A last-minute amendment to a Kentucky bill regulating Bitcoin ATMs has placed hardware wallet providers like Ledger and Trezor in the legal crosshairs, triggering fierce opposition from the crypto industry. The bill (HB 380), originally designed to regulate virtual currency kiosks, was expanded to require any entity offering a hardware wallet to include a mechanism for resetting passwords, PINs, or recovery phrases.
Amendment Details: Mandating a 'Backdoor'
Under the amended text, providers must maintain a toll-free, live customer support line for Kentucky residents, offer a functional reset mechanism for wallet access credentials, and verify user identity using methods independent of the security credentials themselves. Non-compliance would be classified as an “unfair, false, misleading, or deceptive act” under Kentucky's consumer protection laws, empowering the attorney general to seek civil penalties.
The Bitcoin Policy Institute (BPI) warned this week that the requirement is “technologically impossible for non-custodial wallets.” In a post on X, BPI explained: “Hardware wallets are designed so that no one—including the manufacturer—can access or recover a user's seed phrase.”
Industry Opposition: Technically Unfeasible and Creates Single Point of Failure
Critics argue that requiring manufacturers to have the ability to reset or recover private keys essentially mandates a backdoor, creating a massive central point of failure that would make users more vulnerable to the very attacks and fraud the bill aims to prevent. Sponsors Representatives Tom Smith and Aaron Thompson have framed the measure as consumer protection, aiming to help residents who lose access to their digital wealth. However, the technical reality of blockchain security means resetting a seed phrase is not a feature manufacturers can simply enable; it would require a complete re-engineering of devices, stripping them of their non-custodial status.
Next Steps: Passed House, Heads to Senate
Despite the uproar, HB 380 has already passed the Kentucky House of Representatives. It now moves to the Senate, where industry leaders expect to lobby for the removal or complete revision of Section 33 before it reaches the governor's desk. If passed in its current form, Kentucky would become the first state to legally mandate recovery protocols for private keys, potentially forcing major hardware vendors to cease shipping products to the state to avoid legal liability. Meanwhile, 15 U.S. states are actively pursuing legislation for strategic bitcoin reserves, highlighting the complex landscape of crypto regulation.