FDIC-FTX spat is another reason for investors to self-custody their funds
Searching for more evidence that self-custody of your cryptocurrency holdings beats a centralized manager? Look to the latest action by the Federal Deposit Insurance Corporation (FDIC).
The agency sent a letter to FTX Exchange this month — along with four other entities — that included a cease and desist order for “false and misleading statements.” Namely, it accused the exchange of falsely implying that user funds were FDIC-insured.
It could have turned into an ugly situation if customers expected — but did not receive — a certain level of protection in the event of catastrophic failure. It’s difficult to ascertain how heavily the guarantee factored into the adoption of FTX services, but the firm enjoyed a record-breaking year in 2021 with revenue growth of more than 1000%.
Ultimately, the incident serves as an endorsement of self-custody, because it reminds us that exchanges can only protect user funds as far as their pockets allow them. Empowering consumers to hold their own funds on ideally cold wallets significantly reduces the chance their funds will be lost to a company's insolvency, like in the case of Celsius, or even to a hacker gaining access to wallets held by a central entity.
Those who say self-custody is fraught with danger would be right. Retail investors cannot be expected on a widespread scale to properly manage and protect their funds in a wallet owned solely by them, and many in fact prefer the oversight from a seemingly too-big-to-fail central exchange.
Even experienced crypto investors and holders can send tokens to the wrong address by mistake, or even in some cases face issues with technical glitches on self-custody wallets. If mainstream adoption is the goal, this isn’t even close to being a safe way
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