This is your reminder that fractional reserve banking begins with "custodial wallets"

When you use a "custodial wallet," you never have a guarantee that the coins shown in your account are backed 1:1 with reserves. This obviously might not be the case. The custodian might choose to fractionally reserve.

When custodial banks fractionally reserve, they create money and cause inflation. It's true that no base currency (M0) is created. But the M1 money supply is inflated when custodians fractionally reserve, with the exact same effect on the money's worth in the market as if extra coins had been minted.

To see this in action, imagine Alice deposits 100 BTC in her custodial wallet with XYZ. XYZ only holds 10% of the deposits, and lends out the other 90% to borrowers. This is how every bank works.

Bob needs 90 BTC so he asks XYZ for a loan and Bob ends up with 90 of Alice's original BTC. So now the accounts show this:

• Alice: 100 BTC
  
• Bob: 90 BTC
  

90 BTC of M1 inflation was created.

Bob doesn't need to use his 90 BTC yet so he holds them in his custodial account at XYZ. XYZ retains 9 of them and makes the other 81 available for lending.

Charlie needs 81 BTC so he borrows them from XYZ. Now the accounts show:

• Alice: 100 BTC
  
• Bob: 90 BTC
  
• Charlie: 81 BTC
  

If you allow this to play out, then Dave ends up with 72 BTC, Ernest gets 64 BTC, and so on and so on.

The net result is that if reserves are 10%, then the money supply grows by 10X.

(If all of this is confusing, here is an excellent tutorial that explains it much better than I can.)

TL;DR: by forcing BTC users into poorly regulated and almost surely fractional banking solutions, BTC users will experience the very sort of inflation that they think BTC is supposed to protect them from.