Kemal of Galoy Money joins me to chat about his Bullish Case for Bitcoin Custodians. We debate the trade offs and points such as:

  • Remnant vs ‘Big Tent’
  • Why not write down 12 words?
  • “Mis-selling” Bitcoin
  • Shotgun KYC, and FRB ‘paper bitcoin’ risk
  • Jurisdictions and regulation
  • Financial hierarchy of needs



Stephan Livera links:

Podcast Transcript:

Stephan Livera 00:00:00

Kemal, welcome to the show.

Kemal 00:00:04

Amazing to be here a big long time, long time fan and listener of your podcast and your work.

Stephan Livera 00:00:11

Well, thank you and yeah, thought it would be interesting to chat with you about some work you recently put out or an article you recently put out, as well as what you’re doing with galloy. And so, yeah, let’s get a little bit into that, but maybe just a quick intro. What do you do, you know, just 30 seconds. What do you do? For Galloway, what are you doing in?

Kemal 00:00:27

So I’m a political scientist by education and marketer by trade and have. Been working on and researching and yeah trying to push forward Bitcoin adoption since the early days of lightning since 2017 and since 2021 I’ve joined Galloy and I’m the director of marketing there and doing research and stuff like that. Anything to advance Bitcoin adoption? That’s why my daily work.

Stephan Livera 00:00:59

And so yeah, listening to may not be familiar galloy with the company who are behind. And what used to be called Bitcoin Beach Wallet is now Blink Wallet. And so in El Salvador a lot of people are using this wallet in terms of the features it has for lightning, lightning, address and stable. SAS is also another well known feature inside this wallet and I think on the Galloway side you would say it’s probably more accurate to say it’s like this idea of having the. Banking infrastructure, Bitcoin banking infrastructure that a company could adopt, or even a community can adopt, right?

Kemal 00:01:32

Yeah, that’s exactly right. So we’re building developing basically free and open source Bitcoin banking infrastructure and blink is formerly known as the Bitcoin Beach Wallet, now called Blink, is basically one such Bitcoin bank that you can stand up on this open source stack and that’s what we.

Stephan Livera 00:01:52

Do at color Ohh and well, I guess one other upfront thing. I should just disclose I as part of Bitcoin adventures and you know a small investor in Galloway just for the sake of anyone listening to understand, you know conflict of interest or etcetera, but yeah, so let’s get into the article you wrote, which is around this idea and I guess you  titled it the bullish case for Bitcoin custodians. And of course, this is rightly triggering for a lot of people because a lot of people in Bitcoin talk about this notion of being your own bank, of being financially sovereign. How are you? Yeah, but why are you? Why are you making this case for Bitcoin custodians?

Kemal 00:02:29

So I think one thing to understand is maybe where self-custodial, what is it and what does it mean and what kind of concept? Is it and it’s fairly a novel concept that’s been bestowed upon humanity with Satoshi’s invention, mostly before that? Sure, there was self-custody of gold, a physical money, if you will. You can take possession of it without relying on a third party. But we know problems. Problems with gold, obviously. But in terms of, it’s like a digital good that can be self custodied. I think Bitcoin is like the first thing and what it requires is. That you keep a secret, right, and you protect it. And this is a very, very novel concept that has not been out there before. Bitcoin really like if you think around the stuff that you memorize and keep secret, what is there like maybe your bank pin for your EC, for your card, right. So it’s a four digit number that you type in when you want to withdraw money from an ATM and you keep that private, right? But if you lose it, it is your money gone? You can go to the bank and they’ll just reset it after they verified your identity. So it’s a very, very novel concept. And I think like self-custody is a fantastic property, a unique property, and bitcoiners cherish it for right, for all the right reasons and it’s and really like emphasize its importance and the bullish case for Bitcoin custodians obviously is a play on BJ’s Bullish case for Bitcoin that was a very great read at that time. That opened up a lot of minds to understanding Bitcoin better, especially explaining how money evolves over in the course of humanity and in and also in the course of its own life cycle. From a collectible to a soft value to a medium of exchange and to a unit of account, ultimately and so it changed it opened up a lot of yeah, new perspectives and better understanding of Bitcoin. And yeah, like he broke it down really well in his article. And I actually, like, wanted to do that same for a taboo topic which it is like basically saying that Bitcoin can be used custodial and that it’s actually good for Bitcoin adoption is something that is a taboo topic, basically and yeah, so it may be a little bit triggering, but what we’re really doing is we’re proposing A framework to yeah, like, think about custodians and how because. I think like custodians will be existing in a Bitcoin future and we should have an honest discussion about what these should look like and that will require basically, yeah, breaking up that taboo of not talking about custodial Bitcoin and yeah approaching this with a level head and a sound.

