This is a central premise to many in the world of cryptocurrency.
The existing financial system depends heavily on custodians for the safekeeping and security of assets. These trusted third parties are seen as a point of vulnerability within cryptocurrency.
At the core is the concept that if you do not have the private key, do you really own the coins or tokens?
Not your keys, not your crypto says the answer is no. Having one's crypto assets in wallets that he or she has the private key is paramount. If that is not the case, those assets are not yours.
The bear market of 2022 exposed this fact as many platforms found themselves in illiquid states and were forced to stop withdrawals.
Cryptocurrency Exchanges
Too many believe that a cryptocurrency exchange is similar to a brokerage firm or like a bank. Many are finding out the hard way this is not the case. While there is a good chance regulation from governments changes this, the present reality is that people are not protected.
Even the U.S. courts are backing this up.
If a company that has your cryptocurrency files bankruptcy, you are simply another creditor in the case. Your funds are not protected like in a regular financial institutions. Hence, you have to file like everyone else and wait for the case to be resolved.
This was first shown with Mt. Gox. At the time of its bankruptcy, it was the largest Bitcoin exchange in the world. It was reported that 850,000 Bitcoin went missing.
Celsius and other companies revealed this reality in 2022. The king of the hill on this one is FTX. That took billions with it and has a list of some of Wall Street's best known names on the hook. For example, Blockrock acknowledged it had $25 million with FTX. Certainly, to a company that size, with near $10 billion in assets under management, can withstand that type of hit.
The average person cannot.
Nor can many of the other cryptocurrency exchanges who had their money with FTX.
All of this proves, not your keys, not your crypto.
Counterparty Risk
Blockchain was designed to eliminate counterparty risk. By utilizing centralized exchanges, we introduced that idea back into the equation. Suddenly, the financial viability of an entity is of concern.
This is not the case with blockchain. As long as one has the keys to a wallet, plus the blockchain keeps running, then the money is accessible. This allows people to access whatever coins are on-chain.
When we place them "on" an exchange, we are simply moving them to another wallet. The coins never leave the blockchain, just your control.
It is akin to sending your cryptocurrency to a completely stranger than asking for it back. While these exchanges were known, as people found out, there is no guarantee they are going to return them.
In fact, with FTX, due to fraud and using customer funds to trade, it is questionable whether they even have the funds to provide back to users.