21 December 2022

Why Do Users Still Trust Custodial Exchanges Despite Risks?

Despite the recent collapses of crypto lenders, many users still prefer to keep their bitcoin in custodial exchanges. Our Senior Product Manager, Marija, explains the psychological reasons behind this decision and its potential impact on the crypto industry.

Why Do Users Still Trust Custodial Exchanges Despite Risks?

    Confidence in the crypto sector has been shaken yet again. Following the high-profile collapses of huge crypto lenders – Celsius, Voyager, and most recently, FTC – and the resulting fallout, it seems surprising that a considerable amount of users are still keeping the majority of their bitcoin in custodial exchanges. Even more surprising is that these users know the risks – each regulated crypto company must clearly outline not only the investment risks, but also custodial arrangements – but prefer convenience.

    A few days after FTX imploded, we sent out a survey to our beta users to better understand their concerns. The results were eye-opening. 25.2% of respondents prefer to keep their bitcoin in a custodial wallet, with an additional 8.1% opting for a custodial Lightning-enabled wallet. In parallel, an overwhelming 54.1% report fears of government regulation as their primary concern regarding crypto services. At 55.6%, it’s an even more pronounced fear among custodial wallet holders.

    This poses an interesting conundrum. Instinctively, users wary of regulation could be expected to avoid custodial wallets, most of which are obligated by law to conduct Know Your Customer (KYC) checks and collect personal information. So why would they willingly keep their bitcoin with custodians requiring identity verification?

    The answer – as with most things – is human nature. In a recent article, the Head of Research at Genesis Trading – another lender purported to be affected by the FTX meltdown – posits her belief that while it may sound appealing to “eschew centralized platforms forever,” humans tend to “choose convenience over safety, convinced that [they] will be better at spotting danger signs next time.”

    Convenience is a powerful motivator for users, and it trumps security every time. Nearly 36.3% of the global population uses Facebook despite its multiple data breaches and scandals. We continue to trust Google despite its numerous antitrust fines. And it explains why many use custodial services despite the great intermediary risk.

    In our view, the focus must be on the end user. Our industry must be conscientious in facilitating seamless user experiences with tangible benefits — without sacrificing security. The next billion users do not care about the underlying technology — they care about convenience, ease of use, and simplicity. After all, what’s the incentive to learn complicated new terminology and processes if it doesn’t simplify their day-to-day transactions? However, if we’re able to guarantee a faster, cheaper, more secure financial infrastructure without sacrificing convenience, we’ll reach mass adoption.

    Author: Marija Riba - Senior Product Manager @NOAH

    Please be aware that: Cryptocurrencies are unregulated in the UK; Cryptocurrencies are not protected under Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS); Profits may be subject to capital gains tax; The value of investments can go down as well as up.

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