Not your keys, not your crypto - how to keep your digital assets safe
If you’re investing or storing your money, you’ll want to ensure security measures are in place, so it’s not stolen, and you are in control of your investment. It’s simple enough with traditional finance; you open an account, access it with a private password and two-factor authentication (2FA) then decide when and how much to transfer in and out of your account. Additional safety measures will also be in place to protect your deposits, which regulators mandate. For example, the US Federal Deposit Insurance Corporation (FDIC) pays compensation if an FDIC-insured bank fails.
Things are a bit more complicated in the crypto world. Regulation is in its infancy, and there are currently no compensation schemes to protect investors. And if you don’t have control of the private keys to your wallet, then you don’t really own it, think of it as more of an IOU, hence the popular saying ‘not your keys, not your crypto.’ There are two types of keys involved in crypto transactions.
Private key: a secure code, similar to a password, that allows users to access their crypto wallets, make transactions and prove ownership of their assets.
Public key: is shown to other crypto users so they can send cryptocurrency to your wallet, like a bank account number or IBAN. The public key is a cryptographic code used to facilitate transactions and receive crypto into your account.
When you start a transaction, you’re issued a private and public key pair. The private key is used to sign a transaction digitally, and the public key proves the digital signature came from your private key. The crypto is only sent to the recipient’s public address once the transaction is verified.
Not your keys, not your crypto
If you store your crypto with a custodian, for example, a crypto exchange like Coinbase, they control your private key, not you. So theoretically, they can access your crypto and move it around as they like and are responsible for keeping your funds secure.
Although relatively rare, exchanges are hacked – the South Korean exchange GDAC lost almost US$13 million in April 2023 – and if you lose your money, the exchange is unlikely to have to reimburse you for your loss.
Why you should be in control of your private key
To reduce the risk of losing your funds and ensuring total control over them, you should hold your digital assets in a wallet where you have the keys and are the sole custodian of your crypto.
Control your crypto
Having complete control of your crypto means no one can access it without your permission. Furthermore, if you keep your digital assets on an exchange, you risk being hacked or losing your money should the exchange stop trading. On the other hand, exchanges are a fast and easy way to trade and store your crypto.
Your crypto will be more secure.
If you store your crypto on an exchange, they are in control of securing it. Although highly unlikely, if they have substandard security protocols, you risk losing your money if someone exploits their weaknesses. When you oversee your keys, you can put additional security measures in place to protect your funds.
Where to store your crypto
Crypto exchanges are not all bad and usually go to great lengths to ensure their platforms are secure and follow best-practice security protocols. In addition, they often have digital asset insurance to protect their customers from losing their assets through hacking or other criminal activity. They are also easy to use if you are starting to invest in crypto.
However, for complete control over your funds, you should use an off-exchange wallet and follow security best practices such as using unique passwords for websites and wallets and 2FA. The types of wallets that give you control over your keys include:
Desktop wallet: a hot wallet (connected to the internet), a piece of software installed on your computer that uses encryption to protect and store your private key on your hard drive. A desktop wallet is easy to use, and you hold the keys. However, they can be vulnerable to computer viruses, and if anyone else can access your computer, they may also be able to access your digital assets.
Mobile wallet: another hot wallet like a desktop wallet but for smartphones. They should be encrypted for security purposes and are easy and convenient to use. If you lose your phone or it’s stolen, your crypto could be at risk.
Hardware wallet: a cold wallet (not connected to the internet), a physical USB device that stores keys and public addresses offline. Transactions can be signed and verified offline, which prevents hacking. They are one of the most secure methods of securing crypto, but they can seem complicated if you’re new to crypto.
Paper wallet: a cold wallet where you write down or print your private key and store it offline. If stored securely, for example, in a safe, a paper wallet is impossible to hack. However, they can easily be lost or stolen.
Backing up keys
Another sure fire way to protect your crypto is to partner with a trusted third-party like Coincover to back up your private keys. Adding an extra layer of security and having someone hold a backup of your keys reduces the risk of losing access to your digital assets should something untoward happen.
If you’re an organisation looking after your customers’ crypto, you can minimise the chance of monetary loss and protect your reputation by having best-in-class security measures in place. You can also get ahead of regulatory requirements by demonstrating that you have adequate disaster recovery plans to protect your customers. Interested in learning more about how we can help look after you and your crypto? Contact us today, and one of the team will be happy to talk to you.