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The Bullish Case For Bitcoin Custodians

By rallying around a nuanced yet challenging standard for assessing custodians, we can minimize risk and maximize the speed of Bitcoin adoption.

Andrew Mahowald
Andrew Mahowald and Pretyflaco
May 12, 2023May 12, 202322 min read22 minutes read

In this exploration of Bitcoin adoption, the essential role of Bitcoin custodial services is discussed, particularly with the Global South in mind where there’s an opportunity to get ahead of government-led Central Bank Digital Currencies (CBDCs) by introducing Bitcoin first. The concept of 'Satoshi’s hierarchy of needs' is introduced as a way to understand individual financial priorities. Recognizing that self-custody can be a significant step for some, the article advocates for the use of professional Bitcoin-only custodians as an intermediary solution. Guidelines are provided to help select reliable custodians, emphasizing the importance of safety and upholding Bitcoin principles. Amid these complexities, Swan Bitcoin, as an educator in self-custody, simplifies this process, making it accessible to everyone. By recognizing individual differences and prioritizing education, the Bitcoin community can drive faster adoption, benefiting lives and strengthening the Bitcoin movement as a whole.

Bitcoin, we’ve got a problem.

The network is under myriad new forms of coordinated attack. In the United States, Bitcoin-friendly banks are being either systematically shuttered or denied licenses to even open their doors in the first place (full reserve banking? Sounds risky, Custodia, sorry!).

One can easily imagine Satoshi, in his or her lonely exile, staring off into the abyss of the global financial crisis 2.0, wondering if their baby Bitcoin is ready for the real “Then They Fight You” stage (It’s here, we’re in it).

To win this thing — to win the "Race to Avoid the War" — Bitcoin needs to onboard enough users (and eat enough value) before it’s too late. There quite literally is no time to waste.

So. Pause and ask yourself, if your friend wants to start eating healthier, would you tell them to hold off until they can buy land, start an organic farm, and raise their own cows? (Sorry, unless you rip that steak out with your own two hands, it’s bugs for you, pal)

Or maybe a colleague wants to teach their child how to ride a bike. Would you advise them to slow down and design a comprehensive, multi-step bike training program instead of just using the tried-and-true training wheels method?

Let’s hope not. You’d soon run out of friends asking for advice, and they’d still use the classic training wheels to teach their kids how to ride a bike (hello, balance and confidence!) and start wondering if someone as dense as you should really be giving advice about the future of finance.

Then why, why, WHY, if someone wants to dip their toes into Bitcoin, do we tell them to first spend a hundred hours becoming a certified Bitcoin Self Custody Expert™ before they take the first step and join the network?

Or, possibly worse, we tell them to write down a seed phrase and self-custody from day one without proper foundational understanding and readiness for the gravity and responsibility of self-custody.

New User Journeys

→ The first journey is largely a progression via cognition: a user’s curiosity was sparked some time ago, and there is already enough conviction to dedicate significant amounts of time to study, leading to books, podcasts, and videos. The user begins to understand Bitcoin as a special asset that will appreciate in value over time (i.e., a good investment) and thus seeks exposure. It is proposed that at this point, users should acquire extensive knowledge about self-custody through best-practice tutorials before committing significant purchases and then proceed to hodling their Bitcoin in a secure setup.

This journey is mainly advocated by financially privileged Westerners. It deemphasizes Bitcoin as a medium of exchange, focusing instead on its use case as a store of value and speculative investment. The purist journey leads with “store of value” at the expense of hands-on, peer-to-peer engagement.

Instead, consider an alternate path known as the “optimal journey.” This journey emphasizes practical experience and application when onboarding new users, fascinating them by solving tangible problems. It proposes that users start by sending and receiving some sats over Lightning with friends and family first to familiarize themselves with the tech.

By doing this, users experience the usefulness of Bitcoin as a borderless, frictionless medium of exchange with instant payments. Crucially, this initial experience must be smooth and successful (enter custodial Lightning with maximum success rates and low barrier to entry).

For most people in the world, this can be a fascinating experience that solves real problems for them. Naturally, they may be intrigued by this magic internet money, encouraging further learning and curiosity and, in turn, growing their conviction. Driven by empowered self-interest, they become proficient and confident enough to store significant value in the network.

Now, naturally, is the ideal time to learn about long-term self-custody and self-sovereignty best practices as the need for securing one’s Bitcoin properly increases together with the amount of value stored in Bitcoin.

