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Lake in the forest

Connections

Insights, perspectives and viewpoints from our lawyers on topical issues

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10/14/2022 11:20:53 AM | 1 minute read

How do you put a fence around a quicksilver asset such as Bitcoin?

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Norton Rose Fulbright
Norton Rose Fulbright
4
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This is the question asked in this article that is worth a closer look.  Public key infrastructure is a critical part of maintaining the security of crypto assets.  

A recent case in the US highlights that expert knowledge on the mechanisms used to store and secure private keys for crypto assets is essential.  In this case the hardware device that held the private keys was locked up by US federal investigators, having been seized as evidence as part of a crackdown on a crypto money laundering scam. 

A layman might well consider the hardware wallet to be secure in lock-up, given it was what's known in the trade as being a 'cold wallet', and not connected to the internet.  However, certain features of the wallet allowed the perpetrator - who was out on bail - to generate what's called a seed phrase (or a mnemonic phrase) that allowed him to recreate the private keys to the crypto wallets and drain 713 digital tokens (worth almost $5million in fiat) despite the hardware wallet being in lock-up. 

A seed phrase is effectively a hashed version of the private key.  It comprises random words of usually between 12 to 24 simple words.  These seed phrases are as valuable as the private keys themselves as it enables the person with the information to recreate the private keys to transact with the crypto wallet.

The case in this article is interesting because it shows the complexity in dealing with security of crypto assets. Expert help to understand security features and implement effective security processes, wherever these assets are in custody, is essential.  

Hardware crypto wallets hold the cryptographic private keys—long strings of numbers and letters—that allow someone to go online and use a Bitcoin address for transactions. [Some] hardware wallets can generate a “seed phrase,” a combination of as many as 24 words that can re-create those private keys on another device. In essence, anyone who knows the magic words and an additional PIN can take control of the Bitcoin. Unplugging the wallet device and physically locking it away is no protection.
www.bloomberg.com/...

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Norton Rose Fulbright
Norton Rose Fulbright
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