Bitcoin Policy Institute raises concerns over Kentucky bill's hardware wallet 'backdoor' requirements
Elements within the proposed state-level legislation undermine the fundamental principles and value proposition of Bitcoin as a digital asset capable of being maintained in self-custody, according to the advocacy organization.
The Bitcoin Policy Institute (BPI), an advocacy organization dedicated to Bitcoin (BTC), has issued a warning that Kentucky House Bill 380, proposed cryptocurrency regulation at the state level, contains language that would compel manufacturers of crypto hardware wallets to integrate a "backdoor" mechanism into their products.
According to BPI, the language mandating that crypto hardware wallet manufacturers offer recovery mechanisms for users' seed phrases was inserted into the legislation through a "last-minute" floor amendment. The modified Section 33 of the proposed legislation states:
"A hardware wallet provider shall provide a mechanism for, and assist any person who owns a hardware wallet that was provided by the provider with, resetting any password, PIN, seed phrase, or other similar information that is necessary to access the contents of the hardware wallet."
State Representatives Aaron Thompson and Tom Smith are listed as the sponsors behind the legislation.
Additionally, the proposed bill includes requirements for identity verification procedures for individuals seeking to reset a password, seed phrase, or PIN through a hardware wallet manufacturer.
"The mandate is technologically impossible for non-custodial wallets. Hardware wallets are specifically designed so that no one, including the manufacturer, can access or recover a user's seed phrase," BPI said in response.
According to BPI, the language within the bill poses a threat to the self-custody of private keys, a cornerstone principle of cryptocurrency technology, and further stated that such mandates force users toward centralized custodial services that remain vulnerable to security breaches and institutional failures.
SEC officials defend the right to self-custody
Paul Atkins, Chair of the US Securities and Exchange Commission (SEC), has expressed his support for providing market participants with self-custody alternatives, particularly in scenarios where intermediary services would create financial or operational burdens for end users.
In November 2025, SEC commissioner Hester Peirce, who also serves as head of the regulatory agency's Crypto Task Force, reinforced the importance of the right to self-custody and financial privacy, characterizing both concepts as fundamental to individual liberty.
During an appearance on the Rollup podcast in November 2025, Peirce posed the question to the hosts: "Why should I have to be forced to go through someone else to hold my assets?
"It baffles me that in this country, which is so premised on freedom, that would even be an issue — of course, people can hold their own assets," she said.