Stephan Livera 00:05:45

So of course, like most people I have this initial negative reaction to this idea of you know, trying to like trying to advocate or anyone trying to push this idea that people should trust custodians, but at the same time, to your to what you’re saying. I think it’s fair to point out that we know today that Bitcoin as it is today, even with lightning, will not self-custodial scale to 8 billion people. So that necessitates either you know not everyone’s going to use Bitcoin. For a lot of people will be using custodians. Now, of course, there may be future scaling technology that comes things like any pro out and maybe some of the covenant, CTV and some ideas like this. But where we are today that that’s what it is and so. So, I guess it does necessitate some discussion about what custodians are at least less bad than others, but I think it’s also important to think about this idea of premature optimization. I think that’s maybe something that’s worth talking about. Also, because as an example, even today, many people and just be on board with the likes of, let’s say Phoenix or Breeze or some of these. Non-custodial hybrid model lightning wallets. So, what would you say to that? Would you say that that’s not feasible for certain people in the developing countries or you know, for whatever reason that people need certain features that are not available in those kinds of wallets?

Kemal 00:07:08

So first off, I think I’m a big fan of Phoenix and the work they’re doing. Same goes for Breeze and I have much love for everyone who’s working on making self-custody easier. All the developers that are that are out there out there and I appreciate their work. I truly do and it’s really necessary for the future that we’re building for. Whereas usability or is like a self-custodial lightning wallet suitable for someone in the global S for example. I mean it’s, I mean you mentioned before I go into that like you mentioned, like the technical limitations in lightning. Yes, that’s one side of it. I’m hopeful that there will be solutions to it. You mentioned some like the OS and CTV we saw like some great proposals recently coming out like ARC and that are very optimistic about self-custodial future now when it comes to self-custody like we said in the beginning, like it’s not just the technical limitations, it’s also like the limitations on the human side. It’s a novel concept, and no matter how well it scales on the technical side, people will be required to keep a secret. No matter what, like this is not going to go away. If you want to have self-custody and that’s entirely a novel concept. So, with those things, let’s dive into like. Be a little bit the self-custody lightning wallets that I’m a big fan of and yeah, I mean they work great. Like a lot of the management of a lightning node is abstracted away and it worked fairly well. All channels are opened on the fly However, if you think about like high mempool times. It still requires chance to be opened. They incur a fee and maybe to you and me, like financially privileged people that might not seem like a. But it might be for it might be prohibitive for people who are living on less money. So I think this goes, yeah, so that that aspect is there as well and I don’t know maybe is it related like maybe I just read recently that I’m a big tenter.

Kemal 00:09:22

Like some, some say that Bitcoin should be accessible and usable for everyone instead of just those people. Will that have the technical knowledge, the understanding of what self-custody is and what why they need it and the necessary change to pay the fees like versus the remnant theory, right? Like if you don’t get it, if you can’t do it well, tough luck for you. You’re gonna not be my citadel. And you’re gonna be. I don’t know working for me for yeah. Like a slave? So, I don’t subscribe to that vision at all. I think I Yeah, I have a hard time sympathizing with these people that think like that and the reason is because I’ve seen what Bitcoin can do for a person like on a human development level and how it affects their outlook on the future. Like the ability to save in a hard money and to transact with it, like really catalyzes human development in a in a very beautiful way. And I’m a big tenter for absolutely selfish reasons, like big tenter saying that everyone should be able to use Bitcoin and have access to it and transact with it and saving it because ultimately it will benefit me if like if people if the people that I’m living in a society with which I’m which there won’t be a way around that unless I lock myself up. I will be better off my children will be better off if the people around me are not driven by consumerism, low time, high time. Rents and chronically short on money trying to make a living and survive. Like I’m here in Turkey and I’m seeing, like, the effects of inflation on people and on the societal mind and how it changes people and how morals erode and people are more likely to scam and to steal. And just because and I attribute that to chronic inflation and being stolen from and I think like a beautiful future awaits us if we can make Bitcoin available to everyone. And so, I think I there was a little bit of a tangent going from South custodial lightning wallets in the global S but I think it’s still not there your ex wise it takes a little bit of time until the Lightning wallet is ready to receive payments. To send payments, a channel must be opened. A fee is incurred and most importantly, a secret must be kept in a secure manner.

