Have you ever wondered where all of our cryptocurrency vocabulary comes from? It's a good question without clear answers. But that's not the half of it. If you step back and analyze the terms that we use every day, some of them do not even make sense. It causes one to wonder if the terms were chosen for lack of anything better.
Coindesk Director of Research Noelle Acheson wrote a very compelling article in late August 2019 discussing the term 'custody' and how it applies to digital assets. Her article was the impetus for this post. While we will not go into what Acheson wrote in great detail, we must acknowledge the spirit of her article: many of the terms we use to describe various aspects of cryptocurrency are not truly fitting.
What is a coin?
We are going to look at several cryptocurrency terms in this post to drive home Acheson's main point. Let's start with 'coin'. We refer to the tokens created by cryptocurrency code as coins. There is Bitcoin, and then there are all the other alt coins that followed. And of course, there are stablecoins as well. But what is a coin?
A coin in the traditional sense is a piece of money minted with metal or made with some other material. It differs from a bill only inasmuch as a bill is made of paper. So regardless of the material, a coin is something tangible. You can hold it in your hand, put it in your pocket, or throw it into the lake.
A digital coin isn't tangible. In fact, it has no substance whatsoever. Cryptocurrency coins are represented only as digits in a computer ledger. That's it. Since when do digits constitute something tangible? Since when do digits constitute property you can own? Therein is the problem with the term 'coin'. You don't really have a coin if you do not have something of substance.
Just as a side note, did you know that data has no weight? You could take a blank CD, weigh it on a scale, fill it with data, and then weigh it again. You would find that your weight measurements are exactly the same before and after you filled the CD with data. There is absolutely no substance to data. As such, there is no substance to cryptocurrency ledgers or digital coins.
What is a wallet?
As long as we are talking about digital coins, what is a wallet? The traditional definition of a wallet is some sort of bag or folding case for carrying credit cards, bills, and other items. A wallet can usually fit nicely in a pocket or purse without issue.
Did you pick up on the similarity between a wallet and a coin? That similarity is substance. A wallet is a tangible object with inherent substance. You use that wallet to hold something else that is tangible and with substance. Think about your own wallet. What do you keep inside it?
A digital wallet is like a digital coin. It has no substance, nor is it tangible. But it gets worse. A digital wallet doesn't even hold digital coins. Yes, you read that correctly. A digital wallet does not hold digital coins. If you don't believe it, we'll prove it to you.
Storage is everything
We assume you already own some cryptocurrency. If not, imagine you do. Where do you store your crypto assets? If you follow the advice of crypto investment experts, you have multiple storage media. You might have your assets stored both on a flash drive and the hard drive of your main laptop.
Go to either one of those so-called wallets and locate the private keys that go with each asset. Then write down those private keys on a piece of paper that you will subsequently take down to the bank and lock in a safe deposit box. Finally, destroy your flash drive and wipe the data from your computer.
Now, have you suddenly lost all of your cryptocurrency? No. You have your private keys written on a piece of paper. Those private keys give you access to your assets. You can use the keys to make purchases, transfer some of your assets to another wallet, list your assets on an exchange, etc.
The fact is that your flash drive did not hold your coins. Neither did your laptop. In fact, the piece of paper doesn't hold anything either. Remember that your digital assets exist only as digits on a ledger. Those digits reside on that ledger permanently.
The bottom line here is that storage is everything. But it is not coin storage that you should be worried about. It is private key storage. Whoever has your keys has ownership of your coins. Lose your keys and you will be forced to kiss your assets goodbye.
What is custody?
Acheson's biggest question was one of custody. She began her piece by explaining that the term 'custody' is not a legally defined term. She also explained that courts have historically had trouble defining it. As such, custody means different things to different people. This is before we ever apply it to cryptocurrency.
In terms of traditional securities, custody is typically understood as holding assets belonging to someone else for the purposes of protecting them and, in most cases, growing them. A mutual fund manager is seen as having custody over all of the money and assets the fund contains.
This definition is tenuous even when applied to traditional assets like stocks and bonds. It becomes downright scary when you apply it to cryptocurrency. Remember, he who holds your private keys also owns your coins. This is why the concept of custody doesn't really apply to digital assets.
Storing coins on exchange
Once again assuming that you already own cryptocurrency, let's also assume you store some of it on an exchange. Pick your favorite. We will pretend you picked Coinbase. They are as familiar to most cryptocurrency users as any other exchange.
As long as your assets stay with Coinbase, they are considered the custodian of said assets. You can choose to leave your assets alone or login to the Coinbase website where you can create individual keys for each different kind of asset you own. The moment you generate those keys and store them someplace else, you have custody of your own assets. You have custody even though your Coinbase wallets still show a positive balance.
The other side of that coin holds true as well. Until you generate those private keys, you do not have custody of your assets. You do not have ownership either. It is all a mirage. Coinbase maintains ownership because they are the ones who possess the private keys relating to your transactions.
The way the system is set up throws custody out the window. Custody does not really exist in the cryptocurrency world. It barely exists in the world of traditional securities either, so no big deal. The big take-away here is to remember that ownership exists only in the private keys associated with buying and selling coins.
What does it all mean?
At this point you might be terribly confused about digital coins, wallets, and custody. That is normal. Cryptocurrency is a completely unique enterprise unlike anything else in the technology arena. It is also something that is difficult to fully grasp unless you are one of the few coding experts who truly understands all the nuances of blockchain.
So what does it all mean? For starters, it would appear as though many of the terms applied to cryptocurrency have only been applied because no one has come up with anything better. Remember that Bitcoin was established more than a decade ago as an alternative monetary system. As such, traditional terms like 'coin' and 'wallet' were adopted. And why not? They were easy enough to understand for the average consumer.
It is all well and good that we use the term 'wallet' to describe the process of holding digital assets. It is all well and good that we refer to our assets as coins. But the danger in using these terms is that they give cryptocurrency users false impressions. They lead people to believe things about cryptocurrency that are not true.
Can anything be done?
Perhaps it is appropriate to close this post by asking if there is anything that can be done about confusing crypto terminology. The answer depends on your perspective. One option is to invent completely new terms, similar to what the vaping industry did five or six years ago. The downside of this strategy is that new terms do not necessarily make concepts more understandable.
Another option is to stop using the terms without actually explaining what they mean. Describing a means of cryptocurrency storage as a wallet is not a problem as long as users know how a digital wallet actually works.
Many of the terms we use in the cryptocurrency world do not make a whole lot of sense. Many of them are confusing because they attempt to equate traditional financial principles with cryptocurrency. Unfortunately, we use many of the for lack of anything better. That's just the way it is.