- Ledger introduced a new feature called "Recover," allowing the company to access the customers' seed phrases.
- Users fired back at Ledger for potentially lying about their claim of the "keys never leaving the device".
- Ledger CEO claimed over 100 million customers could want this feature in the future.
- The decline of faith in self-custody could bring back crypto holders to centralized exchanges.
Ever since FTX collapsed, cryptocurrency holders' faith in storing their assets in any other entities than themselves has depleted. The impact of this was initially suffered by crypto exchanges like Binance as investors moved to self-custody wallets like Ledger.
But as one of the biggest custodial service providers comes under flak for potentially providing other entities with customers' data, investors could come back to centralized exchanges.
Ledger faces scrutiny again
Earlier this week, Ledger released an update for its firmware which allowed users to enable a feature called Ledger Recover. The initial panic was brought on by the fact that the subscription feature basically provided Ledger access to its customers' seed phrases.
This was later also confirmed by Ledger co-founder Nicolas Bacca who stated,
"The device sends the encrypted shards of your seed to different companies if you decide to use the service. You can of course still choose to backup it yourself.”
This revelation enraged the entire crypto community, calling Ledger "liars" for basically misleading investors with their claim of "your keys never leaving their device". This included a response from the likes of Binance Chief Executive Officer Chengpang Zhao.
So the seed can leave the device now?— CZ Binance (@cz_binance) May 16, 2023
Sounds like a different direction than "your keys never leave the device". ♂️
This led to many users upright renouncing Ledger and its hardware wallet, while others are recommending killing the feature. Another user suggested enabling two different firmware, eliminating the option of key extraction in one.
Ledger Recover Proposal— Ryan Berckmans ryanb.eth (@ryanberckmans) May 16, 2023
1. In perpetuity, offer two parallel version tracks of the firmware, one with Recover and one without (key extraction not just disabled, but omitted). In Ledger Live, clearly show both firmware upgrade options. Default to NO Recover for existing devices.
In response to all the commotion, the CEO of Ledger, Pascal Gauthier, during an ask me anything on Twitter, stated,
"Ledger Recover is what our future 100m of customers want - they will onboard into crypto in a secure way with Ledger Recover.”
This potentially confirmed that the feature would most likely continue to exist for Ledger Nano X devices and could bear a negative impact on the hardware wallets' user base.
Centralized exchanges could reap the benefits
Earlier last year, in November, following the FTX collapse, many Centralised Exchanges (CEXs) like Binance, Coinbase, OKX, etc., faced concerns from investors regarding the security of their assets.
But in the last six months, many top crypto exchanges have proved their transparency using the Proof of Reserves system initiated by Binance.
As part of our Proof of Reserves (PoR) process, #Binance is working with a 3rd party auditor to provide proof of ownership.— Binance (@binance) November 28, 2022
You will likely see some large transfers between #Binance’s owned wallets throughout the day as a result of this.
Funds are SAFU.
Now when it comes to the security of assets, most of the CEXs have passed the test with flying colors. Whereas, in the past, Ledger users were victims of instances of data leaks, including the theft of about 270,000 physical addresses in 2020.
With the resurging fear in Ledger, crypto holders could come back to CEXs, given their track record of security.
Although Decentralised Exchanges (DEXs) like Uniswap, PancakeSwap, etc., are still preferred over CEXs by crypto traders owing to their decentralization. Since these exchanges do not offer custodial services, the only way to trade on them is by connecting the platform to a wallet.
Since many exchanges presently run their own wallets, Ledger's dominance in the custodial sector could decline if the Recover feature remains enabled.
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