Blockdaemon Blog

5 Problems with Institutional Cold Wallets

Nov 16, 2023
We dive deep and take a look at some of the inherent issues with institutional cold wallets and how to navigate them.

Cold wallets are a long-standing staple of institutional crypto management.

They serve banks, custodians, and institutions who require air-gapped wallet services to safeguard against online threats, making them a cornerstone for institutional asset protection.

Cold storage stores and uses private keys offline. By keeping keys offline and in physically secured environments, these wallets have a significantly reduced risk profile when compared to ‘hot wallets.’ While this setup minimizes exposure to online vulnerabilities, it does not, however, wholly negate security challenges. It is crucial for institutions to understand these risks in order to securely manage their crypto assets. 

In this blog, we explore the limitations of traditional cold storage, and the need for institutions to seek more innovative solutions. 

The Limitations of Cold Wallets

Most cold wallets, while secure, also have some undesirable attributes.

  1. Slow, Laborious Signing Ceremonies 

Despite their security advantages, traditional cold wallets carry inherent inconveniences. 

Typically, these wallets are hardware-based, requiring the physical presence of authorized users for access. This setup becomes particularly cumbersome if the approving authority is traveling or otherwise unavailable, as they must physically return to the wallet's location to grant access. This not only hampers efficiency but also introduces logistical complexities, especially in time-sensitive scenarios. 

The nature of cold storage also inherently leads to long signing latencies. 

Given the limited number of approvers, the need for physical presence, and stringent security checks, access frequency to cold wallets remains low. This scenario results in significantly prolonged transaction times. 

The offline signing process and subsequent export of transactions typically extend custodial Service Level Agreements (SLAs) to durations ranging from 4 to 24 hours, or even longer. This delay stands in stark contrast to the more rapid transaction capabilities of online wallets. 

  1. Physical Vulnerabilities

Cold wallets, despite their isolation from online threats, face significant physical vulnerabilities. 

Instances such as power glitching can expose seed phrases, and side channel attacks may compromise private key materials. Additionally, the portable nature of these devices poses a risk of theft. Addressing these challenges requires stringent security measures for cold storage systems. Institutions must ensure highly secure storage environments and enforce controlled access protocols. This approach is vital for safeguarding crypto assets against physical threats. 

  1. The Cost Implications of Physical Security

The secure management of cold wallets often entails substantial costs, particularly concerning controlled access. 

Institutions must ensure physical access to private keys for transaction approvals, which can be challenging in scenarios like disaster recovery or pandemic-related restrictions. To maintain security, cold wallets should ideally be housed in vaults or safes, equipped with advanced physical access controls, possibly including Faraday cages. These settings might also require security personnel or biometric authentication systems. While these measures significantly enhance security, they also elevate operational expenses. Institutions must balance the need for stringent security with the practicalities of cost, especially as they scale their crypto asset operations. 

This balance is critical in ensuring both the security and financial viability of cold wallet solutions.

  1. Lack of Policy Controls

Cold storage’s stringent security norms often lead to a limited number of authorized approvers. 

Given the high value of assets protected and the need for physical security, institutions typically restrict air-gapped signing privileges to a select few. This limitation compounds the inconvenience factor previously discussed. In scenarios where these few authorized individuals are unavailable, the process of asset management becomes cumbersome and time-sensitive decisions are delayed. 

This approach, while secure, also lacks the visibility and approval controls available in online systems. In cold storage, the integrity of the few authorized approvers becomes pivotal, creating a dependency that may pose risks. Some online wallets, in contrast, offer the advantage of quorum approvals. They provide flexibility in specifying potential approvers and the required number for transaction validation, allowing for more distributed control. 

This difference highlights a crucial area for innovation in cold storage solutions: enhancing control mechanisms while maintaining their inherent security benefits.

Institutions must therefore balance the need for tight security with operational efficiency, possibly through innovative solutions that maintain security while easing the constraints of limited approver availability. 

  1. Limited Auditability

The offline nature of cold wallets often leads to limited auditability. 

Cold wallets restrict the capacity to authenticate user actions, typically hindering the creation of comprehensive audit logs. Such logs are crucial for automatically recording which specific party utilized the air-gapped key for each transaction. The absence of this automated tracking diminishes transparency and accountability. It also increases reliance on the integrity of authorized individuals conducting cold signing ceremonies. 

For institutions, this presents a significant challenge: ensuring robust security while maintaining a clear, accountable record of transactions. 

The Future of Cold Storage Solutions

The current limitations of cold storage, including operational complexities and decreased accessibility, can notably impact liquidity and present, substantial, opportunities for security enhancements. 

Forward-looking institutions must focus on overcoming these deficiencies. 

The aim should be to not only bolster security but also enhance operational efficiency and liquidity. By proactively addressing issues like limited auditability, long signing latencies, and multi-approver inconsistencies, future cold storage solutions can offer institutions a more robust, agile, and transparent approach to managing crypto assets. 


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