nick on Nostr: Up front, custodial systems have regulatory risk. Mainly if you look like a bank, ...

Up front, custodial systems have regulatory risk. Mainly if you look like a bank, quack like a bank etc. you will be expected to get a banking license. Banking licenses came about because back in the day everyone made their own banks and it was very easy to take a whole lot of other people’s money.

While it was at the time illegal to take people’s money, the courts can only handle so many “they pretended they were trustworthy then took my money” lawsuits. This is where licensing and regulatory oversight come in— when an industry has the ability to harm others by nature of their business and bad actors continue to take advantage. Custodians are in a position of great power over their depositors.

Custodial ecash gives you the ability to easily be a custodian, and up to a point, (2-5 people?) You probably aren’t looking like a bank. Additionally, if you’re in a country where it is rare for people to use banks, you likely have more cover.

This is where fedimint wants to live. The multi sig federation stuff is uninteresting besides for the unbanked village use case.

Positioning these systems for any use cases beyond very close family / friends or the underbanked village use case is doomed. Here’s the scenario:

A wallet pitches itself as an ecash wallet and has a recommended ecash provider. That provider is a 3/5 federation of bound custodians or one benevolent custodian. By virtue of being the default that custodian grows in depositors and assets under management, despite warnings to know your custodian personally. It becomes too big to not fail (be regulated like a bank).

Wallet of Satoshi went exactly this route, despite recommendations to only use it for small amounts you don’t care to lose. Many small amounts, many depositors, quacking like a duck etc etc.

Said ecash wallet could lean on the thought that we do get the dream of everyone doing it right and there being 1000s upon 1000s of highly trusted and small ecash mints with users who are very careful in choosing their custodians. Unfortunately, this is limited by the number of people who care enough to set up an ecash mint.

A common argument against self-custody is its difficulty to set up. Ecash mints are in the same boat. The difference is, as UX improves for both, self custody will win over creating an ecash mint. Any honest ecash creation service must sufficiently disclaim the amount of trust and risk the custodian and depositors are taking on. Federated systems, doubly so. Self-custody conceptually is very easily explained, and the tools to do it are getting easier.

If creating custodial ecash services is as complicated or more complicated than self custody, only so many mints will exist, and it’s likely that usage will fall into the trap laid out above.

We’ve seen this already with the fediverse. A vast majority of mastodon and similar users are on one instance, being on your own instance is the exception that proves the rule.

In my culture and pov, I could see myself setting up an ecash mint for myself and my parents, maybe my sisters. Beyond that, it’s hard to imagine for me. Even families have issues, /especially/ when it comes to money.