A Kentucky crypto bill is facing criticism after an amendment added language that, according to the Bitcoin Policy Institute, would effectively require hardware wallet makers to build a backdoor into their products. Kentucky House Bill 380 now includes a provision requiring manufacturers to offer recovery options for seed phrases and other credentials tied to wallet access.
The bill was introduced by state Representatives Aaron Thompson and Tom Smith. Under the official text, providers “shall provide a mechanism for and assist any person who owns a hardware wallet” in resetting any “password, PIN, seed phrase, or other similar information that is necessary to access the contents of the hardware wallet.” Users requesting resets from manufacturers would also be subject to identity verification requirements.
Seed phrase recovery requirement sparks technical objections
The Bitcoin Policy Institute argues that the mandate is not workable for non-custodial wallets. Its point is straightforward. Manufacturers of non-custodial hardware wallets generally cannot access or recover a user’s seed phrase, because control over the private keys is designed to remain with the user rather than the provider.
From BPI’s perspective, forcing companies to comply with this kind of recovery obligation would require an alternate access path to be built into the product. That would cut against the core security model of self-custody. The group said the change threatens users’ ability to securely hold their own keys and could push some people toward centralized custodians that do not offer the same degree of control.
BPI urged the Kentucky Senate to remove the provision before the bill goes to a vote. The organization said lawmakers should protect residents’ right to secure their own property instead of rewriting how hardware wallet security works.
Self-custody remains a live regulatory issue
The debate reaches beyond Kentucky. Crypto advocates have long argued that self-custody is a basic right, allowing users to control their own private keys and on-chain assets. Regulators have not taken a single view on the issue.
SEC Chair Paul Atkins has said he is “in favor” of self-custody options in cases where intermediaries create financial or operational burdens for users. In California, Banking and Finance Committee chair Avelino Valencia amended a bill to add provisions protecting a user’s self-custody rights.
At the same time, the SEC warned retail investors last year about the risks tied to crypto custody. The agency said users should weigh the trade-offs between managing their own wallets and relying on third-party custodians. It noted that losing a private key can permanently cut off access to crypto assets, while custodial services carry separate risks such as hacks, misuse, or insolvency that may also leave users unable to access funds.