The Role of Self-Custody in Enabling Financial Sovereignty

TL;DR:

• Financial sovereignty means having complete autonomy and control over your assets. Autonomy and control require actual possession and the ability to directly transact with others without any intermediaries involved.

• Financial sovereignty is intrinsic to blockchain technology. The entire purpose of a blockchain is to allow you to actually hold your assets and send payments without requiring permission from a third party. 

• Self-custody crypto wallets offer financial sovereignty because they allow you - and only you - true ownership of your assets.

Financial sovereignty was one of the fundamental innovations of the Bitcoin blockchain. 

For the first time ever, individuals could completely control their own assets without having to rely on a digital bank or software platform to custody the actual assets. Since then, Web3 has grown and expanded, allowing people a whole new level of freedom and independence in their finances without having to rely on or trust any centralized institution. 

But simply purchasing and holding cryptocurrency on a centralized exchange does not give you financial sovereignty. You’re giving the centralized exchange custody over your funds, like your savings at the bank. For financial sovereignty, you need a self-custody wallet. A self-custody wallet gives you – and no one else – full autonomy and control over your digital assets. However, there are also some trade-offs. And it’s important to understand and accept these trade-offs if you’re going to use a self-custody wallet. 

Let’s dig a bit deeper.

What is Financial Sovereignty? 

Financial sovereignty means having complete autonomy and control over your assets. 

Often people may believe they have financial sovereignty when in fact, they do not. For example, many people prefer to purchase and store their crypto on a centralized exchange. This solution can work for people who fully trust their exchange - but it’s not financial sovereignty. They are trusting the exchange to hold their assets for them, just like a traditional bank. If anything happens to the exchange (e.g. the 2022 FTX exchange collapse), there is little the individual can do to regain their assets. 

From this perspective, you can think of a cryptocurrency exchange like a traditional bank and your self-custody wallet as an extremely secure home safe. A safe where only you hold the key to unlock it - that’s financial sovereignty. 

Self-Custody Crypto Wallets as a Tool to Enable Financial Sovereignty

Financial sovereignty is intrinsic to blockchain technology. The entire purpose of a blockchain is to allow you to actually hold your assets and send payments without requiring permission from a third party. But actual possession and peer-to-peer transactions are only possible if you use a self-custody wallet. 

Remember this rule: if a third-party custodian or intermediary holds your assets, or can prevent your transaction from going through, then you don’t have financial sovereignty. It’s as simple as that.

Just as holding and using cash in the physical world stands for autonomy and control (financial sovereignty), the same is true for self-custody wallets in the digital world. 

Quickly, what is a self-custody wallet again, and what are the benefits?

A self-custody wallet is one where only you have possession of your wallet’s private keys (“recovery phrase.”) Your recovery phrase serves as the only access point to your digital assets. Without the recovery phrase, your digital assets cannot be removed from your wallet. Meaning when you have a self-custody wallet, only you have complete financial sovereignty over your digital assets. 

Check out our articles What Is a Self-Custody Wallet and Why You Need One and Custodial vs. Non-Custodial Wallets — What’s The Difference? These resources offer a more in-depth look at self-custody wallets.

There are several benefits to having a self-custody wallet. The main ones are: 

• Control: It’s all yours. So long as no one else has your recovery phrase, no one else can ever have access to your assets. 

• Privacy: No personal identifying information is required to set up a self-custody wallet. Only a wallet’s “public address” is revealed on the blockchain when that wallet is involved in a transaction. But your identity cannot be determined from the public address itself (however, keep in mind that your identity could be determined from the other types of activity you do with the wallet). 

• Freedom: Enjoy complete freedom with your assets. Save, transact, send, donate, or use them with other DeFi and Web3 products. You never need permission from a third party to do otherwise. 

• Security: Self-custody wallets are uniquely secure. They’re not exposed to security risks from third-party custodians (i.e. fraud, theft, mismanagement, etc.).  

How Self-Custody Crypto Wallets Enable Financial Sovereignty

Self-custody wallets offer you and the broader society-specific benefits. And each benefit increases financial sovereignty. Let's explore how.