It’s time to evolve, team orange, and there’s no time to waste. So go on, grab a hot cuppa tang, and hold that cognitive dissonance close like a byte in the Mempool. Let’s take a clear-eyed view of Bitcoin custodians and what they offer Bitcoin and Bitcoiners: the good, the bad, and the big picture.

It’s time to evolve, team orange, and there’s no time to waste. So go on, grab a hot cuppa tang, and hold that cognitive dissonance close like a byte in the Mempool. Let’s take a clear-eyed view of Bitcoin custodians and what they offer Bitcoin and Bitcoiners: the good, the bad, and the big picture.

The Undeniable Truths About Custodians

You’re not wrong; you’re just an asshole (yes, Donny, we know). There are many issues with Trusted Third Parties (TTP) and custodians and always has been since money existed before Bitcoin.

The Tail Risks

Tail risk is a low-probability event with a high impact. At the extreme, they’re known as Black Swan events (and authors of books on the topic have oddly profound cases of Bitcoin Derangement Syndrome).

These risks can all result in you losing your personal savings through trusting the wrong counterparty at the wrong time.

The Supply Risks (21 Million Coins, Really?)

Perhaps a more esoteric and insidious risk to your Bitcoin is the possible effective expansion of the 21 Million supply cap introduced with certain custodians.

  • Rehypothecation. Every time customer deposits are taken by a custodian and then lent out, and relent out again (and again?), an asset has been rehypothecated (and a Keynesian gets his wings!). And the supply of the underlying asset has effectively been multiplied, sometimes by a great deal. In this way, the sacred 21M supply cap could be effectively expanded without a single code change. 

Related, and perhaps even more unsavory? Those fake, supply-expanding, rehypothecated loans are sometimes used to short-sell the actual underlying asset on over-the-counter exchanges.

  • Paper Bitcoin. Going hand-in-hand with “Fraudulent Management” item above, our narcissist-in-chief can absorb a billion dollars of bitcoin purchases and then slowly sell off that real bitcoin over time in elaborate schemes to make more money (or pay for threesomes in the Bahamas). Meanwhile, depositors are holding a shiny IOU for their money, known as “paper bitcoin.”

These risks attack part of what makes Bitcoin so special and consequential (perfect digital scarcity). Interestingly, since rehypothecation affects the whole system and not the individual (directly), there are unique game-theoretical incentives governing each person’s decision-making. This would enable individuals to make decisions to help themselves and harm the network.

The Privacy Risks

Not your keys, not your… privacy. This one is pretty straightforward.

  • Shotgun KYC. Even a custodian who doesn’t require that you turn over personal information for KYC on the front end may change their tune when the government comes knocking. Oh, you want to access your money? Just give us your personal info first.

  • Identification Via Data Leak / Subpoena. Even without KYC on behalf of a willing custodian, your identity may be discovered due to a data leak and subsequent data analysis or by court subpoena.

The Censorship Risks

Same tune as the privacy risks. If you don’t hold the keys to your bitcoin, you don’t control perfect freedom to transact, either.

  • Reversibility. Custodians are usually legally on the hook for fraudulent transactions conducted by their systems. Therefore, they generally have the ability to reverse your (custodial intraledger) transactions, should they be deemed fraudulent by an authority. However, reversibility can also be deemed a positive in the case of incorrect transactions due to negligence.

Clearly, self-custody purists are right about a lot, and for Bitcoin to grow to its fullest potential over the coming decades, it’ll need to be listened to. 

Bit what if there is another side to this custodian story? One with additional layers of nuance, perfectly relevant for this point in time, that serves to help Bitcoin win in the battles yet to come?

Comparison of Payment Methods across Properties

The Important Nuances About Custodians 

Like a teenager entering adulthood, Bitcoin is 14 and now entering a problematic new stage of life. One full of new concepts, pitfalls, and challenges. And yes, one that demands extraordinary nuance to get to the other side.

Let’s examine the notion that, under certain conditions, custodians can help Bitcoin and Bitcoiners by facilitating adoption, providing new user-friendly features, and enhancing payment success rates.

And let’s recall that everyone has unique needs for Bitcoin; a 23-year-old Nigerian man working on a farm likely sees his financial world very differently than a retired housewife in the Washington D.C. suburbs.

Custodians Can Absolutely Help Bitcoin (And Bitcoiners)

It’s an undeniable reality that custodians currently offer many attractive features that simply aren’t available otherwise. And these features can help people in desperate need of financial inclusion and digital payments get the help they need.

As long as this is the case, there will be good faith Bitcoin custodians who can rapidly onboard these people to the network and help improve their lives. Let’s take a quick look at some of the nuanced ways custodians can help Bitcoin and Bitcoiners.