Stephan Livera 00:12:03

OK. So, I mean, there’s a few things to go into there. A few points to extract or go further into. So in terms of today, right, as we you know, we’re recording this 24th of May 2023 as I check mempool dot space right now, the high priority fee, 50 SATS per V by it’s about in Fiat terms about $1.87 to open a channel. So right, I mean, that’s obviously at today’s levels, of course things will change in the future and we did recently have this recent big bump because of all the ordinance. But nevertheless, they are valid transactions and we have to part of the security model of Bitcoin is that you have to be willing to pay that fee. And so, I guess I think it’s important to untangle a few parts or, you know, disentangle a few things here. One, I think there’s maybe the feature parity aspect, so let’s say. The link wallet can provide users a lightning address and they can automatically do stable sets right in the wallet, whereas today with the likes of Phoenix or Breeze or I should mention blitzed as well. They don’t have that feature unfortunately, but I know that there is work being done on this idea of trying to have asynchronous payments, but it’s not here yet. It might be a few years before that sort of stuff lands, or at least is mainstream, so there is that feature parity component and then also the fee component as we spoke about. So today, like we said, the next block fee is about $1.87. And I mean, I guess that part is not, maybe it’s not necessarily a, a total hurdle because at the same time remember part of the case people make about Bitcoin is look. You’re otherwise going to be going to Western Union and paying, you know, $20.00 on $100 fee. Well, OK, what’s the big deal about out of $100 paying $1.87 to get a channel, right? So, you could see, OK, maybe if it’s just getting a channel or an occasional channel operation and it still saves this person hypothetically. This person in the developing country more than they would have been paying otherwise with Western Union, there’s that. But I think maybe the difficult, the most difficult part is sort of the human scaling and learning aspect, right because. With, for example, with Phoenix you have to write down 12 words and you have to keep those 12 words safe, because if somebody gets those 12 words, boom, they’re gonna take your coins. I know Breeze actually does an auto cloud syncing back up, so that’s maybe something that would be useful. So, you know, maybe some of that can be automated, at least for smaller amounts. Of course, for large amounts. You know you don’t do cloud backups for your client, for your keys, obviously, but here we’re dealing with day-to-day spending and receiving amounts. So, I guess maybe my question to you would be and this is probably the question a lot of people in the Community are probably thinking is they’re saying. OK, Mel, why don’t you just tell people? Write down 12 words. What’s wrong with writing down 12 words as part of your Bitcoin seed? When you when you do Phoenix as an example?

Kemal 00:14:49

Yeah, I mean, writing, writing down 12 words is great. Anybody who’s literate can do it or should be able to do it, but you would think so. But I would argue that you in order to write down 12 words, you not need to have that intrinsic motivation to do that and what does that? What does that mean? Like, why are you even writing down 12 words? Like, why don’t you just trust somebody, right? Like this is what has been done for decades. As long as I personally can think of, I got my first bank account when I was five years old and that bank has been working for me. And that’s what I was raised with and I don’t know. It any other? Way or knew it any other way until I found Bitcoin. But why should I do that? And even when I started to learn about Bitcoin, I didn’t know you could self-custody it. I didn’t know there was a 21 million limit in 2015 when I first found it because I was looking for a digital payment means that I could transact with acro. Brought us and but it just did that for me. What I wanted it to be, which provided utility to me, which basically created interest and the intrinsic motivation to look further into this thing that provides utility to me. And then I started to learn OK wow, that it’s actually scarce. And if adoption grows like it might actually be good idea to hold a little bit of this and not just use it for transacting, but rather save. In it and self-custody it because, yeah, a government might turn rogue or a bank might not like what I’m doing and they might take away my money and just shut me out from what I need to survive and pay my bills, which is like an operational security aspect. But all of that takes time to. Stand and to learn. It’s quite a lot like not everyone is aware of 61 or two in the world. It’s like for us the second nature or like, yeah, all of the evolution of money, just the need of self-custody and the advantages of it. But we’re seeing like utility nevertheless, that Bitcoin provides, even if you’re not aware of these things, and I think that’s important to acknowledge these properties that Bitcoin. It has and that can that that it can provide instantly to people without them being aware of the excellent properties that Bitcoin can deliver on top, like for example Bitcoin held with the custodian is obviously not trustless. It’s not unconscionable.

Kemal 00:17:37

It’s not permissionless, it’s not censorship resistant. It’s not inflation resistant. I mean, it could be with the right technology, it’s not Sedona. But however and despite these, this downgrade in bitcoins like systematically important properties, custodial Bitcoin still has significant benefits over traditional finance with Fiat money, which is, by the way, just like it is also ruggable and not, permissions. So, it’s not and it’s not It’s on par basically custodial, but going on that end, it’s on par as bad as Fiat. So, it’s not a worsening of the situation, but it does offer a couple of advantages over traditional finance. So, it first of all, I’d like to mention it has the option to withdraw to self-custody, right? Like you can start custodial and as you progress and learn and understand it better, you can send your self-custodial Bitcoin to a self-custody wallet and protect it. It is interoperable with other Bitcoin wallets, whether custodial or self-custodial, it’s easier to open an account below certain transaction limits than with the traditional bank. It has a lot lower transaction fees and it works around like around the day, around the clock, even on weekends, it’s borderless, instant settlement. So, these are advantages over other digital payment method alternatives that are out there, like legacy finance, that like mobile money for example, that’s used in MP’s like M pay sign in Africa and yeah, stable coins. I did mention that, yeah. So, there are but again, like it requires like understanding self-custody, I think just imitating someone else a best practice or a tutorial will not cut it in my opinion. Like I think there must be understanding of what you’re doing and. You need to do it consciously like that. Also ties like in a broader picture like the Revolution will not happen accidentally as a byproduct of following a tutorial or a best practice, I think it must be a Bunches opt out of the broken system and opt in into the working system, and for that to happen it needs to be a conscious decision and that requires understanding of what you’re doing.

