From the perspective of a crypto anarchist, in an ideal world everybody would manage their own private keys. If that were the case, centralized power would shift from the middle-men to the individual.

The problem with this fantasy is that not everyone is ready for the responsibility of "being their own bank", and probably never will be.

Although the trend toward self-custody is growing, the majority of the population still aren't taking crypto that seriously, and many will never want to manage their own private keys.

You've probably had the experience of teaching someone how to safely store their seed phrases, only to have them contact you months later because their phone had to be replaced, and they lost that piece of paper you told them to store ever so carefully.

What's the solution here?

State Ownership

Over the past few years we have witnessed the growing practice of governments investing in crypto, and then managing the keys on behalf of the people. While this removes the burden of seed phrase management from the citizenry, it introduces an element of trust that the government will act in the best interests of the population.

Back in 2021, El Salvador was the first country to create a national Bitcoin reserve. With a population of roughly 6 million people, El Salvador could be compared to a state within America, many of which have also proposed their own Bitcoin or digital asset reserves in the past year or two.

Most recently, the president of the United States announced the formation of a national digital asset reserve. While definitely good for "number go up" in terms of price, a national reserve is far more centralized than a state reserve.

Ideally, crypto assets and key management should be as decentralized as possible.

Custodial Wallets

In my own experience, the hardest part about advocating for crypto adoption is persuading a person to write down a seed phrase, and then explaining to them that if they lose it, or it gets stolen, they'll lose all their digital assets. These tutorials rarely go over well, and sometimes the student ejects themselves from the interaction entirely.

Taking that into account, I don't see a problem with giving someone "training wheels" to get them used to crypto, without immediately assuming the risks. Once they are ready for the responsibility, they can then withdraw crypto into their own wallet, and start managing their own keys.

In El Salvador, the official government wallet is called Chivo. Being custodial, the citizens are not required to write down a 12 or 24 word passphrase. Rather, the government manages their Bitcoin on their behalf. While convenient, it gives the state the ability to not only confiscate their funds, but to suspend or freeze accounts too.

The problem is that people often get too comfortable with a custodial wallet, and rarely take back ownership. It usually takes some kind of hack, security breach, or confiscation of funds for an individual to realize the benefits of controlling their own keys. It may take repeated incidents like these to gradually push people into self-custody.

Decentralized Key Management

Given the people's hesitancy to manage their own seed phrases, the benefits of third-party key management become fairly clear. The problem is, how do we minimize the impact of corruption and maximize the decentralization of crypto assets under custody.

Ideally, key management should be as decentralized as possible. State management is better than national management. County management would be better than state management, and community management would be the best.

Until next time...

Expecting everyone to manage their own keys is unrealistic, especially in today's world. Although the trend towards more individuals managing their seed phrases continues to grow, we will need custodians in the meantime, and they should be as decentralized as possible.

If you learned something new from this article, be sure to check out my other posts on crypto and finance here on the Hive blockchain. You can also follow me on InLeo for more frequent updates.

Further Reading

- Why Fair Token Distribution Is Crucial To Effective Blockchain Governance
- How Much Of The Population Will End Up Managing Their Own Private Keys?