7 reasons why internal key recovery and backup is riskier than you think

“It won’t happen to us.” 

Probably the four most dangerous words in crypto asset management. Too many institutions believe that their existing key backup solutions are good enough. Some believe they’ll never face a serious security incident, while others put their faith in DIY backup procedures that remain largely untested and undocumented. The illusion of security grows stronger with every uneventful day.

Until it happens.

A founder dies unexpectedly, taking wallet access with them. North Korean hackers use sophisticated social engineering to trick an employee into handing over private keys. A disagreement in the company causes the CTO to leave without completing proper recovery documentation. Whatever the trigger, “good enough” suddenly won’t be good enough anymore.

Crypto's code is law reality presents unprecedented custody challenges for any institution. Unlike traditional banking where passwords can be reset and transactions reversed, blockchain operations are immutable and self-sovereign. There's no central authority to contact when keys are lost. The safety nets that traditional finance relies on simply don't exist.

In this article, we will talk about the risks of internal key management, the differences between DIY and professional key recovery, and how you can evaluate a key recovery partner.

The 7 risks of internal key management

DIY key recovery solutions introduce several security vulnerabilities that many institutions overlook.

1. Human error

Even the most skilled professional can make a mistake. Research shows that human error accounts for 82% of data breaches in financial services. When it comes to crypto key management, a single mistake in backup procedures, key storage, or recovery protocols can lead to permanent loss. These errors typically occur during:

• Key generation ceremonies
• Backup creation and storage
• Emergency recovery procedures
• Regular testing protocols

2. Personnel loss

Institutional knowledge walks out the door when important employees leave. If your key recovery process relies on specific people with undocumented knowledge, you're exposed to significant risk when they go. This isn't theoretical. We've seen cases where:

• The only employee with recovery knowledge left abruptly
• Critical recovery steps were known only to an employee who wasn’t available during an emergency

3. Asset theft risk

DIY approaches often inadvertently create additional vectors for asset theft. When raw text private keys or backup files are handled internally without proper security protocols, they can be exposed during the backup process itself.

The irony is painful: the very process designed to protect crypto assets can create new vulnerabilities when not implemented with rigorous security practices.

4. Lack of documentation and testing

Many institutional recovery plans exist only in theory. They're rarely fully documented, regularly updated, or properly tested. When was the last time your company conducted a full recovery simulation? It’s an uncomfortable question, but if the answer is "never" or "not recently," you're operating on faith rather than evidence that your system works. 

In a crisis, companies often discover that steps are missing, assumptions are invalid, or dependencies aren't available. What seemed comprehensive in theory turned out flawed in practice. Recovery is a practical skill that deteriorates without regular exercise. Like any emergency procedure, it must be practised under realistic conditions, so it’s reliable when needed most.

5. Infrastructure failures

Technology fails. Sometimes catastrophically. When primary systems go down, recovery should depend on infrastructure that's:

• Geographically isolated from primary systems
• On different power grids and network providers
• Regularly maintained and tested
• Accessible during emergencies

Few DIY solutions properly account for true disaster scenarios when primary data centres or cloud providers experience complete failure. Many organisations assume their cloud-based redundancy is sufficient, overlooking that cloud regions often share critical dependencies. Consider how a major AWS outage in December 2021 took down multiple supposedly redundant systems because companies hadn't anticipated such failure could happen.

6. Internal threats

While hackers make headlines, employees often pose equal or greater risks. Disgruntled executives, insider fraud, or simple negligence represent significant vulnerabilities in DIY key management systems.

Without proper segregation of duties and multi-party authorisation for recovery operations, internal threats can compromise even well-designed recovery systems. True protection requires independent oversight from stakeholders with different incentives and responsibilities.

7. Regulatory non-compliance

As regulatory frameworks mature globally, institutions face increasing requirements for digital asset custody. DIY approaches often fail to meet evolving standards like:

• MiCA and DORA in Europe
• ADGM in the UAE
• BitLicense in New York

Non-compliance puts an institution at risk of penalties, but can equally threaten operating licenses and business relationships.

How to evaluate a key recovery partner

Despite these sobering risks and cautionary tales, there's reason for optimism. Professional recovery solutions can address these security vulnerabilities and provide institutional-grade protection without requiring significant internal investment or specialised expertise.

Even so, not all recovery solutions are created equal. How do you distinguish between marketing promises and truly robust protection? When evaluating potential recovery partners, look beyond the sales pitch and use the following checklist to assess their capabilities.

1. Recovery speed and guarantees

• What is their guaranteed recovery time?
• Can they demonstrate their historical recovery performance?
• Do they offer SLAs with penalties for non-performance?

2. Security architecture

• How are key shards stored and protected?
• Is key material ever exposed on internet-connected systems?
• What encryption standards are used for key material?

3. Human expertise

• Is recovery fully automated or supported by experts?
• What credentials do their recovery specialists have?
• Is human support available 24/7/365?