Stephan Livera 00:20:16

I say yeah and so I’m sort of torn in a way because I think, like we were saying before about Remnant versus big tent and you know, the aspect of if people needing to get to a certain level of understanding before they take their own self custody and ideally run their own Bitcoin node and do all these things that we talk about that we would like people to do so that they could be self-sovereign, I think we’re probably that is that yes, I accept that some people have to start in a custodial environment and then later we try to. Push them or encourage them to adopt self-custody and to do all of these things. And I think the pushback that I can see and I can hear and I can see from people saying out there is that. Is there a potential of misselling something of Miss selling Bitcoin here, right? This idea that people are out here selling Bitcoin as though it’s free of money? But actually, you’re putting people on a custodian and then they can get they could be KYZ KYC, you know exit, you know they could be shotgun KYC, they could be blocked from withdrawing, they could be they could, as soon as they start to ask for the money out to withdrawn, they could be asked. Show me an invoice what are you spending for, right? We’re seeing this now in the UK in, in the Fiat banking world or in other country. Around the world, when people go to do large Fiat transactions, that bank is often having a compliance department who again because of AML and fat F and all this other stuff. They then ask them all these questions about, hey, what are you sending to? Where’s the invoice for that? Where’s your source of funds? And I think the challenge that people are posing here with this, this bullish. This, for custodians, is that are you pushing people into a scenario where just in the future there’s gonna be more regulation and more action on even Bitcoin custodians?

Kemal 00:22:00

Yeah, I mean, very valid criticism. Custodians are reliant on a on a sensible jurisdiction that they can operate in properly that that does not have enforcement by law. But that might necessitate like something like shotgun KYC, where people are cut off from the access to their funds only in exchange for providing like intrusive documentation and some people can’t even provide right like there are undocumented refugees around the world. They might have a account with a custodian and suddenly they’re locked out, which is basically a confiscation, and they will never be able. Maybe to provide that documentation so yeah, it does rely on a jurisdiction that does have regulatory clarity, ideally is Bitcoin friendly and it’s a precondition like custodians are a centralized entity that are subject to regulations. They have a like we have to comply like with link with any, any subpoenas that would come our way. So that is definitely a valid criticism and a precondition A prerequisite for. All of this that there is sensible jurisdictions. However, I think we have sensible jurisdictions out there. I think jurisdictions are incentivized to be sensible about this. They have in the end also the best interest of their citizens in their mind, or they should have, and there are not every politician. Our regulator is like completely evil there are there also need to be elected or reelected and they do profit from making the lives of their citizens better. So we see that in El Salvador, for example, they call themselves Bitcoin country, they have adopted Bitcoin as legal tender and they are trying to make it. A great place for Bitcoin companies to set up shop and have their headquarters us and we’ve been seeing that just recently with a couple of announcements of Bitcoin companies moving away from hostile jurisdictions to friendly jurisdictions where they can actually provide services that are more in line and more sensible and less intrusive. Again, of course, there is on the other hand. Certain forces that are also being applied on El Salvador and the regulators there, they can’t do whatever they want either they have, there are like intergovernmental organizations like the Financial Action Task Force or just the dependent. See on the Federal Reserve because they’re using the dollar and they don’t want to be shut out of the US dollar system and also the correspondent banks that they don’t that they don’t want to be cut off from. And so they have to walk a thin line there and between providing financial inclusion with Bitcoin to their citizens. In a non-intrusive manner while on the. Yeah, not being cut off themselves from the legacy financial system globally. And I think they’re doing a great job. Stacey Herbert is doing a fantastic job there with the Bitcoin office like they’ve even before, and they peculiar past the Bitcoin law. Now they’ve basically made it clear that Bitcoin is money and. And everything else, security and further regulations that give basically Bitcoin companies. The room to operate and within certain boundaries and the boundaries. That means, yeah, lower KYC requirements for example with blink you can just sign up with the phone number and even if you lose your device and stuff like that, that’s really practical. And but that is all that comes with transaction limits. Right So there’s still any anti money laundering like regulations that regulate the entity needs to comply with in order to operate. Right. And therefore, not all the great properties of Bitcoin, right can be offered with a custodian. Like if you use Bitcoin custodial, a lot of the magic wears off, but there’s still a lot of magic left. And yeah, there’s a thin line to. Be walked there.

Stephan Livera 00:26:14

And so, when it comes to jurisdictions, of course I’m bullish on El Salvador. I think it’s great that they’re adopting Bitcoin. But there aren’t a lot of other countries going to that level yet. Does that pose a risk then if there’s not enough competition with other countries who are also very pro Bitcoin like I think I would say the UAE where I am is relatively pro. You know, now the kind of quote pro quote UN quote crypto, not that I’m a fan of the term. Crypto but they seem to be but do you see any other jurisdictions that are reasonable or at least trying to walk that thin line rather than just going right over to the over regulation side?

Kemal 00:26:53

I mean, we’re seeing some developments there. So, in many places, Bitcoin is not regulated yet. I think El Salvador is one of the first. The UAE and Dubai have just earlier this year, I think, passed some extensive regulation and provide regulatory clarity, which is really important for. Companies and custodians to operate in in a predictable and reliable way and basically determine what services they can offer. I think, and I’m not an expert on this topic, but I suppose because it’s a very intransparent world, the world of banking and licenses and it’s evolving in new. So, I heard good things about Hong Kong and Singapore. Switzerland has been obviously doing and. On that regard a lot and with sensible regulations, sometimes not so sensible.

