Ledger’s Crypto Wallet Innovation Is Blasphemy to the Faithful

In this edition of the Bloomberg Crypto newsletter, Hannah Miller explores a crypto contradiction locked in hardware: 

Wallet woes

Crypto (still) has a user experience problem, as the uproar over a new tool unveiled by a provider of hardware wallets makes clear.

Ledger, a Paris-based crypto startup recently valued at more than €1.3 billion ($1.4 billion), attracted ire over a feature that would make it possible for anyone who forgot or lost the equivalent of their wallet password to recover it. That’s important, because without that recovery phrase, Ledger holders are locked out of all their crypto holdings. 

The proposed feature, dubbed “Ledger Recover,” would allow users to split their secret password into three pieces, or “shards.” Each of those pieces, according to a Ledger blog post from May 18, would be encrypted and held by “a separate and independent company in different countries: Coincover, Ledger and Escrowtech.”

Cue: outrage. The service, which Ledger took pains to stress would be opt-in only, nonetheless drew criticism from people who are fond of the mantra “not your keys, not your crypto.” That creed, and the realization that when centralized exchanges like FTX go under they can take your crypto with them, helped propel sales of cold wallets including Ledger’s own. 

The backlash against Ledger evokes the constant tension between centralization and decentralization within the industry. It’s also a reminder of the trade-offs between maintaining security and privacy and achieving a user experience that’s friendly and accessible to people who aren’t security professionals.

The fact remains that digital currencies are hard to access, store and protect, especially for new kids on the blockchain. Ledger said the recovery option, available for a monthly fee, would make things easier for non-crypto-native users — a customer base that the industry will have to tap into more if it wants to get past the current market doldrums and fulfill its ambition of changing the global financial system. A subscription service also offers Ledger a recurring source of revenue, a key area of diversification.

A shift toward a software-as-a-service model that has a potential bonus of drawing in new customers would likely fly well in traditional tech — but crypto is no ordinary industry. The backlash over the new offering, which saw the company’s CEO on the verge of tears as customers destroyed their Ledger wallets, has culminated in Ledger saying they will postpone the release of the new feature

“The main pain point for crypto self-custody adoption is precisely the problem of seed phrase recovery,” Ledger’s CEO Pascal Gauthier wrote in an open letter announcing the delay. “The majority of users in crypto today either don’t own their private keys and/or are putting their private keys at risk using less secure forms of self-custody, and hard-to-use forms of storing and securing their seed phrase.”

This technical and philosophical spectacle has only added to the fear and distrust hanging over the market, rather than making crypto seem safe and welcoming to the new users the industry is desperately seeking to attract. Instead, crypto looks more complicated than ever.

Counting it out

Hearing them out

What we’re reading (and writing)

• Memecoin Mania and NFTs Bring a ‘Seismic Shift’ for Bitcoin
• Emails, Chat Logs, Code and a Notebook: The Mountain of FTX Evidence (New York Times)
• Crypto Trading Takes a ‘Few Steps Back’ After Jane Street, Jump Retreat
• Binance Commingled Customer Funds and Company Revenue, Former Insiders Say (Reuters)
• Crypto Startup Says It Found a Path to Register With SEC Under a Broker Rule
• The AI Gold Rush Will Take Humanity to Some Dark Places: Lionel Laurent (Bloomberg Opinion)

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— With assistance by Emily Nicolle