Arguably the most significant benefit to using crypto for personal finances is self-custody: direct and exclusive control over your assets. Early crypto consumer apps were often unmistakably, even painfully self-custodial - the very first step in the process was to generate a private key (or a long seed phrase tied to a private key), and if you lost the device and your key, your wallet became forever irrecoverable.

Over the last couple years, several new ideas have been widely adopted to make managing a crypto wallet more convenient. Through clever cryptography, it became possible to setup wallet recovery via email or social logins like "Sign in with Google". Others improvements under the umbrella of Account Abstraction solved problems like needing to first fund a wallet with ETH before being able to use it for anything, by allowing an app to sponsor gas on a user's behalf.

Along the way though, these conveniences made it significantly less obvious which wallets and crypto apps are actually self-custodial, and which were only claiming to be. And for most people, the distinction often doesn't matter right until it really does, at which point it's too late to realize you didn't actually have custody of your assets.

A self-custody litmus test

To help quickly determine whether your wallet isn't self-custodial, you can use the following checklist. Note that the items on this checklist are necessary but not sufficient; that's to say, an app that fails any of these is definitely not self-custodial, but an app that passes all of them isn't necessarily fully self-custodial.

I can export a private key or seed phrase.

If the app doesn't provide a way to do this, then it definitely isn't self-custodial. As the old saying goes, not your key, not your coins.

I can take that private key or seed phrase and import it into another wallet.

You should be able to import your private key into a 3rd party wallet, like MetaMask or Phantom. If the private key or seed phrase you exported can't be imported into another wallet, then it may be a dud.

The address of the key I imported has tokens and transaction history that match what I expect.

An increasing number of crypto apps use Account Abstraction to provide a whole slew of nifty and convenient features like gas sponsorship. Not all Account Abstraction the same, though; one older, but still common approach is to proxy all activity through a smart contract separate from your wallet, which the app is able to control.

In these cases, while your private key might still be responsible for authorizing transactions in the app, all of your assets and history will be under the proxy smart contract. Without intimate knowledge of the app's configuration and how to program, your assets and history will be stuck in the smart contract instead of in your wallet.

You can check whether this is the case by seeing if your exported key's wallet address has tokens in it, and if the transaction history generally matches what you would expect. This approach, which might technically be self-custodial on paper, but is arguably far from it in practical terms, is typically the most difficult to spot.

Why would an app falsely claim self-custody?

Self-custody might seem like an odd feature to falsely advertise, given that many users may not particularly care about it, and those that do often know how to check if it's true (or at least, obviously false). Which begs the question, why does it sometimes feel like every single crypto app includes "self-custodial wallet" in the first 10 words of their pitch?

By putting custody fully in the hands of their users, crypto apps are often able to circumvent the need for expensive licenses, pass on many liabilities they'd otherwise have to shoulder, exempt themselves from certain app store rules, and more. This is often quite reasonable given the increased security and additional guarantees that true self-custody offers - the problem is when an app tries to have its cake and eat it too, by retaining more access and control than it should, and still claiming to be self-custodial.

What to do if I find my app isn't self-custodial?

Realistically, not every app you use truly needs to be self-custodial; that said, if an app claims to be self-custodial and you find that it isn't, that should be an immediate red flag, and your signal to start seriously consider withdrawing any assets you might have on it and finding an alternative.