Stephan Livera 00:27:46

Although I’ve heard I heard Singapore is not is a bit of a no go nowadays because I heard the FX stuff like got well also because in Singapore what I heard is that Temasek, which is a Singaporean, I think it’s a wealth fund or a Singapore. And government fund had invested in some of these and so then because of that, it was just a massive like they had to do like a big public apology because they’re investing in, you know, these what, you know, this recent round of stuff that went wrong. But I’ve heard Hong Kong is trying to reopen a little bit. So, I think maybe Hong Kong, we’re trying to open back up a little bit more. It could be that you know the optics of what went on the last few years is bad. Now they’re trying to sort of open back up a little bit. But yeah, also Switzerland has. I mean there’s a lot of **** going stuff there over as well, but nevertheless, you know there are there are projects and things there as well like Lugano Plan B of course bit for next and tether are there and Paolo and the guys are there. So, they’re setting things up there and I know El Salvador and Lugano are doing a little. Partnership there as well. So hopefully there are at least a few jurisdictions, but we need more, don’t we? Otherwise, the risk is that. More ammo, more fat F more sanctions compliance comes down the line, and everybody gets shepherded into a CBDC system, which is obviously.

Kemal 00:29:04

Ohh yeah. So I mean yes, more would be great. Ideally everyone has sensible regulations and you mentioned CBDC’s, yes. So maybe that’s also like an angle to keep in mind, like I’ve been recently seeing adverts for CBDC’s preparing the public for the benefits of CBD. This, and I’ve noticed that the language that they use like was very similar to the language that we. Use in terms of describing the benefits of using a CDC. And there were even, like, surprising properties that they mentioned, like I I that I thought would not be possible at all, like, borderless, interoperable and so and instant payments are on the clock and all the all the beneficial stuff that provides instant utility and that might sway the opinion of the general public. To actually adopting this new form of digital payment method for their day-to-day trip. Actions and we know that cash is disappearing and probably like it’s inevitable that it disappears at this point. So we are steering towards the future where there will be digital transactions dominating and what is are what are the options then like obviously like we see. CBC’s as our adversary and we need to provide an alternative to it with Bitcoin and. I think there is an opportunity there right now. I think lightning is at a place where it can it actually works for day-to-day payments for merchants, for a circular Bitcoin economy that is entirely like banking on Bitcoin, if you will, and paying merchants. Suppliers and like all the good stuff that’s that has tremendous benefits in terms of also not having to interfere. It’s with the with the Fiat legacy banking system where all the KYC stuff actually happens and so the on and the off ramps are really the choke point as we’ve already seen and like and they’re going after that with recent operations. So on and off ramps, not having to interface. With Fiat and banking is like a great, great future if we don’t. If we manage to get there and in order to get there, we need more on and off ramps and circle. The economy is because there I think like it would be very beneficial also from other angles like privacy and avoiding surveillance dystopia. If you could manage that, and we argue that the quickest way to get there and beat CDC’s in that race is basically with custodial but with Bitcoin with custodial lightning. Yeah, we can see that it is instant onboarding and you can instantly receive and send payment. It’s very reliable and it provides all of the utility already, plus an opportunity to upgrade to achieve more benefits. Right now, that can already like, improve the lives of a lot of people, provide utility to them and hence inside curiosity and interest, to learn more about it. Before CDC’s are rolled out, so basically advocating for a father complete in. Places where yeah, in cash based economies in in the global S maybe where CDC’s projects are not as far progressed where banking where there’s a lot of unbanked people that do not that where even custodian but can provide immediate benefits.

Stephan Livera 00:32:47

So yeah, this comes into the whole race versus the war concept which, you know Corey, CEO and founder of Swan has spoken about and written. About and so I can see something to that point. I think that’s there. But there is also the downsides that we really have to think about also because for some people just pushing or advocating for any kind of custody and is sort of seen as though that’s beyond the line that’s beyond the pale. You know, that’s just too much or it’s a bridge too far for them. And I think there’s some points that do need to be considered. So for example If people advocate custodial lightning. Are they creating more fractional reserve risk? Right? We saw what happened with FTX and the paper Bitcoin that they had. Could a similar thing happen if people are being taught that all custodial, Bitcoin and custodial lightning is quote UN quote? OK.

