Lesson Topics:
The different types of crypto wallets
Hot Vs Cold
Custodial Vs Non-Custodial (Self-Custodial)
Not you keys; not your coins
Crypto wallets I use
Current geopolitical events, news, and risks (Feb 19, 2022)
Canadian Freedom Convoy
Canada’s Prime Minister Justin Trudeau - Emergencies Act
Potential Russian Invasion of Ukraine
U.S. About to Provide Regulatory Framework on Crypto
What legislation / regulation scares me
What gives me hope
Summary
My motivation and mission:
Google sheet that contains list of all WCD lessons and links to all content:
Lesson reviewing how to use Google sheet:
The Different Types of Crypto Wallets
As I will describe in more detail in the next section (Geopolitical events, news, and risks), there is a confluence of events that has me incredibly worried about crypto and personal freedom. The most consequential of these events is the Canadian Prime Minister, Justin Trudeau, imposing the Emergencies Act (an extreme, war-time legislation meant for combating terrorists) upon peacefully protesting truckers.
The main purpose of invoking the Emergencies Act is to give the Canadian government the authority to financially cut-off support to the truckers. This is the first time in history that decentralized, blockchain P2P networks have existed and Canada is finding it frustrating that they can’t “freeze” all types of crypto wallets.
This is an excellent time to educate yourself on the different types of crypto wallets because not having the correct type could be financially devastating if the government ever decides you are a terrorist, a threat, or disagree with your “free speech”….
….
There are two major distinctions when it comes to crypto wallets:
Hot Vs Cold
Note that there are 3 permutations between these two distinctions:
Cold Wallet & Non-Custodial (Ledger Nano S / Arculus / Trezor).
Hot Wallet & Non-Custodial (Mobile or desktop app where you own the private keys).
Hot Wallet & Custodial (Leaving coins on an exchange like Coinbase or Robinhood).
By design, all cold wallets are non-custodial (aka self custody…aka you own the private keys)
Hot Vs Cold
Hot Wallet - Software
Cold Wallet - Hardware
Cold Wallet
Examples:
Ledger Nano S
Arculus
Trezor
Cold wallets are physical devices. The Ledger Nano S is basically a USB drive that you can plug into a computer to access the wallet. You can send crypto to the wallet using the wallet’s address without it being plugged into the computer, but in order to withdraw any crypto, you will have to plug it into a PC. In general, the user interface isn’t great and a USB stick is easy to lose. As such, this prevents a lot of people from storing crypto on these devices.
The Arculus is a next-gen hardware wallet that involves a metal card that has the private keys encrypted, a PIN (that you memorize), and a mobile app (that requires facial recognition to access and allows you to send/receive crypto). This is my preferred method for keeping coins in cold storage.
Hot Wallet
A hot wallet is 100% software. Although the Arculus has a software component (the mobile app), it’s still considered a cold wallet because there is a physical component to it.
Examples of Hot Wallets:
Desktop Wallets
Mobile Apps
Browser Extensions
Exchanges
Although there is nothing inherently wrong with Hot wallets, they are seen as “less safe” because they are natively connected to the internet and if your cell-phone or PC was ever compromised/hacked, theoretically, the hacker could access your wallet.
Another way of saying this is, a hacker can’t hack a physical object; they would have to physically steal it from you.
In this moment in time, I am less concerned about Hot Vs Cold. My preference has actually been Hot wallets as I like to keep my funds relatively liquid and I like to be able to check my fund frequently. Additionally, most of the Hot wallets have a great user interface (as compared to the cold wallets).
The VERY important distinction in regards to recent events is Custodial Vs Non-Custodial….
Custodial Vs Non-Custodial
Custodial - You do not own the private keys to your wallet, somebody else does (like an exchange)
Non-Custodial (AKA Self Custody) - You and only you own the private keys to your crypto wallet.
The TLDR / ELI5 of why owning your private keys is important….
Owning your private keys is important because if you DO own them, then when you are sending/receiving crypto, you are communicating DIRECTLY with the Blockchain. If you DO NOT own the private keys, you are communicating with a 3rd party intermediary (probably an exchange) who then communicates with the Blockchain. Any send/receive request you make to this third party intermediary could get rejected…
…why might they reject your request?… well maybe the government has evoked a war-time emergencies act and told the exchange to freeze your funds. Or perhaps the government is about to pass an over-reaching regulation that allows them to freeze your funds on “suspicion” of criminal activity… or for not voting in their favor…
…I’ll save the political rant for the next section, but below is a simple visual to help you understand owning your Private Keys
Owning Private Keys (Non-Custodial Wallets)
Wallet A <> Blockchain <> Wallet B
Nothing can get in the way of you making transactions as long as you have electricity and an internet connection.