4. Regulatory compliance

• Which jurisdictional standards does their solution meet?
• Can they provide compliance attestations?
• How do they adapt to evolving regulatory requirements?

5. Integration and implementation

• How seamlessly does it integrate with your existing systems?
• What changes to your workflow are required?
• What is the implementation timeline and resource requirement?

6. Recovery infrastructure options

• Do they offer both hot and cold storage recovery solutions?
• For hot recovery, what security measures protect online key material?
• For cold storage recovery, what physical security standards are implemented? 

Case studies of DIY key recovery failures  

QuadrigaCX’s single point of knowledge

In 2019, Canadian cryptocurrency exchange QuadrigaCX collapsed after its CEO Gerald Cotten died unexpectedly in India. Cotten was allegedly the only person with knowledge of the private keys to the exchange's cold wallets that contained approximately $190 million in customer assets. 

An investigation by the Ontario Securities Commission later revealed that QuadrigaCX was operating as a Ponzi scheme, with Cotten creating fake accounts and using customer funds to cover losses and fund his lifestyle. The lack of proper backup protocols, key recovery systems, and regulatory oversight led to the complete loss of customer funds.

Coincheck’s regulatory failure

The Japanese exchange Coincheck lost $523 million in NEM coins in a 2018 hack that exposed critical security failures. The exchange had been using inadequately secured wallets without proper protection measures that lacked multi-signature authentication to store their assets.

Following the incident, Japanese regulators conducted an inspection that revealed numerous compliance gaps, forcing the company to suspend operations temporarily. Monex Group later acquired the exchange, but not before its customers suffered massive losses due to inadequate security practices and non-compliance with emerging industry standards.

DMM Bitcoin’s private key catastrophe

In May 2024, the Japanese exchange DMM Bitcoin suffered one of the largest hacks of the year when attackers stole 4,502 Bitcoin worth $305 million. The breach was attributed to private key compromise, though the exchange never fully disclosed the exact vulnerability. Despite implementing cold storage solutions, the centralised management of private keys created a single point of failure.

Following the hack, Japan's Financial Services Agency issued a business improvement order criticizing the exchange's centralised control over system operations. Unable to recover from the breach, DMM Bitcoin announced its closure in December 2024.

Why CoinCover is the standard for institutional key recovery

Now that we’ve examined the vulnerabilities of DIY recovery approaches, we hope it’s become clear why institutions are increasingly turning to professional solutions. CoinCover stands out in this specialised field for several reasons.

Proven track record

CoinCover brings unparalleled experience, operating since 2019 with an unmatched history of protecting institutional digital assets. This longevity has earned the trust of more than 500 crypto and traditional financial institutions worldwide, including government agencies and top-tier institutions like Ledger, Bitso, and MoonPay, which demand the highest levels of security and compliance. 

Seamless integration

Implementing CoinCover happens instantly through several infrastructure providers like Fireblocks, Bitgo, Cobber, Cobo, Fordefi, and others. This, to eliminate complex deployment processes. CoinCover integrates with your existing architecture without requiring workflow changes or migration of assets. There's essentially no operational disruption. All tokens supported in your current infrastructure are automatically protected, regardless of blockchain type.

Unmatched security

CoinCover's crypto-native security design addresses the unique challenges of digital asset protection. Access is secured through both biometric verification and formal identification processes, eliminating the risk of unauthorised recovery attempts. All key material is AES-256 encrypted and sharded across secure locations, ensuring that no complete key ever exists until the moment of recovery, and then only under direct client control.

Human-led expertise

Technology alone isn't enough. CoinCover provides 24/7 recovery specialists who understand both the technical and operational aspects of institutional key management. Monthly test recoveries ensure system readiness and staff preparedness, while comprehensive audit logs document every action for compliance purposes and post-incident analysis.

Global compliance

CoinCover’s solution is designed to meet evolving regulatory frameworks across jurisdictions, including MiCA and DORA in Europe, ADGM in the UAE, BitLicense in New York, and many more. The compliance team continuously adapts procedures to address new regulatory requirements as they emerge. Key storage follows jurisdictionally appropriate patterns, ensuring that your recovery solution never creates a compliance risk.

From risk to resilience

The crypto industry has evolved beyond its early days of simply accepting security risks. Today's institutional participants require the same operational resilience and business continuity standards that exist in traditional finance. DIY disaster recovery isn't a plan. It's a risk. Internal processes, no matter how well-intentioned, introduce vulnerabilities that can lead to catastrophic loss when disaster strikes.

CoinCover transforms this vulnerability into resilience by providing institutional-grade key recovery that eliminates the risks of DIY approaches, while maintaining the security and control that crypto operations demand nowadays.

Don't wait for a disaster to discover the gaps in your recovery plan. Contact our institutional team today for a confidential assessment of your current recovery posture and discover how CoinCover can eliminate your key recovery risks.