Kentucky crypto bill sparks backlash over wallet backdoor

A proposed crypto bill in Kentucky has triggered strong criticism after introducing rules that could alter how hardware wallets function.

The legislation, known as House Bill 380, includes provisions that would require wallet manufacturers to enable recovery access for users.

Bitcoin Policy Institute warned that the measure effectively forces a “backdoor” into devices designed for secure self-custody.

The controversial clause was reportedly added through a last-minute amendment during the legislative process.

Under Section 33, providers must assist users in resetting passwords, PINs, and even seed phrases tied to their wallets.

This requirement directly challenges the design of non-custodial wallets, which are built so that only the user controls access.

The bill is sponsored by state Representatives Aaron Thompson and Tom Smith.

Lawmakers also propose identity verification checks for individuals requesting access recovery from wallet providers.

“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,”

The Bitcoin Policy Institute said.

Industry experts argue that forcing recovery mechanisms undermines the core principle of private key ownership.

Critics say such measures could push users towards centralised custodians, which carry risks of hacks and insolvency.

The debate highlights a broader tension between regulation and the foundational design of cryptocurrencies.

Supporters of self-custody stress that the ability to control one’s assets without intermediaries remains a key value proposition.

US Securities and Exchange Commission officials have also weighed in on the issue of user control.

SEC Chair Paul Atkins expressed support for allowing individuals to manage their own digital assets.

He noted that intermediaries can introduce additional costs and operational risks for users.

In 2025, SEC Commissioner Hester Peirce reinforced the importance of financial autonomy in crypto markets.

“Why should I have to be forced to go through someone else to hold my assets?”

Hester Peirce said.

“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.”

The proposed Kentucky legislation now faces growing scrutiny from both industry groups and policymakers.

Observers warn that the outcome could influence how other jurisdictions approach crypto regulation.

As discussions continue, the balance between consumer protection and decentralised control remains at the centre of the debate.

At the time of reporting, Bitcoin price was $70,234.22.