Custody problem solved: centralized and insured

[aoluain]

Recently we've read a lot of stories and there has been much discussion here as well about how best to secure your investment in Bitcoin.

The stories about self-custody are not new: people have been losing their Bitcoin due to theft or accidental loss since Bitcoin began. And this has not just been due to their own direct actions, but the failure of self-custody products are well.

Self-custody has always been a bad idea for the simple reason that most people are not security experts, they do not live their lives in a high security context, and most importantly they do not want to. What good is having more money when that money diminishes your lifestyle? Living in constant fear that you may accidentally lose your life savings, or that you may be beaten or killed because of that savings is no way to live. If you have to wake up every morning and check to make sure your self-custody product(s) are still secure, your life is diminished.

So everyone* now uses a smart phone which is the portal to yor emails, bank access,
utility bills and at this stage everyone knows that there is a certain degree of security
savvyness required to owning these devices and it doesnt seem to deter people.

If people dont want to buy a hardware wallet, a hammer and an alphabet medal stamp
kit and a small offcut of stainless steel, spend 2 hours to recods a seed phrase they
should be left to their own devices - its all choices.

Anyone who has savings in a bank is prone to the same personal attacks either in real
life or online as a Bitcoiner so in theory fearing for your life should be everyones concern,
if they are so inclined.

[Smartprofit]

Nobody's saying everyone should own Bitcoin. 🙋

Of course, there are plenty of people willing to trust centralized organizations (banks, investment funds, etc.) to store their money. These people might like your insurance idea.

However, none of this has anything to do with Bitcoin. If you want to use Bitcoin, you need to learn how to store it yourself. In doing so, you assume all the risks of losing your private keys. Those are the rules of the game. Nobody's saying using Bitcoin is easy.

In my opinion, Bitcoin is a very specific financial instrument. It was created for use in a very chaotic and unpredictable world, where it's impossible to trust centralized organizations (including insurance companies). Do you live in such a world? I don't know... Maybe it's not relevant to you. Personally, I feel like I live in a very chaotic and unpredictable world. That's why I need Bitcoin.💁

[promise444c5]

Insurance primarily protects the custodian, with users benefiting indirectly. Individuals can still lose their money in so many ways including forcing them to send their funds out after a kidnap or at gun point.. yet all of this can be largely avoided by staying quiet.

Living in constant fear that you may accidentally lose your life savings, or that you may be beaten or killed because of that savings is no way to live. If you have to wake up every morning and check to make sure your self-custody product(s) are still secure, your life is diminished.

You don't have to live in fear of being robbed or killed if you don't announce that you have such an amount lying around with you.
Many would assume even if you wealthy that it would be in a bank except you announcing this is Bitcoin money.

The thing is just like announcing you kept “ hundreds to millions in cash inside your home”, i don’t what they want to happen after that though.  
Does that mean people aren’t keeping such big amount in their homes ? No but no body is gonna know if they don’t announce it..

[Botnake]

Self-custody over your bitcoin cannot be replaced with just an insured centralized exchange.  If you want to gain the maximum protection of your coins, having full custody over your coins is still the best option. Prevention is always better than cure.

And it does not mean that just because the exchange itself is insured, then it can totally replaced or pay all your lost bitcoin. There's this strict policy limit and that they can only pay the partial amount, not the total catastrophic losses. So if you trust an exchange over a decentralized, its like you fall on the set trap, its like you have already give them the permission to steal your bitcoin any time.

[EL MOHA]

And it does not mean that just because the exchange itself is insured, then it can totally replaced or pay all your lost bitcoin. There's this strict policy limit and that they can only pay the partial amount, not the total catastrophic losses. So if you trust an exchange over a decentralized, it’s like you fall on the set trap, it’s like you have already give them the permission to steal your bitcoin any time.

This is one thing that many people have filed to understand the insurance mostly do not cover for everything rather it actually does cover just for certain amount and this was what I read under the SAFU insurance by binance that 100% can not be covered all. Although most people are deceived by all this exchanges and they think that the government will even help them get back their funds back off this exchanges if anything happens but it’s clearly not and the very first case to understand this is the Mt Gox hack which until now most people could only get back fractions of their coins back instead of everything

[Alphakilo]

Am going to use gold as a first example as to why people prefer other ways besides centralized institutions to hold their wealth Incase the economy collapse due to devastating reasons and there's the immediate need for alternative source of income.

Even countries hold gold reserves instead of only having the CBN, but since gold asset created a huge wealth gap because modern generation also has to prepare for worst case scenarios like we saw the COVID-19 pandemic, an alternative currency becomes imperative besides gold bars and cash, hence why Bitcoin as digital gold asset became a great option that has proven itself as a decentralized blockchain currency that bridges the gap between rich and poor today and a great alternative to gold assets or cash with far reach use case scenario than both.

So anything that makes a Bitcoin investor hand over the custody of their Bitcoin for keeps and insurance as in a centralized platform, it makes Bitcoin being created on the decentralized blockchain network for the key reason of being kept by the individual for good reasons without trusting anyone to do so, be defeated. It simply makes Bitcoin just like the every other currency and in worst case scenario, it might pose difficult to access it, which of course isn't supposed to be.