Not Owning Private Keys (Custodial Wallets)
Wallet A <> 3rd Party <> Blockchain <> 3rd Party <> Wallet B
The 3rd party is likely an exchange like Coinbase or Robinhood. These are public or private companies that have to comply with government regulations and requests (for better or for worse).
If the US government starts imposing 1984 type legislation or regulation, these exchanges could move their operations overseas. However, then the US government could target Google and Apple and removes these apps from the app stores and make it illegal to use these services.
My Crypto Wallets
These are the crypto wallets that I personally utilize:
Cold Wallets (Hardware & I own the Private Keys)
Ledger Nano S
Arculus
I definitely have my “don’t touch for 10-years” crypto in cold storage and locked away in a safety deposit box.
Hot & Non-Custodial Wallets (Software & I own the Private Keys)
Coinbase Wallet (not to be confused with Coinbase exchange!!!)
Terra Station (for access to the entire Terra ecosystem)
Exodos Desktop Wallet
Brave Browser Wallet
I split up my crypto across multiple hot wallets to reduce any single point of failure. I tend to trust the security of Coinbase more than any other company as it is the most mature and well capitalized. As such, I keep a larger percentage in my Coinbase Wallet than the others.
Hot & Custodial Wallets (Software & I don’t own the Private Keys)
Coinbase Pro - I only keep a small percentage of my crypto here for trading
Coinbase Exchange - I have some ETH2 that I locked up and can’t move - In hindsight, the 5% APR wasn’t worth the risk… alas.
Geopolitical Events, News, and Risks
Over the past few weeks there have been a confluence of events that directly or indirectly touch crypto and I don’t like how they mix together:
Current geopolitical events, news, and risks (Feb 19, 2022)
Canada
It is not important whether you agree or disagree with the beliefs of the Canadian Freedom Convoy (CFC). What is important is that people have the right to express their opinion and protest against a government.
Justin Trudeau completely bypassed the rule of law and went directly to the most extreme “solution” to the problem. Utilizing the Emergencies Act on regular Canadian citizens and calling them terrorists is about as tyrannical a move a politician could make.
What’s destressing is that this is coming from a “democratic” G7 country that is supposed to be “easy going.” What’s even more worrisome is the US government has been completely silent about the Canadian government freezing innocent citizen’s bank accounts and custodial crypto wallets…. hint hint… probably because they plan on doing something similar in the future.
Normally, the US government would condemn such an act of tyranny and overreach of power, especially from such a large and respected country. The silence is deafening.
Russia / Ukraine
In parallel to what is happening in Canada, Russia has been threatening to invade Ukraine. I feel like my news feed flip flops every day between Russia withdrawing tanks and Russia adding more troops to the border. I suspect that Russia is getting ready to invade and they are also mounting a fake-news campaign to confuse people.
What has me most concerned about this situation is that Russia might be able to defeat the US government’s favorite geopolitical weapon… sanctions. The whole premise of cryptocurrencies is to be able to send wealth across time and space using the rails of a decentralized/global network. The existence of crypto definitely makes it harder for the US to implement sanctions effectively.
If Russia is able to subvert US sanctions effectively using crypto, this is probably very bad news for the crypto industry. The US will not respond well to losing their favorite toy in the geopolitical sandbox. Additionally, as a human who lives on earth, I would prefer the US use sanctions vs physical force.
The Confluence / US Regulation
What concerns me most isn’t any of these events happening in isolation, but it’s the confluence of them all happening simultaneously and how they all mix together.
A regulatory framework and a CDBC by themselves don’t scare me. If anything, I think they could be very bullish for the crypto industry. One major hurdle that has prevented adoption from many institutions is regulation. I could see these skeptical institutions jumping into the crypto industry once any regulatory ambiguity is removed.
What concerns me is that this regulatory framework and CDBC are going to be drafted in the following months and I can see the following scenario starting to unwind:
Russia invades Ukraine.
US imposes sanctions.
Russia gets around some sanctions using crypto.
US gets mad at crypto.
US imposes unsavory crypto legislation/regulation.
Canada protests continue as the Freedom Convoy continues to get funding from people with self-custodial crypto wallets (which can’t be frozen).
US begins to understand that crypto weakens their control on individual citizens.
US imposes unsavory crypto legislation/regulation.
It’s during times of war when governments start to push the envelope and grasp for additional control/power. The Russian invasion of Ukraine would be a perfect excuse for the US to push the envelope. The announcement next week is sure to be reasonable, practical, and accommodative, but the US just needs one good excuse to “crack down on crypto”.
