For centuries, self-custody has symbolized financial autonomy, allowing people to secure their wealth (from gold to cash) without intermediaries. bitcoin extends this principle to the digital realm, offering a decentralized and censorship-resistant way to hold assets. However, upcoming European regulations under the Markets in crypto Assets Regulation (MiCA) and the Transfer of Funds Regulation (TFR) threaten to complicate self-custody for bitcoin users.
A new regulatory era
MiCA, adopted in April 2023, aims to regulate crypto assets comprehensively in the EU. The revised TFR applies the “Travel Rule” to bitcoin transactions, and requires detailed sender and recipient information for compliance. These changes will take effect in 2025, making it difficult for Europeans to interact with bitcoin self-custody wallets without cryptographic proof of ownership.
One proposed solution is the “Satoshi Proof”, where users verify wallet ownership by sending a small amount of bitcoin (e.g. a satoshi) from their wallet to the exchange. While simple for existing holders, this process creates a paradox for new users: they need bitcoin to verify ownership, but they cannot acquire bitcoin without passing the test. This “catch-22” risks alienating new users, driving them towards custody solutions that compromise bitcoin's spirit of decentralization and financial sovereignty.
Privacy and security risks
In an effort to comply with new regulations, some exchanges are exploring alternatives to the Satoshi test; These involve using end-to-end encrypted messages signed with the private key to cryptographically confirm ownership of the wallet, for example via the WalletConnect Network. This preserves privacy while helping institutions remain compliant.
The core spirit of bitcoin technology and cryptocurrencies is decentralization and privacy. Centralizing sensitive user data not only creates attractive targets for cybercriminals, but also contradicts the principles that have driven the adoption of cryptocurrencies. The recent history of data breaches in the financial sector highlights the dangers of storing large amounts of personal data in centralized repositories.
“Not your keys, not your coins”
The saying “Not your keys, not your coins” serves as a reminder of bitcoin's core philosophy: control over private keys equals control over assets. Users should carefully evaluate exchanges' self-custody support, as cumbersome processes or centralized data storage undermine bitcoin's promise of financial freedom.
The TFR is just the beginning. Future legislation, such as the proposed Payment Services Directive 3 (PSD3), indicates increasing regulatory scrutiny of bitcoin self-custody. To preserve bitcoin's core values, the industry must proactively develop solutions that comply with regulations while protecting user privacy.
This is a crucial moment for bitcoin in Europe. Users should advocate for exchanges that prioritize self-custody and privacy-preserving measures. Exchanges, in turn, must innovate to comply with regulations while staying true to bitcoin's decentralized principles.
As Europe tightens its regulatory framework, the decisions made by bitcoin users, exchanges, and regulators will determine whether bitcoin continues to empower individuals or becomes entangled in centralized systems. By championing privacy and self-custody, we can ensure that bitcoin remains a tool for financial sovereignty and freedom.
This is a guest post by Jess Houlgrave. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