  • Less Friction & Up-Front Investment. In today’s attention-based economy, most people have maybe 10 seconds to complete a task, not 10 hours. Requiring first-time users to learn about multi-sig, metal seed plate backups, and GPG file authentication is quite an unnecessary barrier for beginners.

Custodians can reduce the upfront costs to nearly zero, enabling someone to immediately start using Lightning for payments (and move to self-custody when they’re ready).

  • (Much) Higher Payment Success Rates (Lightning Is Nascent Tech). Using the Lightning Network (LN) is magical. In an instant, anyone can send value around the world with zero intermediaries.

However, as still-developing technology, it’s often not smooth or seamless for the end user. Even River Financial’s LN routing node — one of the best/most efficient and responsible for all transactions through the Chivo wallet in El Salvador — has ~1.3% of its transactions failing (as of Sept' 22).

This may be fine for seasoned Bitcoiners, but for budding Bitcoin circular economies (like Bitcoin Beach, Bitcoin Jungle, and Bitcoin Ekasi), a simple, smooth, fast, and reliable Lightning UX is critical.

For many custodial Bitcoin-only wallets, the focus is on making Lightning accessible and payments reliable for everyone.

  • Features That People Need. Today’s custodial applications can provide features that people need. Features that will bring people into Bitcoin. And keep them there.

Like Stablesats in the Bitcoin Beach wallet app, for those users who cannot afford the variance of bitcoin the asset, Stablesats allows them to: (1) Keep their value inside the Bitcoin network and (2) Keep transacting inside the Bitcoin network (using L.N.) using whatever unit of account they need.

Or sending Zaps on Nostr, which is made simple and reliable with wallets like the Wallet of Satoshi and Alby (doing cool shit, easily, is a great user experience).

Or simply bridging the gap between Bitcoin & legacy banking. If users need to send money back to their bank account, they’ll need the help of a centralized service.

  • Immediate Financial Inclusion. Banking the unbanked is still important, right? Those 1.4B people need a fast and easy solution to get banked on Bitcoin. For now, at least, Bitcoin’s technical limitations mean that a maximum of ~300,000 people per day could open a self-custodial Lightning channel or receive a transaction on Bitcoin’s base layer.

According to one scalability analysis, that means it would take over 121.28 years (!) to onboard all of Earth to Lightning in a self-custodial way. Obviously, this isn’t the kind of fast financial inclusion people desperately need.

  • Self-Custody Can Be Scary. My whole family has at least a bit of bitcoin, advocates for it, and defends it against the fiat Luddites in their networks, and yet… they’re not all self-custody of their assets.

Why? Because it can be a bit scary to take irreversible personal responsibility for your assets. If you make a mistake, it’s gone. And if you die without a mindful and properly documented Bitcoin estate plan, your assets die with you (the network thanks you for your donation).

It will take time for each person — and humanity as a whole — to evolve back into a self-custody-first mentality. And in the meantime, custodians will allow people to participate in the network at their own unique comfort level.

  • Wallet Advantages. Beyond the beneficial user-facing features noted above, custodial wallets have a few other benefits, such as:

(1) Super fast time from download to first Lightning payment

(2) Lightning addresses enabling non-interactive payments (no actions are required by recipients to receive payment; the node is always online)

(3) Not doxxing one’s own home node / I.P. address when sharing invoices in public

(4) No channel or liquidity management

Some custodial wallets offer users these advantages and more.

  • A Bridge To Fully-Scalable Bitcoin. On-chain & layer two solutions simply can’t onboard 8 billion people (yet). Even with the Lightning Network, channel factories, and other existing scaling solutions, Bitcoin isn’t even close to being ready to service the planet. The world will not wait forever to move to digitally native money.

Critically, custodial solutions can be the bridge between today’s immature Bitcoin and tomorrow’s full-featured, ossified, and humanity-scalable Bitcoin.

Satoshi’s Hierarchy Of Needs (We Are All Satoshi, And We Are All Unique)

The beautiful statue of Satoshi Nakamoto in Budapest invites everyone to see their own face reflected in Satoshi’s hooded visage. Behind each of those reflections is a mixture of life experiences, circumstances, and preferences as unique as a fingerprint, all of which inform someone’s individual needs at any given point in spacetime.

In Maslow’s famous hierarchy of needs, he proposed that people are motivated to achieve certain things based on where they sit within a particular hierarchy. Importantly, for example, before a person can be expected to focus on self-actualization, they must first meet their basic physiological needs (e.g., food and shelter).

