How Bitcoin Exchanges Should Secure Their Wallets

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NEW YORK (InsideBitcoins) — Due to the many hacks and thefts that have taken place in the bitcoin industry over the past few years, it makes sense for anyone holding a large amount of bitcoins to act a bit paranoid when it comes to the security of their private keys. At the North American Bitcoin Conference in Miami, Ciphrex CTO Eric Lombrozo and Bitcoinsultants president Michael Perklin gave a presentation on proper bitcoin wallet security.

These two companies developed the vault used by Ethereum to secure the bitcoins raised during their ether crowdsale, but the lessons laid out in their talk could also apply to exchanges, bitcoin banks, and anyone else who is responsible for the security of a valuable bitcoin address. In the case of the Ethereum crowdsale, Lombrozo, Perklin, and their coworkers were responsible for securing over 31,000 bitcoins.

What are the main risks when securing bitcoins?

When beginning their talk, Lombrozo and Perklin wanted to cover some of the key risk areas for securing a valuable bitcoin wallet. The three main categories of risk were laid out as follows:

Natural disasters – This covers any sort of problem caused by mother nature. If a flood or fire wipes out your private keys, you can say goodbye to your stack of bitcoins.

– This covers any sort of problem caused by mother nature. If a flood or fire wipes out your private keys, you can say goodbye to your stack of bitcoins. Theft and inside jobs – This category covers any sort of threat of theft from outside or inside the organization securing the bitcoins. It should be noted that a case of insider theft could also be caused by coercion. The example pointed out by Perklin during the talk was a situation where one of the key holder’s daughters was kidnapped. It’s possible that the kidnapper could require that individual’s private key as ransom for their daughter’s safe return.

– This category covers any sort of threat of theft from outside or inside the organization securing the bitcoins. It should be noted that a case of insider theft could also be caused by coercion. The example pointed out by Perklin during the talk was a situation where one of the key holder’s daughters was kidnapped. It’s possible that the kidnapper could require that individual’s private key as ransom for their daughter’s safe return. Advanced technical risks – This category covers anything to do with trusting that hardware and software are doing what they’re supposed to do. For example, a random number generator may not be as random as one believes without deep inspection. This was an issue that actually popped up in many bitcoin wallets in 2013 due to a weakness in the way that Android was generating random numbers.

One of the key points made by both Perklin and Lombrozo throughout the presentation was that bitcoin security is not strictly a technical issue. At one point during the talk, Perklin explained, “It’s not just about the technology — it’s also about the people.”

The five keys to a secure information system

After explaining the key risks that are faced when securing a high-value bitcoin wallet, Perklin and Lombrozo went into some of the details of how these risks can be mitigated. It was during this part of the presentation that the duo laid out the five keys to a secure bitcoin information system:

Software – Using a secure, open-source bitcoin wallet should be obvious. The team in charge of securing Ethereum’s bitcoins decided to use mSIGNA, mainly due to the wallet’s use of hierarchical deterministic multisig.

– Using a secure, open-source bitcoin wallet should be obvious. The team in charge of securing Ethereum’s bitcoins decided to use mSIGNA, mainly due to the wallet’s use of hierarchical deterministic multisig. Hardware – In addition to the software, a bitcoin storage specialist also needs to be able to trust the hardware. After passing on the Raspberry Pi for being too slow and the Beagleboard-xM for not providing a sufficient amount of entropy, Coinsultants and Ciphrex decided to generate their keys using an Araneus Alea 1.

– In addition to the software, a bitcoin storage specialist also needs to be able to trust the hardware. After passing on the Raspberry Pi for being too slow and the Beagleboard-xM for not providing a sufficient amount of entropy, Coinsultants and Ciphrex decided to generate their keys using an Araneus Alea 1. Procedures – When it came to proper storage procedures, Perklin and Lombrozo recommended nested multisig cold storage based on geographic regions. For example, you could separate the key holders into different groups in different cities and require 2-of-3 cities to sign a transaction. There would also be a 2-of-3 group in each city needed to handle that city’s share of the transaction process. This essentially breaks down into a 4-of-9 multisig wallet broken up by geographic areas. In the case of the Ethereum bitcoin wallet, it was also customized to force the signatures to happen simultaneously — similar to a nuclear launch button.

– When it came to proper storage procedures, Perklin and Lombrozo recommended nested multisig cold storage based on geographic regions. For example, you could separate the key holders into different groups in different cities and require 2-of-3 cities to sign a transaction. There would also be a 2-of-3 group in each city needed to handle that city’s share of the transaction process. This essentially breaks down into a 4-of-9 multisig wallet broken up by geographic areas. In the case of the Ethereum bitcoin wallet, it was also customized to force the signatures to happen simultaneously — similar to a nuclear launch button. Policies – The identities of the various key holders and location of the cold storage devices should both be confidential.

– The identities of the various key holders and location of the cold storage devices should both be confidential. Trained personnel – You need to have people who know what they’re doing in control of the private keys to prevent human error. Personnel must also report any compromise immediately, which will activate the Key Compromise Protocol.

Although the average bitcoin user does not need to go through all of this trouble to enjoy a relatively-secure level of storage with their personal holdings, this presentation provided the community with a peek into the paranoid mindset that must be in place at various bitcoin companies across the globe.

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