Counterparty risk

Whenever someone else holds your money, you’re trusting them to give it back. Counterparty risk is the chance they won’t: because they’re bankrupt, frozen by a court or a regulator, hacked, or because the money was never there.

With bitcoin and digital dollars it turns up in three places:

• Exchanges and apps that hold your coins. Your balance is a promise on their books. When one fails, its customers become creditors and wait. Customers of Mt. Gox, which collapsed in 2014, began to be repaid in 2024.
• Platforms that pay interest. The interest comes from lending your coins to someone else, which adds the borrower as a second counterparty, one you never chose.
• Stablecoin issuers. A dollar token is worth a dollar as long as its issuer holds the reserves and pays out when asked.

Self-custody removes the first two for bitcoin: no one holds it but you, and no one lends it. It doesn’t remove the third for a stablecoin: whoever holds the keys, the issuer still stands behind each token.