Kentucky Crypto Bill Faces Backdoor Wallet Backlash

TLDR

• Kentucky lawmakers amended House Bill 380 to require hardware wallet recovery mechanisms.
• The bill directs manufacturers to assist users in resetting passwords, PINs, and seed phrases.
• The amendment also requires identity verification before providers process reset requests.
• The Bitcoin Policy Institute said the requirement is technologically impossible for non-custodial wallets.
• The group urged the Kentucky Senate to remove the provision before a final vote.

Kentucky lawmakers amended a crypto bill to require hardware wallet recovery mechanisms. The Bitcoin Policy Institute said the change would force manufacturers to create backdoors into devices. The group urged senators to remove the provision before a final vote.

Kentucky Bill Amendment Targets Hardware Wallet Recovery

State Representatives Aaron Thompson and Tom Smith introduced House Bill 380 in Kentucky. Lawmakers amended the bill shortly before review in the Senate. The amendment requires hardware wallet providers to assist users in resetting access credentials.

The bill states providers “shall provide a mechanism for and assist any person who owns a hardware wallet.” It covers resetting any “password, PIN, seed phrase, or other similar information.” The language applies to information necessary to access wallet contents.

The amendment also requires identity verification before manufacturers process reset requests. Therefore, users must prove ownership before receiving assistance. Lawmakers included this clause to set clear compliance standards for providers.

The Bitcoin Policy Institute opposed the amendment and issued a public statement. The group said the requirement is “technologically impossible for non-custodial wallets.” It added that no one “can access or recover a user’s seed phrase.”

The organization warned that the measure threatens self-custody rights in Kentucky. It stated that the rule could shift users toward centralized custody services. The group urged the Senate to “strip this provision before the bill reaches a vote.”

Self-custody Debate Expands Beyond Kentucky

Self-custody remains a central issue in United States crypto policy discussions. Supporters argue that users should control private keys without third-party control. They describe self-custody as a property right tied to digital assets.

Some regulators have expressed support for self-custody options. U.S. SEC Chair Paul Atkins said he is “in favor” of self-custody in certain cases. He referred to situations where intermediaries impose financial or operational burdens.

In California, Banking and Finance Committee Chair Avelino Valencia amended a separate crypto bill. He added provisions that protect a user’s right to self-custody digital assets. Lawmakers there framed the changes as consumer protection measures.

However, the SEC issued a warning to retail investors last year about custody risks. The agency urged users to weigh trade-offs between managing wallets and using custodians. It stated that losing a private key results in permanent asset loss.

The SEC also outlined risks tied to custodial services. It warned that hacks, misuse, or insolvency could block access to funds. The agency released the statement as part of broader retail investor guidance.

Kentucky lawmakers have not yet scheduled a final Senate vote on House Bill 380. The Bitcoin Policy Institute continues to advocate for the removal of the recovery requirement. The bill remains under legislative consideration as drafted.

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