Owning your crypto assets. What does it mean?  Covered: Defining Ownership Proving Ownership Guarding Ownership Defining Ownership Oftentimes in the crypto world, you will hear about the importance of “owning your crypto“. If you are on crypto Twitter, you may have seen the Paul Reveresque rallying cry: “Get your crypto off exchanges!” Is this really […] The post What Does it Mean to “Own Your Crypto?” appeared first on CryptosRus.

What Does it Mean to “Own Your Crypto?”

Owning your crypto assets. What does it mean? 

Covered:

  • Defining Ownership
  • Proving Ownership
  • Guarding Ownership

Defining Ownership

Oftentimes in the crypto world, you will hear about the importance of “owning your crypto“. If you are on crypto Twitter, you may have seen the Paul Reveresque rallying cry: “Get your crypto off exchanges!” Is this really something that requires your attention and concern? The concept of ownership as it pertains to crypto is important to conceptualize and understand. Let us touch on the basics to define our terms. Also, every theoretical instance in this article regarding ‘general ownership’ assumes normal, legal ownership.

As a preface, this whole topic deserves its own dissertation, and there may be something out there that can explain it in a more scholarly fashion. Ok. Let’s begin with the concept of ownership in regard to crypto. It can be defined by one question: can my assets be arbitrarily confiscated? One may immediately think: “well, what about all the stories of confiscated bitcoin?!” Well, it’s key to know that anything can be confiscated (or stolen) that is not incorporeal.

If something exists in the physical realm, it can be taken. There is no such thing as perfect privacy. What’s more, we are talking about the digital realm, where your property and assets are incalculably more vulnerable. As author Catherine Butler said: “Privacy on the internet? That’s an oxymoron.” There is an unmistakable relationship between ownership and privacy. Regarding your online ‘life‘ and the goods therein, a breach of privacy can mean a breach of ownership. This reality is even more complicated in the crypto space.

Blockchains are built to be publicly accessible. Everyone can see every transaction ever conducted on the ledger. There is no true hiding.

Yet, this whole article is meant to elucidate the importance of crypto ownership, which is contingent on privacy… so how can we square this circle? As it pertains to this article, privacy is mainly about compulsory confiscation or unmitigated theft. Mainly, how the nature of ownership, with respect to crypto, inherently improves the expediency of real ownership.

The federal government can use chain analysis to track coins, matching names to addresses. However, confiscating those coins is a different matter. To be clear, this article is not about evading the law, or the ability of federal agents to unmask you and your private keys. It is about sovereignty, which is another key element of real ownership. In short, the idea of real ownership is predicted by this question: “Can anyone arbitrarily stop you from transmitting information?” In this case, transmitting digital money [crypto].”

Dovetailing with that is this question: “Can anyone arbitrarily seize the information you seek to transmit, rather than stopping the transmission?” In this context, that question means: “Can your information be seized at will.” At will is the operative term. If the answer is yes, you do not possess expedient sovereignty. Would you allow the seizure of your Ford F-150 if you legally own it? (Assuming they don’t hot-wire/steal the car.) Of course not. The question is: “are you able to summarily mitigate the confiscation/seizure of something?”

It could be argued, in many different circumstances, that one has this ability. Say federal agents come to your door looking for drugs. You can summarily mitigate confiscation by simply flushing the contraband down the toilet. But keep in mind, that you have ceded this ability (likely by impulse) by disposing of the contraband. Destruction is not a rational means of sovereignly maintaining something, obviously. In this case, you are ceding ownership via destruction.

Proving Ownership

The next point to tackle is the legal and protocol components. In 2014, the IRS issued a formal ruling expressly stating that for federal tax purposes, “virtual currency is treated as property.” Does this imply you inherit property rights with respect to your bitcoin holdings? More importantly, how is ownership ‘proved’, irrespective of the nuance drawn from legal guidelines? Generally speaking, “ownership of bitcoin is established through successful completion and recordation of transactions on the bitcoin blockchain.”

This is how the massive American Law firm Perkins Coie LLP describes it. That is to say, the legal component, which is jurisdictionally contingent, is generally derived from the protocol rules embedded and encoded on the chain, (in this case bitcoin.) In light of this, there is no point in fleshing out the legal minutiae beyond understanding the IRS decree deeming ‘virtual currency’ as property. While this is very significant, it is subject to change. In this article, we will use bitcoin and ethereum ‘rules’ to explain proof of ownership.