Kemal 00:33:33

I mean, custodians, if you use Bitcoin custodian Lee, there is you don’t know if you have Bitcoin, right? You’re trusting the custodian You only know if that you have Bitcoin. If you run your note and verify yourself. So yeah, advocating custodial usage does have that risk of more fractional reserve. I think, but again I must say like this is not a this improvement over what the status quo, right? Everything is fact. Reserve in, in, in the status quo. So there is we we’re already living in that world and I think there is a way forward for. With this transparent and open technology Bitcoin. And with cryptography, there are concepts out there that are still being worked on, and there’s like proof of reserves and liabilities and solvency. And that can that can provide some assurances in terms of auditability and mitigation. Of these risks. And Bitcoin companies and custodians should embrace that opportunity of providing maximum transparency where they can and develop these features and integrate them to avoid exactly like, like, approve like a seal of approval or transparency. Like just go out there and provide that. If there is no shady business, just be open about yourself and what you’re. And how you’re doing it and so yeah, you can be audited. I mean, being open source is part of that, I think, of course, like if custodian runs on open source software, you’re still trusting their integrity and you’re also trusting their competency. But if a Sodium is and so if a custodian is closed source, you’re trusting their integrity and their competency. If it’s open source, you’re still trusting them. But you can actually verify their competency with the code that they wrote and what they’re doing if, like they might be good intentions, but just really bad at programming or something and lose your funds accidentally like you, there is no way to verify in a closed source custodian on that. And so I think, yeah, those two elements are, I think, crucial going forward to have custodians accountable and auditable as much as possible. But there will always be some trust necessary. And I think that trust can be leveraged. For good for advancing Bitcoin and progressing users, educating them, I think custodians are also like the best place to educate yourself about Bitcoin. They have unique infrastructure and opportunities there. I mean, swan Bitcoin is doing a great job there as well. Like I know there’s custodian behind the back, but you can hold like the Bitcoin that you stack and until you are ready to get there. And then, yeah, people are being nudged up into, into upgrades to level up into self custodial Bitcoin and this is the division that that we have that and that there’s a duty and an opportunity for banks and custodians to provide that. And actually I’ve just recently seen. A presentation by the folks eyes and folks bank, Raiffeisen bank by and Mitter in Germany, which is a very small region. Bank that have started to look into Bitcoin and educate about Bitcoin, their customers in Germany and their rationale is basically what they said is I found that really cool. They said we have to educate our customers what this new technology is. If we don’t do it, they will get scammed or make mistakes. And they’re providing like 1 to one education. They’re educating about self custody and hardware wallets because they think they are the experts to educate the right people who have that duty and  yeah, we have that infrastructure already established around the world with banks and many banks are looking into it and it’s it would be beneficial if they did that like in a proper way and with the best intent for their customers and progress them. Yeah, up the Satoshi’s hierarchy of needs. As we like to call it.

Stephan Livera 00:38:07

So yeah, there’s a few things there. Let’s dig into the hierarchy of needs thing that you walk through or the financial hierarchy of needs. Do you wanna just talk a little bit on that?

Kemal 00:38:19

So while writing this article, we were thinking a lot about like, why are people using, why are they not just using self-custodial wallets like why are they not just writing down 12 words? Why are they attracted to custodians and don’t care about certain properties as much as we care? And we’ve been talking a lot about people in, yeah, global S countries. We like with Blink; we’re trying to create the best wallet or bottom-up Bitcoin adoption. And so naturally, we’re talking with people in Peru, in South Africa, in Nigeria, in Kenya, in El Salvador, and we’re trying to understand like, what is it that’s holding you back from holding Bitcoin or using Bitcoin and what we discovered is basically. That person. Will finance development is driven by the needs intensity at a given time and it’s different for everyone for all the people, for every, for every person. It’s individual, but generally we can see that it’s very similar to Maslow’s hierarchy of needs that has been. Postulated some 80 years ago, which is a motivational theory in psychology comprising of five tier model of human. Needs and that’s often depicted as hierarchical levels within a pyramid and from the bottom of the hierarchy upwards, there are certain needs, like physiological needs like you need to have food and clothing and shelter and then on the one up you have. Like safety, you have you want to have job security. For example, one level up is like love and belonging and friendship for example, and then esteem for yourself and what you’re doing. And on top is basically this actualization of yourself, the self-actualization and this is a concept where the needs lower down, like having something to eat and a shelter to sleep in that are lower down in the hierarchy. They must be satisfied before individuals can attend to the needs that are above and this is what we also observed. Like with the psychology behind like, which properties are interesting to people? Actually, that Bitcoin offers? And we basically transferred that model to Bitcoin and the journey in Bitcoin and broke it down into different properties and basically applied it 1 to 1. So, on the bottom of Satoshi’s hierarchy of needs as we call it.

