Hard to Be a Bank: How to Solve the Security Problem of Cryptocurrencies

The main difficulty in adapting ordinary users to cryptocurrencies lies in the cognitive dissonance between familiar service models and sovereign ownership. In the crypto industry, security ceases to be a service and becomes a personal responsibility, giving rise to a number of systemic risks that are often mistakenly interpreted as “blockchain vulnerabilities,” although in fact they result from the human factor.

In the architecture of digital asset ownership, two fundamental approaches determine the legal and technical status of the holder.

The custodial approach involves an intermediary (exchanges, Telegram wallets, centralized platforms) that de facto holds the private keys. The user possesses only a claim against the service. This simplifies UX (user experience), allowing access recovery through customer support, but deprives assets of their key feature — censorship resistance;

The non-custodial approach embodies the true concept of cryptocurrencies. The owner has exclusive control over the private key. Here arises the “security paradox”: the absence of an intermediary makes external account blocking impossible, but turns the loss of the seed phrase (a mnemonic password of 12/24 words) into an irreversible loss of capital.

When analyzing attack vectors, storage methods should be divided according to their level of isolation from the global network.

Hot Wallets are software solutions integrated into operating systems. Their advantage is liquidity and high transaction speed; however, constant network connectivity creates a permanent attack surface for malware and phishing.

Cold Storage refers to hardware modules operating in an isolated (air-gapped) environment. The private key never leaves the secure chip. This is the gold standard of security, which nevertheless does not protect against physical destruction of the device or social engineering aimed at extracting the seed phrase.

A key barrier to the mass adoption of cryptocurrencies is precisely the archaic nature of access recovery methods. The requirement to store 24 words on a piece of paper in the 21st century appears anachronistic.

Modern cryptography offers elegant solutions to this problem.

MPC (Multi-Party Computation) is a technology that allows a key to be generated and used in parts. The key does not exist in full at any single point: one part is held by the user, another on a server, and a third in the cloud. A transaction requires confirmation from two out of three parts. This mitigates the risk of a “single point of failure”;

Social Recovery represents a model in which the user designates “guardians” (trusted individuals or devices). In the event of access loss, the guardians can collectively confirm the owner’s identity and reissue the key. This is an attempt to recreate the human face of banking services in a decentralized environment.

One of the most acute and least studied issues remains the inheritance of digital capital. Within the framework of classical law, this process is associated with enormous bureaucratic and tax costs, especially in an international context.

Cryptocurrencies offer a radically different model. Through the configuration of smart contracts (for example, a “Dead Man’s Switch”), assets can be automatically transferred to heirs’ accounts if the owner shows no activity for a specified period. This is the first opportunity in history to transfer value without the involvement of notaries, banks, or state registries, relying solely on a mathematical algorithm.

Today, the crypto industry is following a path similar to the early Internet of the 1990s. We are witnessing a transition from “complex for the few” to “invisible for the many.”

It can be argued that the future of asset security lies not in strengthening user discipline (hoping that everyone will become a cybersecurity expert is utopian), but in improving infrastructure. The true success of the technology will come when the level of protection is ensured by the system architecture by default, and users can manage their capital without delving into cryptographic primitives. Blockchain will become truly mainstream only when it learns to protect individuals from their own mistakes better than modern banks do.

Author: Candidate of Economic Sciences, Associate Professor of the Department of World Economy and World Finance, Financial University under the Government of the Russian Federation Natalya Ivanovna Chovgan.