A CEX with insurance might make great sense but what makes it usable is if its policies align with yours, how their monetary system is arranged and the regulations surrounding them.

[uchegod-21]

Everyday, we keep seeing more encouragements to draw closer to centralisation than take responsibility for the safety of our bitcoins ourselves. When exchanges first came into the picture, people loved it because it was more convenient for them to have their bitcoins with them. But then, came the risks of having third parties control your keys. Hackers targeted them more and people who trusted them have lost their bitcoins as well.

Now we are introducing insurance as a better substitute to self custody. Remember that, once insurance companies become fully involved, scammers and hackers will target them too. Bitcoiners who trust them will face thesame fears they had with exchanges.

Nothing beats self custody. People should learn how to be their own bank and protect their privacy at all cost, instead of trusting another third party company with their bitcoins again.

I don't care how well this idea is decorated, I won't buy such idea.

[Questat]

It only creates temporary solution but it does not lost the fact that you are putting all your coins highly compromised by trusting a centralized exchange over a self-custody decentralized wallet. In the end, losing your coins are still highly possible. And having that kind of insurance may only mean a trap as its not a guarantee that everything you have lost will be given back to you. It might return a small portion, but that portion is nothing compared to the total amount of coins you have lost.

[Darker45]

While I believe custodians would never lose relevance, let's just say there are people who prefer to be their own custodians. Some trust third-parties, some don't. And things are likely to remain like this until the unforeseeable future.

What's funny with insurance is that sometimes the providers themselves are the earliest ones to crumble. So, rather than providing some kind of assurance, peace of mind, or a good night's sleep, insurance providers themselves may be the cause of great emotional distress.

In the end, this debate will continue indefinitely because as you said, there's no perfect solution. Some custodians fail, some insurance claims unpaid, some of those who self-custody lose their funds.

[cryptoaddictchie]

The idea has a point. We can perceived that a retailer or even a big institutions or whale in a traditional investment industry didnt have the skills or sort of idea how self custody works that rely solely on a reputable custodian and thats not bad. Most of us even do this even before bitcoin becomes a thing. But like the majority who prefer to hold their own thats a new set up that drives decentralization.

I dont know but example money on the banks of each depositors, its likely to be this way cause no one want to keep on their home some cash lying around and you want it to be safe. We cant infer that the money being secured at home is totally safe than at the bank right? Rhats why blockchain is much easier to handle.

Theres literally pros ans cons to this and theres no wrong justification on each side.

[Ziskinberg]

Maybe it can be a short term solution while you are still in the process of mastering self-custody but it will never be a permanent solution. CEX insurance still have limitations compared to the highly safety and security that you can gained out from having full custody over your coins.

The bottom line, CEX cannot compete with decentralized hardware wallets no matter how highly insured it is. But the outcome also depends how the owner of the wallet execute self-custody, if he has mastered it or not really.

[crwth]

This most likely deals with the risks of dealing with cryptocurrencies. In general, we are more secure when we use a regulated, compliant, legal institution, but if we are just HODLing it, it isn't protected.

BUT isn't that the point of crypto? Having your own, and actually YOU, as the person, are responsible for your coins.

In the eyes of the law, I think there are a few things to consider, like WHO the real owner of the coins is if someone gets access to a seed phrase or something. I think this is one reason insurance companies don't deal much with it.

[notocactus]

This most likely deals with the risks of dealing with cryptocurrencies. In general, we are more secure when we use a regulated, compliant, legal institution, but if we are just HODLing it, it isn't protected.

BUT isn't that the point of crypto? Having your own, and actually YOU, as the person, are responsible for your coins.

In the eyes of the law, I think there are a few things to consider, like WHO the real owner of the coins is if someone gets access to a seed phrase or something. I think this is one reason insurance companies don't deal much with it.

Doing things legally is safer than doing things illegally but let's widen our view beyond that.

Bitcoin years ago did not need to be considered as legally in different activities like Bitcoin mining, buying, selling, holding, investing, and as a payment method to be used and to give people completely freedom, full control of their bitcoins, and absolutely security of their funds with private keys.

No matter what governments consider Bitcoin as either legal or illegal, with Bitcoin private keys, Bitcoin users can secure and control their bitcoins. There is no power and tool for governments to stay at their offices and freeze bitcoins of their citizens.

It's different than digital money in banks, gold in bank vaults, stocks in accounts.

[Japinat]

I hope we don't think that when we read the word "insured" we should assume right away that it covers everything.

Because the truth is, that's not always the case. Even Coinbase explains that their insurance only covers certain types of losses, and losses caused by negligence are not covered at all. They also say that losses can exceed the amount recoverable from their insurance.

So it's good to have insurance, but it only minimizes the risk. At least we should know that so we don't expect that everything will automatically be covered once something goes wrong.

[SeriouslyGiveaway]

I hope we don't think that when we read the word "insured" we should assume right away that it covers everything.

