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Crypto Law/Level IV · Holders' traps/4.1 Custody/Lesson 5

Self-custody and its risks

Holding your own keys removes the risk of a platform’s failure, but it moves every other risk, from loss to theft to inheritance, onto you, with no court able to restore access.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Self-custody costs nothing beyond a device: FinCEN FIN-2019-G001 treats single-signature unhosted wallet value as the owner’s property and personal use is not money transmission; income tax and records duties still apply to every disposal.
  2. Free opsec: never photograph or type the recovery phrase, test recovery with a small amount, and keep holdings private, which reduces theft and coercion risk; privacy from the public never excuses omitting crypto from tax returns.
  3. Inheritance at low cost: leave a sealed letter naming wallet software and where the backup is (never the phrase in a will, which becomes public in probate); RUFADAA reaches custodial accounts only, not keys nobody knows.
  4. A professional estate planner is cheaper overall only for larger holdings or multisignature setups; Howells v Newport City Council (2025) shows courts cannot restore a lost key, so planning is the only remedy.

MaterialsFinCEN guidance FIN-2019-G001 (9 May 2019), section on unhosted walletsHowells v Newport City Council [2025] EWHC 22 (Ch), on the National Archives’ Find Case Law serviceYour own wallet’s recovery instructions and a written note of which wallet software and settings you use (never the recovery phrase itself)

Wonder

  1. If I hold my own keys, does the law treat the coins as mine?
  2. What can the law do if I lose my recovery phrase?
  3. How would my family find and reach my coins if something happened to me?

Explore

  1. Self-custody means you, not a company, hold the private key that controls your coins, usually through a software or hardware wallet. The key can typically be rebuilt from a recovery phrase (or ‘seed phrase’), a list of words generated when the wallet is set up. US regulators recognise this arrangement. FinCEN’s 2019 guidance, FIN-2019-G001, calls such wallets ‘unhosted’ and says that with a single-signature unhosted wallet the value ‘is the property of the owner’, who has ‘total independent control’. A person using one to buy goods or services for themselves is not a money transmitter.
  2. The legal advantage is the one lessons 4.1.2 to 4.1.4 show by its absence: there is no platform whose bankruptcy, fraud or terms of use can turn your coins into a claim against an estate. Ownership of crypto as property is recognised in many legal systems (lesson 1.2.1). But the protections that come with intermediaries go too. No help desk can reset a lost key, no chargeback reverses a mistaken transfer (lesson 1.1.6), and no deposit insurance applies. The law can say who owns the coins; it cannot make the network obey anyone without the key.
  3. An English case shows the gap. In Howells v Newport City Council, decided on 9 January 2025, James Howells said a hard drive holding the private key to 8,000 bitcoin, which he says he mined in 2009, was deposited in error at the council’s landfill site in August 2013. He asked for the drive, or for his experts to excavate, or else compensation. The council accepted that it did not own the bitcoin; its case was that it owned the hard drive, as waste delivered to it, and that he had no right to it. His Honour Judge Keyser KC gave summary judgment for the council and dismissed the claim.
  4. The main risks fall into a few groups. Loss: a forgotten phrase, a destroyed backup or a failed device. Theft: phishing, fake wallet apps and malicious signing requests (lessons 4.2.2 and 4.2.3), or someone finding your written phrase. Coercion: threats or violence against holders known to own crypto, sometimes called wrench attacks. Error: sending to a wrong address or an incompatible network. In each case the loss usually falls on you, and recovering stolen coins, if possible at all, means a police report and tracing, not a refund (lesson 4.2.7). Whether a loss is tax-deductible is a separate question (lesson 2.3.3).
  5. Inheritance is the quiet risk. If no one else knows a wallet exists or where its recovery phrase is kept, the coins can be lost for good when the holder dies or becomes incapacitated. Many US states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act, a model law that helps executors and other fiduciaries obtain access to accounts held with custodians such as online services. It cannot produce a key that only the deceased knew. Tax treatment of inherited crypto is covered in lesson 2.1.5; estate planning documents are for a qualified adviser to prepare.
  6. A practical check, as education and not a recommendation: confirm that your backup actually restores your wallet, ideally by testing recovery while the amount at stake is small, and that wallet software and firmware come from the maker’s official source. Write down, separately from the phrase, which wallet and settings you use, because the same phrase can produce different addresses in different software. Consider who could find your backup in a fire, a burglary or your absence. Finally, ask whether someone you trust would know that your coins exist and how to start the process of reaching them.

Key facts

  • FinCEN guidance FIN-2019-G001 of 9 May 2019 describes unhosted wallets as software on a person’s own device that lets them store and transact in crypto without a third party.
  • FinCEN states that a person using an unhosted wallet to buy goods or services on their own behalf is not a money transmitter.
  • In Howells v Newport City Council [2025] EWHC 22 (Ch), decided on 9 January 2025, the High Court dismissed a claim to access a landfill for a hard drive holding bitcoin keys.
  • In the Howells case the council accepted that it did not own the bitcoin but argued that it owned the discarded hard drive.
  • A wallet’s recovery phrase can usually regenerate its private keys, so anyone who obtains the phrase can control the coins.
  • The Revised Uniform Fiduciary Access to Digital Assets Act helps fiduciaries reach accounts held with custodians but cannot recover a private key no one else knows.

Exercise nine, six, three, one

9CollectList up to 9 ways the coins in a self-custody wallet you hold or know of could become unreachable, such as a lost phrase, a broken device, a theft, a mistaken transfer or a death without instructions.
6ClusterSort them into 6 categories: loss of the key, theft by deception, physical theft or coercion, user error, device or software failure, and inheritance or incapacity.
3DistillReduce the 6 categories to 3 groups: risks your current setup already addresses, risks it addresses only partly, and risks it does not address at all.
1CrystallizeWrite 1 sentence describing what would happen to your self-custodied coins, or a real example’s, if the only person who knows the recovery phrase were suddenly unavailable.

Fact check

Dates, figures and claims checked against the published sources listed below.

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