14th November 2022 > > Self-custody.

tl;dr

Self-custody of crypto assets is more than just a thing.

Market Snap

Market Wrap

An announcement by Binance stabilised the overnight sell-off:

“To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis. More details to come soon. In the meantime, please contact Binance Labs if you think you qualify.”

Occasional Series – Gotta laugh, courtesy of The Milk Road

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Curious Cryptos’ Commentary – Centralised cryptocurrency exchanges

This week we saw the collapse of centralised cryptocurrency exchange FTX, and its sister hedge fund Almeda Research, to which FTX had illegally and surreptitiously loaned customer deposits.

FTX is not the first of its kind to die.

Mt. Gox famously went bankrupt back in 2014 after an almighty hack of its reserve base. In my view the incompetence at the heart of the failure of Mt. Gox weighs better than the fraud engendered by personal hubris at FTX, but that is only an opinion of mine, and matters not a jot to those who put their trust, and funds, into these organisations.

Yesterday the CCC raised some legitimate questions about the balance sheet of Crypto.com.

Since then, matters have taken a turn for the worse.

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To understand better, we need to roll back a few days in time.

Binance is the world’s largest centralised cryptocurrency exchange. Its product offering is broad, its user interface I personally love, but I do understand it can look daunting to anyone whose knowledge and use of trading screens is limited. In terms of its regulatory behaviour, there has been a sea-change in attitude from its CEO, Changpeng Zhao in the recent past. I think it is fair to claim that this is partly due to some of the stinging, yet justified, criticism from the CCC about the corporate culture at Binance.

In response to the FTX fiasco, Binance has proposed a mechanism dubbed “proof of reserves”.

Rapping off the nomenclature of crypto consensus mechanisms, proof of reserves is a centralised concept piggybacking off the decentralised world to gain credence.

But this is no bad thing. It is yet another demonstration of how both the decentralised and centralised worlds will find room to accommodate one another, to the benefit of all humankind.

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The idea behind proof of reserves is that an exchange like Binance will regularly publish details of its assets and liabilities.

This is such a patently obviously good thing there can be no argument against it. And this initiative does not need regulation or legislation. I assume that thinking of trading with a centralised cryptocurrency exchange going forward will now demand to see such details before committing assets.

Crucially, that proof of reserves needs to be audited by an auditor of reputation before it can be issued.

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But here’s a thing.

Even without auditors, if a centralised organisation tries to lie about its decentralised assets and liabilities, it will get found out.

And found out very quickly, something which could never happen in the centralised world.

This is a bold claim, so let me explain.

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It has been reported that soon after Crypto.com made public its assets (but not its liabilities – see yesterday’s CCC) 320,000 ETH were moved to Gate.io and included in the latter’s public statement proof of reserves.

In a similar fashion Huobi.com transferred 10,000 ETH to OKex shortly after the former’s public statement of proof of reserves.

There may be legitimate reasons for these transfers, and to be fair they have limited USD value. But my scepticism about such transfers goes through the roof when the CEO of Crypto.com, Kris Marszalek, admitted that the funds — representing 82% of Crypto.com’s ETH holding — were sent accidentally to Gate.io:

“It was supposed to be a move to a new cold storage address, but was sent to a whitelisted external exchange address.”

Yeah right. We all believe that one mate.

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How are we left?

Once again, I must repeat my mantra that one should have no more than 5-10% of one’s crypto assets held on a centralised cryptocurrency exchange.

The remainder should be in self custody, preferably facilitated by using a Ledger Nano X. If you are in any doubt, sign up to our free online training course:

https://www.curiouscryptos.com/cccourses.

I would also add that Coinbase and Binance are probably the only exchanges on which one can confidently hold assets. For example overnight Hong Kong based exchange AAX has halted all withdrawals, though it claims to have no exposure to FTX.

I have just trawled through my crypto spreadsheets and my personal accounts package. There are only a few hundred dollars’ worth or so of cryptos held on a variety of minor exchanges other than my two preferred ones.

Not for much longer.