Self-Custody: The Key to Avoiding FTX’s Fraud
– FTX’s collapse was caused by fraud, highlighting the loopholes in the current financial system.
– U.S. Rep. Warren Davidson has introduced a bill that would prohibit financial institutions from transacting with self-hosted wallets.
– Rep. Davidson has introduced the Keep Your Coins Act to protect consumers’ inherent right to self-custody and to protect them from third-party vulnerabilities.
The recent bankruptcy filings and criminal indictment of Sam Bankman-Fried, the founder of FTX, have made it clear that fraud was a major contributing factor in the collapse of FTX. This has caused many policymakers to take a closer look at the loopholes which allowed such criminal activities to take place. It has also prompted U.S. Representative Warren Davidson to introduce the Keep Your Coins Act, in order to protect consumers’ right to self-custody and to mitigate the risk of third-party vulnerabilities.
The 2008 Bitcoin white paper, authored by Satoshi Nakamoto, effectively launched the era of fintech innovation, but unfortunately, the current legal and regulatory framework continues to reinforce the structure of the traditional financial system and the legacy flaws that come with it. Bankman-Fried exploited this system by convincing customers and investors to deposit funds into FTX’s platform and to maintain digital asset balances in their FTX accounts. He then used these funds to leverage assets under the control of Alameda Research, the trading firm he founded in 2017. He established his own cryptocurrency, FTT, as collateral for any loans made from FTX to Alameda.
In essence, while Bankman-Fried purported to be a third-party intermediary to purchase digital assets on behalf of customers, he was actually committing fraud. The only way for customers to protect themselves from FTX’s fraud was to transfer their digital assets off FTX’s platform and onto their own self-hosted wallets, devices that allow digital assets to be stored off the internet. This highlights the importance of self-custody for protecting consumers and mitigating third-party vulnerabilities.
In response to this, Senator Elizabeth Warren (D-Mass.) has introduced a bill that would require the Treasury Secretary to promulgate a rule prohibiting financial institutions from transacting with self-hosted wallets. This bill is misguided and it is a clear and present danger to consumers, as it reinforces the system that fraudsters continue to exploit.
In contrast, Representative Warren Davidson has introduced the Keep Your Coins Act, which seeks to protect consumers’ right to self-custody of their digital assets. This is the only sound protection against any third-party intermediary’s failure. It is essential that Congress passes this must-pass legislation in order to protect consumers from any potential catastrophes in the future.