Kentucky House Bill 380, a state-level cryptocurrency regulatory measure, contains provisions that would effectively require hardware wallet manufacturers to build backdoor access into their devices, according to the Bitcoin Policy Institute (BPI). The provisions were introduced through a last-minute floor amendment and are now part of the bill’s amended Section 33. The legislation is sponsored by state Representatives Aaron Thompson and Tom Smith.
The amended bill requires hardware wallet manufacturers to provide recovery options for users’ seed phrases. It also proposes identity verification checks for users who request a password, seed phrase, or PIN reset from a manufacturer. BPI has raised serious concerns about both requirements, arguing they conflict with the fundamental design of non-custodial wallet technology.
BPI stated that the mandate is technologically impossible for non-custodial wallets, explaining that hardware wallets are specifically engineered so that no party, including the manufacturer itself, can access or recover a user’s seed phrase. The organization emphasized that the ability to control one’s own private keys is a foundational feature of cryptocurrencies, not an optional add-on. Requiring manufacturers to circumvent this design would undermine the core security model these devices are built upon.
Beyond the technical objections, BPI warned that such requirements would push users away from self-custody solutions and toward centralized custodians. Centralized platforms carry their own risks, including vulnerability to hacks and the possibility of business failures that could leave users without access to their assets. The advocacy group framed the provisions as a threat to financial autonomy rather than a consumer protection measure.
The debate over self-custody has drawn attention from federal regulators as well. Securities and Exchange Commission Chair Paul Atkins has stated that he is in favor of market participants having self-custody options, particularly in situations where using an intermediary would impose a financial or operational burden on the user. His position aligns with broader industry arguments that individuals should retain direct control over their digital assets.
SEC Commissioner Hester Peirce, who also leads the regulator’s Crypto Task Force, reaffirmed the right to self-custody and financial privacy in November 2025, describing both as foundational to freedom. Speaking on the Rollup podcast, Peirce questioned why individuals should be compelled to rely on third parties to hold their own assets. She expressed that it was difficult to reconcile such a requirement with the principles of freedom on which the country is based.
BPI’s warning highlights a growing tension between state-level regulatory efforts and the technical realities of decentralized financial infrastructure. If enacted as written, the provisions in House Bill 380 could set a precedent that conflicts with both the design principles of cryptocurrency hardware and the positions taken by federal officials on self-custody rights. The outcome of the bill is being closely watched by the broader crypto community.
Originally reported by CoinTelegraph.
