There is a saying in crypto:
Your keys, your coins. Not your keys, not your coins.
Many who have been holding crypto understand what that means, and know the responsibility of being your own bank or custodian of your funds. This is through the use of a digital wallet, which holds access to digital assets using a private key.
The problem is what if a user loses the information about their wallet or private key, are cryptocurrency assets recoverable?
That is the big question as more users are getting into crypto. Many beginners (i.e. newbies) do not understand the basics and this can be a cause for concern when it comes to further crypto adoption.
Why Use Crypto?
The main philosophy behind crypto is to have financial freedom. However, it requires more resilience and due diligence on the part of the user. This puts the sole responsibility to the user for safeguarding their assets.
Rather than have banks hold your money, in crypto the user is their own bank. You are basically bankless, and you have more control of your funds.
When your funds are in the custody of a third party like a bank or a digital exchange, you do not have full control over it. This allows banks and other traditional finance providers more authority over their customers.
Banks can freeze or take funds, if they have grounds to do so. This leaves users at the mercy of institutions, with no other means to get their funds until their issues are resolved.
Crypto is not controlled by a single entity or institution. Users have complete control, and this can be accessed without the need for permission from any party.
Reality Check
While being able to control your own money using crypto is great, it can be very technical. The difficulty in understanding the process is the reason why custodians are available.
Those coming from traditional finance are used to having brokers manage their investment portfolios. The technicalities are left to the brokers, who are paid by the investors to provide them this service.
Likewise, the same can be applied to crypto. In this case it is through the use of financial instruments like ETFs or futures contracts. A broker (e.g. Blackrock) will handle the management of the wallet and private key details while the investor just purchases a share of the digital asset the brokers own.
Unfortunately, the investor does not have custody of the digital asset. It all falls under the brokerage or fund manager, who are responsible for safeguarding it.
This is actually fine for traditional investors, who are familiar with having another party handle their finance. The third party also provides mitigation in the event something goes wrong, like a system hack or black swan event.
Brokers provide risk management, which is an important feature for any financial service. In crypto, that means the brokers will be responsible for what happens to the digital asset while the investors can relax and worry about other things.
If the brokers lose any vital information about the digital assets under their management, they will be liable for it. The investors can be compensated for any damage or losses.
Despite the availability of these services, there are still many users who prefer to custody their own digital assets. The biggest risk they will face is if they lose or forget any information about the recovery of their crypto.
Can You Recover Your Crypto?
The answer is yes, but it may not be easy for everyone. It is a technical process, and requires understanding the use of a digital wallet, private key encryption and public key cryptography. That might be a lot to know, but it is very important.
When you use a digital wallet for accessing cryptocurrency, you are given a secret phrase, also called seed phrase. This consists of (depending on the wallet) 12 words (can also be 24) that is unique to that wallet.
This allows a user to recover their wallet, and most importantly the private key they use to access their crypto coins or tokens. (To learn more about private keys and digital wallets, read this article about the topic). The private key is a long string of hexadecimal characters that is a code used to unlock your crypto on the blockchain network.
The important thing about the secret phrase and private key is to keep it a secret. Never reveal it to anyone else, because if this information falls into the wrong hands, your crypto can be stolen.
As long as you possess your own private key, you are in full custody of your crypto assets. You do not even need a wallet to hold a private key, but a wallet makes things simpler to manage for crypto holders.
Users are sometimes told to memorize their wallet's secret phrase rather than doing other options. Writing it on a piece of paper does not last forever, since ink on paper fades. Saving it to a file is not recommended since it can be duplicated or hacked.
The problem is that not many people can memorize or take the time to memorize their secret phrase. It is even more difficult if not impossible to memorize the private key characters.
It still makes more sense to have a backup (digital or non-digital) than nothing at all. It will then be up to the user to safely keep the information.
Can A Third Party Help Recover Your Crypto?
The answer is also yes, but this requires trusting the third party provider. Crypto was meant to be trustless, so this is not ideal for those who want to self-custody their digital assets.
The third party might require an encrypted copy of your private key or secret phrase, so that requires the element of trust. Schemes like this prove to be controversial and have received pushback from users.
If the recovery service can recover the digital assets with a backdoor or master key, that is even more concerning. This means the recovery service provider hold very sensitive information and if bad actors have their way they can hack into the system and steal from the provider.
The provider can also be forced to seize the digital assets if there is a subpoena. That can grant other entities access to a user's crypto.
It still depends on how comfortable a user is about recovery services handled by a third party. The user must understand that they may not be the only one who can access their crypto, since they put their trust and grant permission to their recovery service.
The best type of recovery service is one that does not have a backdoor or master key. The solutions require a separate discussion, but this can be the best way to assure users that their crypto is still fully under their control.
When You Need To Use A Third Party
Not all users lose their crypto by losing their secret phrase or private key. It can also be through theft by bad actors who may have gained access to a user's wallet.
This occurs when a user has revealed the information to someone else or by a hack. If this happens then crypto can be stolen.
The digital assets are transferred to another wallet, and this can be through many layers to make tracking more difficult. It can then be liquidated over-the-counter or sent to mixers to make the transaction more anonymous.
There are digital asset recovery services for crypto theft that use the latest on-chain forensics and help from law enforcement. While these services are available, there is no guarantee that anything can be recovered.
These recovery services can also be expensive, so it is worth considering the costs. If the value is worth pursuing recovery, it is more justified since it can be a long and costly process.
Conclusion
With new interest coming into crypto, digital asset recovery becomes an important issue. In traditional finance systems, this is something that IT services can do to provide some assurance to users that their funds are safe and secure through cybersecurity best practices.
With crypto it is a lot different. The idea of taking self-custody of funds is quite radical, and there are those who are not comfortable doing this because of the complexities in managing wallets and private keys.
There are solutions (e.g. hardware wallets, multisig wallets, digital ID, etc.) available, but no easy way to recover digital assets. There is no absolute solution other than having the secret phrase and private key backup.
It becomes even more complex when it comes to recovery of stolen crypto. In this case, users will have to work within the legal framework in finding the perpetrators and possible recovery of the stolen digital assets.
The main point here is that if more people understand how crypto recovery works, more people will have confidence and adopt this technology for their personal finance. This is something that can be further improved through education.
There are many recovery options that can be considered. Users are free to evaluate and choose the best plan that suits them.
The more safe and secure the plan is the better. With an effective plan in place, users can have more peace of mind when disaster strikes.
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Disclaimer: This is not financial advice and is the author's opinion. The information provided is for reference and educational purposes only. Please DYOR to verify information.