Kemal 00:41:17

Is like you have to have money to survive and freedom to exist day-to-day. If you don’t have that, you won’t be caring about as much about your ability to transact or only if you have that covered. You will be caring about your ability to transact. So, the freedom of transaction in a digital world. For example, and all the great properties. That we cherish about Bitcoin, they come later, for example like value to store. Is it auditable? Is it inflation resistant like I won’t care about those stuff if Bitcoin is not accessible to me because I don’t have documentation to or I can’t? I haven’t yet understood the need for self-custody. If so, people care about low fees. In the beginning, they care about intuitive few acts that they can use it. Their instant payments like convenience. That it’s great that it’s borderless, like people understand that immediately. My relatives from United States can send me some money, and I can use it here. And that it’s interoperable with many wallets like these are instant utilities that are that can be provided and that that Bitcoin provides and that people care about in the beginning. And once they have that covered, they start to they might start to and to think about. OK, now I actually have money to store or value to store as we call it now, I have savings in a way, right. And it’s really important to understand at that point like a lot of people don’t have savings even in the United States, like 68% of the population does not have disposable income. This means the money they earn it suffices to cover the cost of the month and at the end they might be running short on money. And eat ramen noodles. Until they get their next paycheck so they don’t have value to store. Now, how can you expect someone who has no value to store to care about protecting that nonexistent value by learning self-custody like it’s not going to happen in an intrinsic motivational way like they will care about it. Once they have assets to store and that requires basically the ability to transact and economize in a digital world with low fees and close to no cost. So this is basically where it’s Building on and we basically build upon that fourth layer of that pyramid is then the immunity to betrayal of trust. Right. So now we’re getting into that area where us bit where the properties lie that we bitcoiners care so much about because we already have like transactions. Covered we have storing and savings covered. Now we don’t want to be traded. We don’t want to be stolen from we. We cherish the self-custody option, right, we use it and we run our node. We also verify it, like the verifiability of Bitcoin, becomes important, that it’s permissionless, becomes important, that I don’t have to ask anybody to transact with my own money, that it’s seizure resistant, immutable and finally in this in the top-level layer of the pyramid, the actualization of self-sovereignty as a bitcoiner. Is basically having to have no trust at all employed in all of my doings, like the like trustless aspect of Bitcoin really shines. And finally, I would say it’s the subversive element that Bitcoin has that it can subvert the existing Fiat system that we want to get rid of and. And that is like this it has like a little bit of an anarchist or antigovernment thing and people in the beginning of their journey. Like they don’t want any part of that like they. They probably love their government. They think it’s there to help them and stuff like that and it requires a lot of learning to get to that to that part. So, and this is basically our exploration of these psychological needs and motivations and which properties are relevant to people and their. Personal needs, at which point?

Stephan Livera 00:45:45

I say yeah. And when it comes to custodians. I guess there’s also an element where to some extent there’s a trust in that custodian to advance self-custody because some custodians may encourage people to stay on the platform, right? So, for example, obviously they have. You know, we keep coming back to this to this example, but with. FDX people were keeping their salary and there. Net worth and life savings on FX, which is also what made. It so bad when it. Went down for the people who were not taking heed of the not your keys. Not your comments. So then how do we assess custodians on that in the future? And I know you also have a section in this article where you compare custodian and say, well, this is a good custodian. This is a bad custodian. How do you distinguish between a good and a bad custodian?

Kemal 00:46:34

Yeah, I mean, like if you if we think about all the Celsius and the FX and stuff and the paper bitcoins and the incentivization to deposit funds with interest. That is promised I mean, those are red flags So, yeah, I mean, there is probably a lot, a lot more, but we tried to put in a like a basic list Bitcoin custodian checklist of what to what a user or a bitcoiner can look for to evaluate whether. This could be a recommendable custodian to someone who is not ready yet to self-custody, but wants to use Bitcoin, so there’s easy, obvious things that you can check with the custodian. Like are they Bitcoin only? It’s the first one like uh custodian, like developing custodian technology and software is already quite demanding and you need to stay on top of a lot of things to make it work and keep it secure. If some if a team is delving into shitcoins and trying to support. And integrate plethora of tokens. Then there will be less attention on keeping on the security that needs to be employed. So just avoiding custodians that integrate anything else but should coins or token or have tokenomics and stuff like that like is a good way, good, good starting point. We already mentioned and talked about like open source it’s important. Like in like you with when the when the code is open source, you still have to trust the integrity of the custodian that he doesn’t pull you, but at least you don’t have to track trust. That’s their competency. You can verify your code and if you can’t do that, others will do so they will look. Into it, they will harden it like more, more eyes on the code base and then suddenly all bugs become shallow and so. And that’s something to look out for. Obviously on that point, like I, I must mention like we are building free and open-source software and it’s for that reason. But it’s a good sign obviously segment and Lightning integration ties into the first point of focusing on Bitcoin and staying on top of your game on developments of what’s going. On providing the best and most efficient technologies for your users to transact, and if you see like when you generate an on-chain address and you get a, you get one starting with A1 like a legacy address. OK. What are you guys even doing here? OK, like, this is not the state-of-the-art of where the technology. And you’re making your customers pay a lot more in fees, and so that’s a red flag as well. Obviously, education, we mentioned it is really important. Swan does a great job in that. We are trying to do a good job in that by providing in app education in in link we have the earned section where we incentivize. Learning people can learn about what is money, what is Bitcoin and in and, and we’ll soon upgrade it to 2011. There 20 more. Persons that are followed by a quiz and if the if the customer or the user answers the question correctly, they are rewarded with a Satoshi onto their balance and all of that is basically open and with a Creative Commons license. So, inviting everyone to have a look at that and support that and also adopt it for this, for the for them to really do that, to be responsible about being a custodian and really further the good principles. And finally, we talked about that as well like look out for like if the custodian is like in the United States, there’s a high chance or in the OR in the United Kingdom or anywhere. Where there’s like stories of that we’ve heard where? Yeah, shotgun KYC is 1 danger to look out for. Like, is it? Does it provide regulatory clarity? Is it one of the jurisdictions that are known to be Bitcoin friendly? Maybe like that’s also something that should be kept in mind. We just recently saw with PAX full how they had to freeze customer funds. Even, and just because their compliance department had to comply with US regulations that were bestowed upon them on short notice. And even if users didn’t do anything wrong, they’re cut off from their funds, and God knows if they’ll if they’ll get them. So those are a couple of things to watch out, probably more, but we try to make an easy handle list for that as well.

