simply recover it through your email. But that only matters if the exchange is actually going to give you access to your funds when needed.
The stupid thing is that this needn’t be a problem, for there are already existing solutions to the private key management headaches. ZenGo is the world’s first consumer-focused multiparty computation wallet, which is essentially a seedless wallet that doesn’t require users to store their private keys safely. Instead, it uses some clever technical trickery to store that private key for you and instead enables access to your wallet via a 3-factor authentication process that involves email, cloud storage, and 3D facial recognition. The key thing is that the user is the only one who can access that wallet, and the funds remain totally safe.
In a nutshell, with ZenGo you don’t need to write down your private key and worry about storing it safely somewhere. There’s no chance you’ll end up like the guy who’s now taking his local council to court for the right to excavate a landfill site to recover his lost hard drive. ZenGo has been around for several years already and not once has one of its customers been unable to access their funds.
It’s a foolproof system that’s only now getting the recognition it deserves. In the wake of FTX’s collapse, ZenGo has seen a 375% increase in asset deposits, along with a 230% increase in new wallet users. People are finally waking up to something that the crypto industry has been preaching for years already. If it’s not your keys, it’s not your coins.
It’s just a shame that it has been such a needlessly painful learning curve for so many. Don’t become the next victim of an exchange collapse. Take back control, and do it the easy way.