The first red flag was Coinbase making changes to its terms of service. Changes that tied its users’ assets directly to the fate of the company. 

According to a Coinbase spokesperson, “In the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

In effect, anyone who bought crypto assets from Coinbase could lose access, ownership and control of those assets as they could become the property of the company. Should the worst happen and the exchange was to go under, users could lose everything as the organization liquidates user funds to pay off creditors, cover leveraged positions and socialize losses across the user base. 

The user would get paid at the end. That’s if there’s anything left. This process can take years if it happens at all. Mt. Gox users are still awaiting their payouts nearly a decade later. 

Coinbase was not the only one. Other centralized crypto service providers are following suit. Celsius Network last week blocked customers from pulling funds from its platform, citing “extreme market conditions” while digital assets slumped in price. Within days, crypto lender Babel Finance also began freezing customer withdrawals.

Centralized exchanges and CeFi services, such as Celsius and Babel Finance, are not really crypto or even blockchain companies. They are essentially banks with less regulation, oversight, and most importantly, responsibility to the consumers they serve. They are not insured by entities like the Federal Deposit Insurance Corp. like many financial institutions, which means that users have little option but to wait to see if there’s anything left for them, once the dust settles.

Repeating past mistakes

As we become more aware of the way in which we are being used and abused by big business, some at least are starting to question the value of the services they use. Yet, it’s also clear that it doesn’t stop us from making similar mistakes in our rush to consume the next shiny service we are offered.

The crypto industry was birthed by a group of technologists and libertarians who were concerned about the direction of the traditional financial system. They saw the potential that blockchain technology offered and set forth to create a democratic system of finance that did not require human intervention and could be accessed and consumed by anyone no matter where they lived or the circumstances they found themselves in.

In short, the crypto industry has the capability of providing essential financial services to those who have gone without, while providing an opportunity for everyone to take back control of a critical asset — our money. 

But in the same way that we have allowed the wholesale capture of our personal data and privacy, more and more we are ceding control and access to our money.  

To understand how, we only have to look at how our relationship with banks has changed. Traditionally, it was a quid quo pro. You deposited money into your account, which the bank invested on their and your behalf. In return, you received security, ease of access and a return on your investment. 

Today, things are not so simple. Your money is still relatively secure but you no longer enjoy a return. High inflation, low interest rates, and money printing are causing the value of all our savings to go down. What’s more, regulations that have been sold as necessary to keep you and your money safe are being used to deny you access to your savings.

In 2021, thousands of customers of a U.K. bank had their accounts frozen without warning and for no apparent reason. It’s still unclear why access was denied. However, one theory is the bank’s system had spotted unusual activity and locked the accounts automatically. No questions asked.

Then in 2022, Canada famously froze the bank accounts of truck drivers (and their supporters) who were dissenting over the forceful mandating of vaccinations. In a move that broadened Terrorist Financing rules, banks were able to freeze the accounts of normal people with impunity. Not because they were terrorists but because they were exercising their democratic right to protest.

And now, crypto intermediaries like Celsius and Babel Finance are doing the same with their customers’ assets.

This, however, is nothing compared to what might happen should we move to a government-backed digital currency, or CBDC (central bank digital currency). Depending on their design, a CBDC can be used to control individuals by limiting how money much you can hold, varying interest rates and prices depending on who you are, preventing purchases and automatically deducting fines. 

We are already seeing this play out. In China during the digital yuan’s pilot testing program, the government distributed electronic “red packets” containing the new CBDC — but the free money was given an expiration date, forcing people to spend it or lose it. 

Another big risk is the relationship between digital identity and CBDC. The use of funds can be made conditional on the attributes of your digital identity. If those funds are in CBDC, then the central bank and by implication, the government can control how you spend and receive money.

Taking back control

To take back control, it’s vital that we move away from custodial services that look after our money for us and move to self-custodial products and services that put us in full control of our digital assets. 

With self-custodial products and services, the user takes ownership of and responsibility for the keys to their digital assets be they coins or NFTs as well as the asset themselves. The user controls how, when and to a certain extent, where their assets are used.

Unfortunately, we have already gotten off to a bad start. While we have made huge strides towards mainstream adoption, the cryptosphere remains a complex ecosystem to navigate. In the main, self-custodial services are extremely un-user-friendly to use and practically require a physics degree to onboard.

So, it comes as no surprise that people are opting instead to participate in custodial services and crypto wallets. Providers like Coinbase, and others make the onboarding process simple and get people up and running quickly. While this has certainly accelerated adoption, which is a good thing, it is also antithetical to taking back control.

Essentially, by signing up for custodial services, people are giving up control for convenience. If we continue on this path, we will lose the opportunity for positive change and instead replicate the old world of finance in the new, with all its incumbent unfairness and big problems as we are seeing now.