Stephan Livera 00:51:36

And so, I think at the end of the day, there are these competing interests and priorities like on one side, getting people to self-custody. But on the other side, as you as you’re trying to point out here, this idea that some custodians are less bad than others, let’s. Say and that there is some element of a race. Against, you know, the war here concept of, you know, trying to get Bitcoin adoption before CBC’s and you know, there’s already a war on cash as most people are aware, we should fight that war on cash. We should use cash, obviously, like I’ll try to use Bitcoin, Lightning first priority and then, you know, try to use cash and then Fiat options. Generally, unless it’s, you know not otherwise feasible. So, I think those are a few things, but at the end of the day, probably the main criticisms I can sort of see of this idea would generally be. The idea around a you know, is there a? Is there a quote UN quote, misselling of Bitcoin? Is there a fractional reserve risk, right? Because maybe not every custodian will be able to do proof of reserves. Maybe not every custodian will do that, and so then all these people are. Kind of getting pushed into fractional reserve platforms. Essentially, so I think that’s probably the main criticism, but I think the I guess for me, the moral of the story or the lesson for me is more just to understand that we can more minutely look at different custodians and compare them and say well. OK, at least this one is less bad than that other one, right? Like it’s better than I would rather people use blink than let’s say FTX or Celsius or something like that. Right. Like that’s kind of if that’s kind of a guideline, at least if the custodian is trying to teach you self-custody, then that’s a good indicator. So, I think that’s probably where I sort of land. On it on this overall, but of course for me personally, if I’m talking to somebody. I’m going to try to get them into self-custody at the first step, but I also acknowledge there’s probably a selection bias, the kinds of people I’m. Talking to are more. Probably going to be higher up on the financial hierarchy, let’s say, and more capable to do that. So, I guess those of you, I guess closing thoughts, do you have any final? You want to mention before we wrap up. I mean, thanks for the for the great conversation, Stefan. I think like we have a couple of problems going forward with regulations and intrusive things like KYC. The and dangerous and I think really like walking that thin line and accelerating adoption and creating these on and off ramps where people holding self-custodial Bitcoin can spend Bitcoin without providing any documentation or answering any questions like where’s your money from, et cetera.

Kemal 00:54:17

I think like by creating these on and off ramps and with on ramps. I also mean like making like for example merchants Bitcoin. Lenders right in these circular economies just really exchanging cash for Bitcoin as long as that’s option still exists and buying it over the counter KYC free. I think this is the future that we’re trying to build for bottom up, not top down with the tools like walking, walking that thin line and trying to be responsible. And yeah, support us on this mission, OK. Like I think there’s a lot of places to get involved in and support that vision. If you if you subscribe to it, not so much If you’re a Bitcoin remnant, I believe you won’t probably care, but if you’re not, then I think like have a look. At our Telegram group we have a chat on telegram called Bitcoin for Comm. Cities where we are discussing all of the challenges with yeah, within Bitcoin circular economies, onboarding people progressing them. What’s the right approach, what works, what doesn’t? And yeah, of course we are also doing a conference in El Salvador. The adopting Bitcoin conference. Where a lot of these people meet that are working on this both on lightning on the developer side as well as on the community building. Side and the and the bottom-up adoption side, there’s been quite a wave of communities around the world that have basically yeah, started from this inspired by what’s happened in Bitcoin Beach and it’s difficult to catch up, shout out to my colleague Andrew who is nevertheless trying to catch up on all of these. Excellent developments that I. And there are Yeah, bringing us a step closer to making that Bitcoin future a reality. And yeah, so check those out. Adopting Bitcoin is going to happen in N7 to 9. Stefan, you’ve been there. I hope we’ll have you back again in November. It’s happening this year from November 7th to 9th. You can find all information on We’re also looking for but if you want to contribute to this discussion, whether on the development side or on the economic side, if you have like privacy workshops to do show us, that’s how easy self-custodial is and why it’s important. If you want to talk about that, like trying really to bring the community. Together there to advance Bitcoin adoption.

Stephan Livera 00:56:59

Fantastic. Well, yeah, I have attended the last two years adopting Bitcoin. Not 100% sure about this year. I’d like to, but we’ll see a few things in the air there. But otherwise, thanks for joining me, Kamal.

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