Binance CEO emphasize on risks of self-custody

When the crypto market expanded, self-storage was one of the most adopted solutions by crypto investors, as it allowed them to hold coins without using exchanges. 

Nonetheless, Changpeng Zhao, the CEO of Binance, one of the most famous people in the crypto sphere, recently spoke about the dangers of owning one’s private keys. 

“Having your coins in your wallet is not safe,” Zhao said in a Twitter Space discussion, warning users about the risks and obligations of self-custody.

In this article, we will examine some of the differences that arise with self-custody, the dangers Zhao pointed out, and how to mitigate those dangers. We will also examine the ongoing battle between centralized exchanges and self-custody wallets and the strengths and weaknesses of each option.

What Do We Mean by Self-Custody in Cryptocurrency?

Self-custody occurs when someone owns and controls cryptocurrency without intermediaries such as Binance or Coinbase. To fully own your assets, you need to use a private wallet to which you hold the private keys. 

Although this approach fits the decentralized concept of blockchain, it brings responsibilities and associated risks that many users may be required to devote more time to.

Why Self-Custody Can Be Risky:

In the live stream Twitter Space, CZ recently spoke about selfriskstody risks; he said people should approach this topic carefully. Here are the main points he raised:

1. Risk of Losing Private Keys

The security of a self-custody wallet wholly lies in the user’s ability to safeguard their private keys. If these keys are lost or stolen, there is no way of recovering the assets, and property might be lost forever.

Zhao’s Perspective: “Some may not have an idea how simple it is to lose private keys,” Zhao pointed out. He said the private keys should be kept in offline storage and not disclosed to anyone.

2. Vulnerability to Cyber Attacks

While self-custody wallets provide more control over assets, they are not protected from cyber risks. Hot wallets, accessible online, can be susceptible to hacks, phishing, and malware attacks.

Zhao’s Perspective: Zhao warned users against putting large amounts of crypto in hot wallets. “It is okay to spend coins in a hot wallet on daily basics, but large sums should be stored in cold wallets, out of the reach of hackers.”

3. Lack of Customer Support

Unlike CEXs, which offer customer support to help users with account problems, self-custody wallets do not provide such a guarantee. In case of emergent complications, the users themselves must solve them.

Zhao’s Perspective: “Self-custody means you’re in full control, but there are no backups,” Zhao said, pointing out that exchanges help when accounts are compromised, whereas self-custody does not.

4. Human Error and Responsibility

Organizing a self-custody wallet involves comprehending the wallets, keys, and backup system in general. Even small mistakes, such as sending money to the wrong account number, can lead investors to lose their investments.

Zhao’s Perspective: Zhao also pointed out that many users are not ready to take full responsibility for owning their private keys. “It’s like you are walking on thin ice; one wrong step and your assets could be gone forever,” he told me.

Self-Custody vs. Centralized Custody: Key Differences

While self-custody liberates a person from relying on third parties, centralized exchanges guarantee additional support, security, and ease of use. Here’s a comparison of the two approaches:

Security

Self-custody offers security that a user manages. Users fully control private keys and must keep their funds safe, preferably offline. On the other hand, centralized exchanges are more secure and have measures to compensate users for lost funds through hacking incidents.

Privacy

Self-custody is far more private, as the user cannot provide personal information to third parties. As for self-custody, transactions are also non-disclosable, corresponding to the decentralized approach of using cryptocurrencies. However, Centralized exchanges may ask for identification, and some manage to track transaction history, which equals low privacy.

Control and Ownership

Self-custody allows users complete control over their assets because no third party exists. However, this control comes with the additional task of handling private keys. 

In centralized custody, the exchange holds the funds, providing smooth interfaces and customer support services but at the same time being more restrictive, where certain accounts may be suspended or restricted.

Account Recovery and Support

One of the most significant disadvantages of self-custody is that it requires more help. If private keys are misplaced or stolen, there is no other way to attempt to regain them. 

On the other hand, centralized exchanges offer help in account recovery and increase support in case of problems.

Transaction Flexibility

Self-custody also enables transactions to be made without limitations or restrictions, as is commonly seen with centralized exchanges, which charge withdrawal fees and sometimes impose restrictions. 

Minimizing the Risks of Self-Custody

Despite the challenges, many crypto users prefer self-custody for the control and independence it offers. 

Here are some tips to help reduce the risks involved:

1. Use a Hardware (Cold) Wallet

There are also hardware wallets or cold wallets where the private keys are stored away from the internet; thus, hackers and malware have limited access to them. Some examples of such devices are Ledger and Trezor.

2. Store Your Private Keys Safely

Always keep your private keys and recovery phrases safe; if possible, store them in cold storage. Store them in fireproof, secure, or different backup locations; generally, do not save them in digital format on interconnected devices.

3. Allow Two-Factor Authentication

If you use a hot wallet, turn on 2FA for more protection. Although it doesn’t directly protect private keys, it can prevent unauthorized access to the wallet accounts.

4. Cross Check the Address and the Transaction

When transferring funds, ensure you verify wallet addresses and transaction credentials twice. This is common to basic mistakes such as typing an incorrect address and losing money forever.

Advantages of Self-Custody Despite the Risks

While self-custody does carry significant risks, it also offers several advantages that appeal to crypto holders:

• Actual Ownership: Self-custody is where the user has custody over the assets without interference from other parties.

• Enhanced Privacy: Unlike centralized exchanges, self-custody wallets don’t ask users to provide data or track transactions.

• Decentralized Philosophy: Self-custody fits into the blockchain concept based on decentralization and independence.

Alternatives to Self-Custody: A Balanced Approach

There are cross-overs for those who wish to have the features of self-wallet and centralized exchanges. 

Some users prefer to have some of the crypto in exchanges while having most of it in cold storage wallets. Some adopt multi-signature wallets, in which a specific transaction requires several approvals and is thus more secure.

Conclusion

Binance CEO Changpeng Zhao's message is clear: that is why self-custody provides ultimate freedom and sovereignty, but at the same time, it implies significant responsibilities and threats. 

Therefore, it is crucial to comprehend these risks and exercise the appropriate measures to ensure the security of the users’ property. 

As Zhao mentions, even the most experienced traders face difficulty when using private wallets, and therefore, all those interested in cryptocurrencies must be ready to face specific challenges.

Read this International Association for Trusted Blockchain Applications guide to learn about safe cryptocurrency usage.