Exactly 80 years after Maslow’s theory, let’s consider a new hierarchy — one focused on our evolving financial needs in a digital world rapidly approaching singularity — and call it “Satoshi’s hierarchy of needs.”

Under Satoshi’s hierarchy, an individual will only care about certain properties of a monetary network when other, more base-level needs have been satisfied first. For example, before someone cares about storing value, they must first have the money to survive each day.

Satoshi’s Hierarchy of Needs

To climb the mountain of Satoshi’s needs all the way up to the summit (actualization of self-sovereignty), every one of us must first safely and successfully make camp and acclimatize in each zone below.

So, if you sit high in your shiny citadel in Austin, Texas, wondering why some dude in Nigeria doesn’t appreciate the immutability of the Bitcoin blockchain, this is for you. It’s time to check your financial privilege and consider that said dude has neither a phone with a data plan nor access to digital commerce yet.

If you’re chilling on a beach in El Zonte, El Salvador, after the Adopting Bitcoin conference, hammering the Lebanese people for their slow adoption of Bitcoin, this one’s for you too. Check your financial privilege and remember that many people in Beirut are struggling with their day-to-day existence (how could they care about hiding assets behind an impenetrable wall of SHA-256 encryption?).

Satoshi’s Dynamic Hierarchy of Needs, overlapping and changing over time

Or maybe you’re at your local Bitcoin meetup, slamming all custodians everywhere for making plebs rekt (been there, done that). Then this one’s definitely for you: check your financial privilege because 1.4B people don’t even have the liberty to consider the possibility of getting rekt by a financial custodian — they haven’t even been banked yet.

Beyond Satoshi’s hierarchy, each of us has a unique set of preferences, abilities, and circumstances impacting both our use cases for Bitcoin and our calculus for whether custodians make sense.

  • Savings Rate & Assets Under Management. Without a positive savings rate or assets under management of any significance, self-custody matters quite a lot less.

  • Risk Tolerance. Not everyone is a high-stakes poker player (most can’t even sit at the table). Self-custody of assets or life savings requires a certain type of risk tolerance that many (most?) are very uncomfortable with today. And the unfortunate reality is that self-custody is inherently risky, too. It’s just a different kind of risk.

  • Technical Literacy. Technically, the capabilities required for basic self-custody of Bitcoin are very low. But with great wealth comes great responsibility, and to properly self-custody a significant stack o' Satoshis can require a lot more planning and investment.

Seed plate execution, duress planning, GPG file authentication, signing device diversification, and more — this is complex. We all have different levels of technical literacy.

  • Risk Environment. Nobody decides where they’re born. Each of our circumstances presents a unique mixture of physical and digital threats to our safety. If you live in a dangerous place, you probably don’t want to carry around your own bank in your pocket, ready to upload away your life savings to the first sophisticated armed thief who points a gun at your face.

The irreversibility of fast final settlement is beautiful. Still, it is a double-edged sword for those with an elevated risk profile.

A Complicated Web Of Trade-Offs

Each of us is on our own journey to find life, liberty, and happiness. We each have a laundry list of competing needs depending on where we find ourselves in Satoshi’s hierarchy.

And the unsexy truth is that just as you’ve used custodial exchange services to execute buy and sell orders on your assets, custodians have the ability to:

(1) Fulfill certain use cases

(2) At certain points in time

(3) For certain cohorts of people.

Custodial wallets and solutions are for specific use cases. If they help to move people up Satoshi’s hierarchy and down Bitcoin’s rabbit hole, then they will have succeeded in both improving people’s lives and strengthening the Bitcoin movement.

Invitation To A New Mental Framework

Bitcoin is a Rorschach test. It’s a mirror. And it contains multitudes. Let this be your invitation to exchange some dogma for discretion and acknowledge that custodians can play a key role in improving people’s lives and helping Bitcoin win the one fight that truly matters: the battle against tyrannical, dystopian central bank digital currencies (CBDCs). 

An All-Of-The-Above Approach (To Win “The Race To Avoid The War”)

As Cory Klippsten so rightly pointed out, Bitcoiners are in a race against time to get Bitcoin adoption so far along that the United States and other world governments will never have the chance to orchestrate a coordinated attack on Bitcoin and Bitcoiners.

If you wanted to ensure that Bitcoin adoption happens far too slowly to win such a race, you would:

(1) Claim the network is ready for ossification, and

(2) Demand nobody use custodians, ever.

