I'm sorry to continue thrashing away at this topic, but it really does have me confused and trying to make these somewhat foolish arguments of mine helps me clarify things a little. If you find talking about ecash offense, don't bother reading any further.
Why custody isn't right for ecash
In my endeavor to assuage my own ignorance of ecash and how it works, I have somewhat incautiously been arguing that ecash tokens should be treated like altcoins that you purchase from the mint with bitcoin rather than IOUs for bitcoin that you deposited at the mint.
Most people in the Bitcoin world understand custody to mean that someone else holds the keys to your bitcoin and all you have is an account balance. This is how exchanges work and also how custodial wallets like Wallet of Satoshi work. Custodial means you can't do anything with your money without someone else's permission.
Even if we understand ecash mints as custodying a user's bitcoin, they are fundamentally different from this common conception of custody because users do not have accounts with the mint and users are able to trade their ecash tokens with anyone they wish without the mint's knowledge or permission.
While calling a user's relationship with a mint custodial helps to make it clear that they are no longer holding bitcoin and are exposed to the risk of getting rugged, it hides these beneficial aspects of ecash and leaves all of us arguing about the wrong things.
It's only custody if you say it is
It is clear from both Cashu and Fedimint's documentation that the maintainers of the protocol understand the relationship between the mint and its users to be custodial, much like a bank.
The mint is running the Lightning infrastructure and custodies the satoshis for the mint's ecash users. Users have to trust the mint to redeem their ecash once they want to swap out to Lightning. -Cashu FAQ
Users can submit a request to deposit bitcoin, "pegging in", in exchange for fm-BTC eCash notes or use the fm-BTC eCash notes in their wallet in order to redeem on-chain bitcoin (note: users could also transfer out to themselves via the LN Gateway). -Fedimint FAQ
What makes a mint custodial is not that you give them your sats. You can give your sats to someone as a gift or to buy something from them without turning them into a custodian. What makes a mint custodial is that the mint says it's taking custody of your sats and promising to give them back when you present your ecash tokens.
The model is similar to a free banking system where independent banks accept deposits and issue their depositors with banknotes which can be traded at will in the open market.
The analogy that mints are like banks is good and helps us think about what a mint is doing. But there are other models for what is going on here. We should remember that banks do more than hold your money; they also issue loans. So allow me to propose yet another way to understand a user's relationship with a mint: the Fed's Repo Window.
What is a repo?
Short for repurchase agreement, you may have encountered this term when reading about the Fed's Reverse Repo Window over the last few years. A reverse repo is where a bank loans cash to the Fed overnight and in return takes collateral from the Fed (usually a Treasury) and earns a bit of interest. What actually happens is that the bank buys a treasury from the Fed with an agreement to resell it to the Fed in the morning for a slightly higher price. The difference in prices is the interest earned by the bank for giving its cash to the Fed. In this case, the bank owns what is called a reverse repo. The Fed owns what is called a repo.
A repurchase agreement (repo) is a short-term agreement to sell securities and repurchase them later at a slightly higher price. -Investopedia
In addition to running a reverse repo window, the Fed also runs a repo window where they loan banks money in exchange for collateral. Banks use this facility to cover shortfalls in cash.
What the heck does a repo have to do with ecash?
What if instead of saying that you deposit your sats at a mint to get ecash tokens, we say that you give the mint your sats as collateral for a loan of ecash tokens. And the form this loan takes is that you sell your sats to the mint with an agreement to buy them back later for a slightly higher price.
EXAMPLE: Let's say you want 1000 ecash tokens, so you go to Nutstash and sell them 1000 sats for 1000 ecash tokens with the agreement that you are going to buy the sats back for 1001 ecash tokens. Obviously, you don't have 1001 ecash tokens, so you won't be able to buy back all your sats. And perhaps in the meantime, you trade some ecash tokens to me for a fabulous bitcoin-themed greeting card. I can take those repos (ecash tokens) you paid me to the mint and buy back the bitcoin they are worth (which is slightly less than a 1-1 rate) and as far as the financial world goes, this is a normal kind of transaction that happens every day.
The ecash tokens (repos) are worth slightly less than the sats I put into the mint, and this is good because it acknowledges that a mint might need to earn income and can include the price of lightning fees (in the case of Cashu) or onchain fees (if you don't use a LN gateway at a Fedimint). People are going to need to get used to the idea that you lose a few sats turning your ecash tokens back into sats.
Another advantage of this construction is that it makes it clear that you are giving up your bitcoin, but it also doesn't involve custody. You are selling your bitcoin to the mint in exchange for ecash tokens and the mint is agreeing to sell the sats back to you for ecash in the future.
In case the example didn't make it clear, what happens in my mint-as-repo-window example is this:
- You sell an asset (your sats) to the mint with the agreement that you will buy it back at a future date.
- The mint gives you ecash for your asset and when you buy it back you must do so with ecash from the mint.
In this case, you are actually getting a loan of ecash from the mint and giving them your bitcoin as collateral.
Now, why in the world would any sane person risk their sats in order to get a loan of crappy ecash tokens? The only answer I can see at the moment is that the ecash tokens are capable of something that your sats are not. One example of these capabilities is using an ecash mint to back your LN address do you don't have to run an always-on LN node.
Is this just a pipe dream?
The developers of these protocols certainly know much more than I do, but I suspect that the decision to describe the relationship between a mint and its users as custodial originated in a desire to make sure users understand that ecash tokens are not bitcoin. The most natural way to do this might have been to say that ecash tokens are altcoins, but this is a non-starter for most bitcoiners (nyet shitcoins!). So, perhaps, seeking the next best thing, they settled on calling it custody.
Clearly, being a custodian makes you vulnerable to overzealous regulators. At least in the US, and possibly in the EU, the main defense any Cashu mint has is to remain small. If they grow to any meaningful size, it's not hard to imagine regulators calling them a money transmitter and coming after the mint's operators. A Fedimint may survive somewhat longer by claiming decentralization, but it is untested how well defense this will work.
Repos are well-understood financial instruments. People know how to trade them and the laws around them are clear. The same may be said for custody and custodial relationships, but it seems to be the case that being a custodian carries rather heavier regulatory burdens than being a party to a repurchase agreement. Perhaps understanding a mint as a repo window could put the mint on sturdier legal ground. As a counterpoint to myself here, I should note that bitcoin-backed loan companies are almost as scarce as non-kyc custodians in the US; so it's possible that I've been on a wild goose chase.
I am not a lawyer nor an accountant. I doubt there is any realistic world where calling ecash tokens repo agreements actually helps the protocols avoid being stifled by regulatory uncertainty. But I do think it may be time for bitcoiners to seek new modes for understanding ecash protocols even if they seem distasteful.