1. Decentralization and Independence from Traditional Financial Systems

Blockchains like Bitcoin operate on a global network of computers. Each computer in this network runs the blockchain’s software and keeps a record of the blockchain’s transaction history. This means that there’s no central point of failure. If one or several computers fail, the other computers keep working to maintain the network. Also, these networks operate as rules-based financial systems on computer infrastructure that’s independent from traditional financial systems. When you use a self-custody wallet, you’re plugging straight into this decentralized network. 

Moreover, traditional financial systems are mostly centralized third-party intermediaries and custodians (i.e. banks). While these systems can be convenient, these assets are continually exposed to central points of failure. Banks fail. Custodians can make mistakes or engage in criminal activity. And there might even be systematic vulnerabilities within the larger system.

Self-custody wallets provide an alternative. With a self-custody wallet, you are no longer exposed to risks from a single point of failure, intermediaries, or custodians. Nor are your assets exposed to any systematic risks within the traditional system.

2. Potential for Greater Privacy and Financial Freedom

No personal identifiable information is required when setting up a self-custody wallet. While a wallet’s public address and transaction history are visible on the blockchain, there’s no way to determine who controls the wallet. So, self-custody wallets provide much greater privacy as compared to typical banking accounts or most other traditional financial products. 

Self-custody wallets provide greater financial freedom because no third-party intermediary or custodian can stop or control your transactions. With a self-custody wallet, you can transact peer-to-peer with anyone, anywhere, and at any time. Assets are sent immediately and are not subject to clearing or hold periods. These wallets can also access a growing selection of DeFi and Web3 products with no restrictions. 

However, keep in mind - the blockchain is a permanent, irreversible record of transactions. Although no transaction can be prevented, each transaction is recorded on the blockchain, forever. This means that all funds can be traced to the previous wallet and transaction they came from. 

3. Role in Promoting Financial Inclusion and Economic Empowerment

With only a mobile phone and an internet connection, anyone can now set up a self-custody wallet in just a few minutes. Those living in under-banked communities or developing nations now have access to the world’s most innovative financial networks. And self-custody wallets don’t discriminate. They’re available to all, regardless of gender, ethnicity, nationality, and income level. 

This is important because it makes digital transactions - and the types of financial services that otherwise would have been too risky or too expensive - accessible, secure, and transparent for billions of people across the globe. Ultimately, an unbiased financial system with low barriers to entry fosters economic equality and independence. 

Challenges and Considerations

There are trade-offs when using a self-custody wallet. And having a clear understanding of the associated challenges and considerations will help you better determine if self-custody is right for you. 

1. Responsibility and Risks Associated with Your Wallet’s Recovery Phrase

The beauty of a self-custody wallet is that only you are given access to your wallet’s recovery phrase. Not even the wallet’s software developers have this access. This is all by design. 

But this security feature also creates a unique risk. If you lose both your recovery phrase and your self-custody wallet (the latter in most cases means your mobile phone), then no one can help you recover your assets. For this reason, it’s critical to take the responsibility of self-custody seriously and follow best practices when securing your recovery phrase. 

2. Lack of Regulation and Standardization

Blockchain and cryptocurrencies are a new asset class. And governments around the world have varying approaches to how they regulate these assets. Cryptocurrencies are transformative and rapidly growing. So, many governments are currently developing regulatory frameworks for how to manage them. However, it’s not yet clear how regulation might impact cryptocurrencies. 

So, when investing and holding these assets, it’s important to stay informed on the risks and unknowns associated with government regulation within your particular jurisdiction. 

Conclusion

A self-custody crypto wallet provides you with financial sovereignty over your digital assets. With these wallets, you’re in control and can freely send transactions across decentralized, global networks. 

For most, the benefits of self-custody are actualized once their wallets are put to use. So, if you’re ready to experience the freedom that comes with financial sovereignty, know that Valora is committed to helping you get there. Take a look at our simple 4-step guide to setting up your own Valora wallet. With only a phone number, you can have your own self-custody crypto wallet operating in just a few taps.

Further reading: Get started with Valora

Unsure what type of wallet you need? Have a look at this article by Valora on choosing the right wallet for your crypto journey.