Recall that under realistic assumptions (and including Lightning), it would take 121.28 years to onboard the planet to Bitcoin right now. Even if every man, woman, and child in the United States were orange-pilled today, it would take several years for them to get a self-custodial wallet and open/close just one Lightning channel or receive one transaction (much less conduct their entire economic lives on Bitcoin). This is obviously unacceptable.

My fellow Bitcoiners, mathematics clearly tells us that we have no time to waste, and we can’t afford the dogma surrounding custodians' role in Bitcoin adoption. Simply put, we need an all-of-the-above approach to onboarding the planet to Bitcoin.

We need code enhancements. We need smart public policy. We need orange-pilled neighbors, courageous thought leaders, and circular Bitcoin communities (psst: custodians seeded these).

And yes, we need professional, Bitcoin-only custodians who will serve as a critical bridge solution to help get us across the finish line in the race to avoid the war (and CBDCs).

Custodians By Bitcoiners, For Bitcoiners (And Verified By Bitcoiners)

What if there were a way for Bitcoiners to both embrace custodians' role in moving Bitcoin adoption forward and simultaneously minimize the risk of anyone falling victim to the next FTX?

It might look something like this: a set of robust criteria created by Bitcoiners to assess all custodians against.

The Bitcoiner Custodian Checklist

Here are a few things you might want to verify about your custodians:

  • They’re Bitcoin-Only. If they keep their hands out of the shitcoin cookie jar, the odds are better; they won’t screw you.

  • They’re Built On FOSS (And/Or FOSS Supporting). Using free and open-source software, like Bitcoin, suggests a lower time preference and a more collaborative and transparent methodology.

  • They’re Based In A Friendly Jurisdiction. Custodians are at significantly less risk of seizing or withholding your assets if they’re located in jurisdictions known to be friendly to Bitcoin or have a clear and sound regulatory framework for Bitcoin companies.

  • They Integrate Lightning & Segwit. Helping users by utilizing Lightning and other core development features is a signal of support for Bitcoiners.

  • They Advance Bitcoin Principles (Including Self-Custody). A good faith custodian will help advance all Bitcoiner principles, including that self-custody is a worthy goal for everyone in Bitcoin to have and achieve.

  • They Submit Proof Of Reserves. A custodian that doesn’t play Binance or Tether or Wall Street games and submits to the most robust proof of reserves available is more likely deserving of Bitcoiner business.

Here are a few red flags you might want to avoid with custodians:

  • They Shitcoin. If any part of their core business model depends on proprietary tokenomics to survive or integrates with a security masquerading as money, you’d best steer clear.

  • They Use Closed Source Tech. There’s nothing inherently wrong with using closed-source technology. But it’s somewhat antithetical to the Bitcoin ethos and certainly the expedient path to high-time preference behaviors.

  • They’re Based In A Hostile Jurisdiction. If a custodian is located in a jurisdiction known to be hostile to Bitcoin, there’s a heightened risk they may be forced to withhold or seize assets.

  • No Proof Of Reserves. Again, refusing an opportunity for transparency is an obvious, very bad sign for a custodian.

  • Doesn’t Advocate Self-Custody. If they make no attempt to educate on the benefits of self-custody for those who are ready for it, they’re probably not supporters of Bitcoin.

  • History Of Unsustainable Or Unreliable Services. If there is a history of their services being discontinued unpredictably or if they are built in unsustainable ways (e.g., the project is riddled with technical debt or considered a hobby, stopgap, or sandbox), then it is not a great idea to depend on them as custodians. Custodianship requires professional commitment; dealing with money is not a joke or science project.

By rallying around a nuanced yet challenging standard for assessing custodians, we can minimize risk and maximize the speed of Bitcoin adoption.

Importantly, we might even live to see Bitcoin adopted as the global reserve asset in this lifetime (and not the next).

So, once again, let this serve as an invitation to integrate a new mental model on custodians and the services they provide for Bitcoin and Bitcoiners. One that acknowledges each of our vast differences and unique journeys. And yes, one that nudges people up Satoshi’s hierarchy — and down Bitcoin’s rabbit hole — to improve people’s lives and strengthen the entire Bitcoin movement.

Andrew Mahowald

Andrew Mahowald

Andrew is a freelance writer and digital marketer living in Minneapolis, MN. When he’s not thinking about Bitcoin, he enjoys photography on his Fujifilm, world travel, chess, and good faith contrarianism.



Political scientist by education and marketer by trade, pretyflaco has been researching and working on bottom-up and merchant bitcoin adoption since the early days of the Lightning Network. Currently he works on Galoy and Blink.

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