In addition, policy makers can be very sneaky. The infrastructure bill was 2,702 pages long and it had one sneaky page regarding crypto that was completely irrelevant to to bill. And yet, it got passed (although there was considerable crypto lobbying and pushback).
I’m sure there are policy makers that:
A. Don’t understand crypto.
B. Are forcefully against crypto.
C. Believe crypto weakens the US in the geopolitical landscape.
Due to the current events happening in Russia, Ukraine, and Canada, these same policy makers will have the narrative and headlines on their side of the argument while the US is defining it’s crypto framework and CDBC.
I can easily see unsavory crypto regulation/legislation get passed subtly, through sneaky tactics, or aggressively using war as an excuse.
What Legislation / Regulation I’m Scared Of
If any of the following happen, it’s very bad news:
US banning the use of non-custodial crypto wallets because they don’t have the ability to freeze the assets.
US consolidating all crypto addresses and blacklisting any that are not registered via KYC. The US could then prevent exchanges from transacting with any addresses that haven’t been white listed.
US keeping the CDBC closed-source. If the CDBC is not open-source, I am very skeptical about it… who knows what it would morph into overtime. The CDBC might start harmless, but it would take just one bad presidency to turn it into something out of 1984. What are some functionalities that would scare me:
Anything that allows the US to target specific individuals. They could give everyone different interest rates depending on saving habits (e.g. incentivize savers to spend by applying negative interest rates).
CBDC tokens that expire by a given date (again to incentivize spending)
CBDC that could not be exchanged for certain crypto assets (the government then effectively selecting which crypto projects get to exist and if any threaten their power they get blacklisted).
CBDC that collects personal information about citizens (this would be like Facebook and Amazon had a baby and gave it steroids). They could collect all of your spending habits, investing habits, and net worth.
What Gives Me Hope
You would think with all of this negativity that I would have sold all my crypto. I have sold some, but I’m still HODLing a majority of my coins. Why you might ask?
I do have faith in the United States. I don’t trust the US government, but the United States is more than just a government. The private sector now has some influential lobbying power and they could help determine the regulatory framework.
The Biden administration and all Democrats who are up for re-election are on the ropes. Their approval ratings are shit. Crypto has gone mainstream and enough people own it that if the US imposed unsavory legislation / regulation that caused the prices to nuke… it would be the final nail in the Democrat’s coffin.
The corollary to this is that if the US imposes intelligent and thoughtful regulation that allows institutional adoption of crypto and prices pump, then Biden might be able to use this as a way to win votes.
Crypto has gone from an after thought to a top priority in voters minds. Smart politicians will realize that “the crypto vote” is actually the easiest way to win votes from the younger generations.
Additionally, a lot of very wealthy individuals now own crypto. These elites have a lot of influence on what happens in Washington (whether you wish to believe it or not). Similarly, the crypto market cap has reached $2-3 trillion dollars, that’s $2-3 trillion of lobbying power.
Lastly, politicians are now being banned from trading stocks. Crypto is now their best Alpha opportunity and they don’t want to lose it either.
Summary
Canada has devolved from a G7 democratic republic to a 1984 dystopian government that is imposing tyrannical, war-time legislation on hard-working citizens that should have every right to peacefully protest. Due process has been completely ignored and they have gone straight to freezing assets of everyone directly or indirectly related to the Freedom Convoy.
I am concerned about what the US government is going to announce in the coming months regarding crypto. A US CDBC, if done properly, could be a good thing. But given the backdrop of recent events, I am concerned that the CDBC will not be open-source and will have hidden features that allow the US government to impose their power to any wallet for any reason.
The confluence of events happening in Russia, Ukraine, and Canada are the exact headline grabbing new items that anti-crypto policy makers need to pass nefarious crypto legislation / regulation.
However, there are a few things that still give me hope that the coming regulation / legislation will actually be healthy and positive for the crypto industry.
The “crypto vote” is now important and any politician who wants to be re-elected will be in favor for crypto.
Politicians, Elites, and large public companies all own significant amount of crypto. This carries a lot of influence and lobbying power.
Regardless of the legislation or regulation, a key lesson for all crypto owners is:
Not your keys, not your coins!
If you don’t have the private keys, the government could cut you off from the financial system at the drop of hat.
I advise anyone who owns a significant portion of crypto to move their coins to a non-custodial wallet (where they own their private keys and have complete control of their coins).
Reference Material & Social Media
In Lesson 030 I cover how to navigate and utilize the Google Sheet I have built for all WCD lessons. This Google Sheet contains a worksheet for each WCD lesson. Each sheet has all of the Excel calculations, tables, graphs, and charts that I have posted in the respective WCD lesson. Additionally, the Google Sheet has a master “Index” worksheet that has links to all of the content associated with each lesson.
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