Because the truth is, that's not always the case. Even Coinbase explains that their insurance only covers certain types of losses, and losses caused by negligence are not covered at all. They also say that losses can exceed the amount recoverable from their insurance.

So it's good to have insurance, but it only minimizes the risk. At least we should know that so we don't expect that everything will automatically be covered once something goes wrong.

Even with a very old industry like bank, customers will not always receive full compensations, get all their money back if a bank collapses, has a bankruptcy. It's helpful to mention about bank before talking about Bitcoin, cryptocurrency and exchanges in this young industry. With less regulations on this industry, there are more risks to lose money if you store your cryptocurrency on centralized exchanges.

Because of a very high volatility of cryptocurrencies, centralized exchanges or companies if have bad treasury management will have more risk of bankruptcy, even in more faster ways than banks face with.

Having business insurance is better than don't have it, but insurance does not guarantee that you will always get 100% money back.

[Japinat]

I hope we don't think that when we read the word "insured" we should assume right away that it covers everything.

Because the truth is, that's not always the case. Even Coinbase explains that their insurance only covers certain types of losses, and losses caused by negligence are not covered at all. They also say that losses can exceed the amount recoverable from their insurance.

So it's good to have insurance, but it only minimizes the risk. At least we should know that so we don't expect that everything will automatically be covered once something goes wrong.

Even with a very old industry like bank, customers will not always receive full compensations, get all their money back if a bank collapses, has a bankruptcy. It's helpful to mention about bank before talking about Bitcoin, cryptocurrency and exchanges in this young industry. With less regulations on this industry, there are more risks to lose money if you store your cryptocurrency on centralized exchanges.

Because of a very high volatility of cryptocurrencies, centralized exchanges or companies if have bad treasury management will have more risk of bankruptcy, even in more faster ways than banks face with.

Having business insurance is better than don't have it, but insurance does not guarantee that you will always get 100% money back.

You cannot compare insurance on banks and crypto exchanges because they are really different. Bank deposits are covered by government-backed insurance, with a maximum coverage of up to $250k in the US, but that mainly applies when the bank fails in its operations, whether through bankruptcy or closure due to compliance violations. The insurance agency will then pay depositors up to the insured amount.

As for crypto exchanges like Coinbase, they are not covered the same way. Instead, they may have private insurance, and users should understand what that insurance actually covers. As I mentioned, losses caused by negligence are usually not covered, while coverage may apply to security incidents such as a hack affecting the exchange itself, and there is no guarantee that every user's full loss will be reimbursed.

Therefore, when it comes to insurance protection, banks are generally safer than crypto exchanges. That's why it's still better to keep our own Bitcoin in a non-custodial wallet.

[Alpha Marine]

And this has not just been due to their own direct actions, but the failure of self-custody products are well.

This is misleading.
Most of the money lose throug self custody are due to the direct action, or inaction, of the person. Only a few of them have been a result of the self custody product, like the ColdCard case.

There is, however, a solution to centralized custody failure: insurance.

I wish I was making this up, but just yesterday, my dad called me, and he was with my younger sister. They complained about how $500 was withdrawn from my sister's account as far back as March of this year, and she had no idea that kind of transaction took place. She wouldn't have known this if she had not requested the statement of account. The bank is claiming she made the transaction and has refused to show further proof.
Now there is going to be a lot of back and forth with the bank if that money is to be recovered.

Now imagine this was a large sum. This will lead to lawsuits, and that costs money.
This is why there are so many lawsuits. The mere fact that the funds are insured in a centralised institution doesn't mean you will easily get the money back if something bad happens to the money or the company. Financial companies don't like incurring losses. There are thousands of lawsuits on matters like this.

My point is, don't make it seem like once your funds are insured, you have nothing to worry about.
A business or company is not owned or operated by one person, so it's normal for that company not to practise self custody. So that is why you find companies giving their funds to centralised custody to manage.
But individuals can hold their money by themselves.
Self custody has its downside. It has always been talked about, but so does centralised custody.

[stadus]

I wish I was making this up, but just yesterday, my dad called me, and he was with my younger sister. They complained about how $500 was withdrawn from my sister's account as far back as March of this year, and she had no idea that kind of transaction took place.

This is a different case though. It's not handled by the insurance the bank offers, because that insurance only applies when the bank itself fails due to certain reasons, like being unable to pay its obligations, mismanagement, or any other issue that results in the bank being unable to operate normally anymore.

Once the bank is already closed and taken over, that's when the deposit insurance agency steps in and handles the insured depositors.

The mere fact that the funds are insured in a centralised institution doesn't mean you will easily get the money back if something bad happens to the money or the company. Financial companies don't like incurring losses. There are thousands of lawsuits on matters like this.

Every bank is required to follow the deposit insurance policy, and this is required by law under the regulations of the central bank. So whatever happens to them, if they fall into bankruptcy, it's no longer only the bank that will handle the problem but the insurer, which is government-backed. Depositors should not be put into too much trouble where claiming their insured deposits becomes very difficult, because there are already procedures in place when you open a bank account. As long as everything was legitimately followed, you should be paid as long as the loss is covered by the insurance, up to the maximum insured amount.