As noted in the aforementioned legal analysis on bitcoin ownership (page 6): “Specifically, ownership rights in bitcoin appear to be rooted in the ability to control the disposition of UTXOs, recorded on the blockchain. As a default matter, therefore, control of sufficient credentials—in the form of private key or keys—to unlock a given UTXO (Unspent Transaction Outputs) should confer ownership of the bitcoin value represented in that UTXO.”

Further, “from an ownership perspective, the key component of transactions is the so-called “unspent transaction output,” or “UTXO.” UTXOs are “chunks of bitcoin” that are “locked to a specific owner [using a so-called locking script], recorded on the blockchain, and recognized” as units belonging to that specified owner by the entire network.” Ethereum and most other chains use an account-based model, similar to an account number at a bank. While bitcoin’s UTXO is more like a trail of digital cash transactions.

This approach allows for transparency through (public) addresses tied to UTXOs, but addresses are not tied to transactions. Simply put: “An unspent transaction output (UTXO) is a discrete piece of bitcoin.” A user’s “wallet application” can calculate a user’s total balance by scanning the blockchain, “adding up all UTXOs that are associated with accounts that the user controls.” Control of “sufficient credentials” in the form of private key(s), will unlock a given UTXO and prove ownership of the “bitcoin value represented in that UTXO.”

Further, the UTXO model “allows all Bitcoin nodes to agree on exactly which bitcoin exists at any point in time.” This allows anyone to audit Bitcoin’s total supply. Your UTXOs are associated with the addresses of your wallet. UTXOs themselves are ‘stored’ in the bitcoin blockchain. Think of UTXOs as being a running count of the difference between spent (used) and unspent bitcoin (hodled), rather than an intrinsic balance tied to your public address, like it is on Ethereum.

To sum it up, UTXOs exist “everywhere all at once” on each node, not in your wallet. The wallet is just a tool to see all the UTXOs that you have the cryptographic signature for. Your private keys, don’t exist “in” the wallet. The wallet is a signing device to sign transactions. It is just an interface. A private key is information, secret information. Owning crypto is in this way “owning a secret.” The magic spell of knowing this information that allows you to spend the UTXOs only works because it’s all reflected in the public ledger that is the bitcoin blockchain.

Guarding Ownership

Now, the application: how to guard your crypto? In summary: there are three things to remember. UTXOs are the ‘coins of your bitcoin’, your public address allows you to receive said bitcoin, and your private key allows you to spend said bitcoin. So, we have hashed out how to understand ownership, and how to prove it. The most important part of this is the application of your ownership. This comes down to custody and control.

When you hold your crypto on an exchange, you are ceding custody control. In crypto, if you don’t have the private keys, you do not own the crypto. To quote the Robinhood terms of service page: “If you want to secure your own crypto and have your own private keys, you can send your coins to a non-custodial software or hardware wallet.” At the root of it, this is what ownership is all about: holding your crypto in a non-custodial or hardware wallet where you own the private keys. No private keys = no ownership.

Your private key, which is an encryption key and a randomly generated string of numbers, is a secret code that allows you to access the bitcoin ledger and move your bitcoin. Once again, if you don’t have access to the private encryption key, you do not possess ownership. The key could also be in the form of a seed phrase. It is like knowing the secret code to get into a speakeasy during prohibition. With this code, no one can stop you from transmitting information. No one can seize it from you arbitrarily. 

You could give up your private key, or you could have erred in your privacy prevention measures. Storing your private keys in the cloud is just one example. Having the keys gives your real ownership of your crypto. Contrast this to dollars. Those are government property. How about Gold? it is difficult to prevent seizure of it–it’s not portable. How about equities? You don’t technically own the shares you invest in. The custodian “holds securities in its own name, on behalf of the actual investors.”

At the heart of all this is permission. When you hold your keys, you don’t need permission from a single person on earth to spend the crypto or specifically, the bitcoin you have. No matter when, where, what, how much, or to whom. (Blacklisted addresses still cannot be stopped from transacting on the bitcoin chain itself.) You can take your ‘secret code’ anywhere to spend your bitcoin, in fact, it’s best stored in your head. That is expedient sovereignty. There are no gatekeepers whatsoever between you and your asset.

Crypto is, legally, property in the US. It is a superior property as it gives one real ownership through an encryption key that can be memorized. No one on earth can know that key, should that be your desire. No one can stop you from transacting with that key. No one is the custodian except you. No one is needed to access the key to spend. You literally have all the power. Real ownership is powerful.

Happy OWNING!

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