Imagine this. You have just bought the house of your dreams. Before the sales agent hands over the keys he tells you he has two pieces of very important advice.
First of all, he warns you that although you can make as many copies of the keys as you like, if ever all the keys are lost, you will never be able to enter the house again – ever. In fact, no one will ever be able to enter the house. It will be empty for eternity.
You have lost your house.
Just as you are pondering which members of your friends and family you should leave spare keys with, he relates his second piece of advice.
If any copy of your keys are stolen or fall into the hands of an unscrupulous person, they can obviously gain access to your house. But worse than that, they would be able to change all the locks and prevent you from ever entering your house again – ever.
Furthermore, you will have no recourse. The scoundrel will be able to sleep in your bed and drink champagne in your jacuzzi, and there is absolutely nothing you can do about it.
You have lost your house.
This may seem far-fetched and ridiculous but it is exactly the situation regarding cryptocurrency and private keys. Here we have the twin issues of the neurotic fear of losing your private keys contrasted with the paranoia of someone gaining access to them through malicious intent.
If you are naturally forgetful and neurotic about losing your keys, you may distribute them among various, supposedly trustworthy people and store them in various secret places. Unfortunately, this just makes it easier for someone to find them or use them for their own benefit. So one day, as you are idly daydreaming about which model of Range Rover you will buy with your enormous crypto profits, you discover that your uncle Bill has run off to Puerto Rico with the maid, accompanied by all your crypto. Your aunt Grace is distraught but she will get over it: she has already sold his golf clubs. But for you, your dreams are over, and it’s a few more years in the battered old Ford.
Or, you have a paranoid bent. You bury your hardware wallet in the garden and hide a copy of the seed phrase in the roof lining of your car. Then the day comes when the dog digs up the wallet and chews it into a hundred pieces and your car is stolen and the thief drives it into the river.
Luckily, you remember you gave another copy of the seed phrase to your sister, so you frantically call her to discover she had hidden the note in the sugar bowl. Unfortunately, she had forgotten about it and the paper had not survived the full dishwasher cycle at 50C. You should have laminated the note but you didn’t, did you? Your sister is very apologetic, but for you, your dreams are over.
It’s a few more years in the battered old Ford.
The main crypto exchanges are holding a huge amount of customers’ cryptocurrency in their custodial wallets. Why is this, I wonder, when all the advice is to get any assets off exchanges as soon as possible after any transacting and secure them with non-custodial wallets.
Could it be that many of us don’t want to be our own bank? We don’t want the responsibility and are averse to suffering the neurosis and paranoia of securing our private keys. We are happier to trust Coinbase, Kraken etc. with our crypto assets as we have previously trusted our banks.
It is true – how many of us in the West have lost money that was held in major banks? Not many. And exchanges are just like banks, aren’t they?
However, the history of crypto exchanges is not so rosy as we mistakenly imagine our bank’s history to be. The Altsbit exchange was hacked only a few days ago and although the losses suffered were far smaller than the fortune spirited away in the Mt. Gox scandal, it simply shows that exchanges are low-lying fruit for hackers and remain vulnerable.
In order to encourage mass adoption of cryptocurrencies, a solution must be found which is user-friendly and provides secure management of private keys without trusting third parties. In this modern age, if the best we have is to etch seed phrases onto hardened steel plates and hide them in the basement, we have a long way to go.
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