Industry backlash grows over Kentucky bill mandating ‘seed phrase recovery’

Backlash is spreading across the crypto industry as the U.S. state of Kentucky advances legislation that would require hardware wallet providers to offer “password and seed phrase recovery” features. Experts say the provision stems from a fundamental misunderstanding of how the technology works.

According to Decrypt on the 19th (local time), an amendment included in Kentucky House Bill HB 380 would mandate that hardware wallet providers offer a way to reset users’ access credentials, such as passwords, PINs, and seed phrases.

The problem is that such a requirement directly conflicts with the architecture of non-custodial wallets. Hardware wallets are devices that store private keys offline and are designed so that only the user can access them—crucially, even the manufacturer cannot recover them.

The Bitcoin Policy Institute (BPI) criticized the clause, saying “it is technically impossible to implement” and “effectively demands a backdoor, which could undermine Bitcoin’s security model.”

Joe Ciccolo, founder and CEO of BitAML, said, “This is a problem arising from policymakers not fully understanding the concept of self-custody,” adding, “Unlike traditional finance, there is no central institution that resets access credentials.”

The industry warns that if the provision is enacted, related companies are likely to pull out of the Kentucky market. Ciccolo said, “Wallet providers will choose to exit the market rather than compromise their security model,” noting that it could “ultimately reduce consumer choice and weaken privacy.”

Some also worry the bill could have an effect similar to an effective “ban on self-custody.” A BPI official said, “If this goes through, self-custody will become effectively impossible in Kentucky.”

Still, the bill’s core thrust is regulation of crypto ATMs (kiosks). The legislation, which includes licensing requirements, transaction limits, disclosure rules, and refund provisions, passed the House with bipartisan support and is now headed for Senate review.

The industry says alternatives are needed that reduce risk while preserving decentralization, such as multisignature and social recovery models. Experts stressed that “improving technical understanding in the policy design process is paramount,” warning that “misguided regulation can instead weaken user protection.”