HSM use cases for crypto assets
Funds, banks, exchanges, trading platforms, and wallet providers
Banks moving into the crypto-assets space understand the need to protect private keys. However, first movers are often overwhelmed by its complexity. They are at high risk of losing crypto assets. In this group of pioneer adopters, almost anybody knows someone who has lost private keys or wallets (i.e. software constructs that hold private keys). Crypto wallets, which are not properly secured, are exposed to very high risks. They can be drained by means of identity theft and unauthorized use of the private keys. Once a wallet or private key is lost, it is gone for good. It is cryptographically impossible to find it again. Numerous real-world examples already exist and a few of them have incurred huge losses.
The hack of Mt. Gox was the first and probably the most prominent incident. Hackers looted about 740,000 Bitcoins after having copied Mt. Gox’s private keys from a “wallet.dat” not appropriately protected. Only recently, an USD 500M incident was reported on the digital currency XEM. Unfortunately, this is not a phenomenon that is going to go away soon. The first of eleven predictions by The Element Group sees the hacking of a major coin exchange in 2018 “… due to lax operational standards and risk management infrastructure”.
The institutional first movers, which are taking crypto assets management and trading to the institutional level, have realized the need for secure enterprise-grade solutions. Securosys is already working with industry leading FinTech companies to provide hardware solutions for securing crypto assets.
Initial coin and token offerings (ICOs/ITOs), like the SET ITO proposed in our whitepaper, are an efficient funding alternative at any stage of a company. They can complement or replace venture-capital companies and initial public offerings (IPO). They allow a larger audience to take part in the early financing stages. So far, only private investment companies, i.e. venture capital companies, were able to participate in most of these investment opportunities. Also, ICOs might move IPOs to a new stage, the IPO 2.0, through tokenization of shares and securities. This new IPO 2.0 market will require offering platforms that are stable, reliable, efficient, and secure. It is the digitalization of the process that allows for a greater automation and thus the possibility to handle a larger audience. Moreover, capital markets are desperately looking for tools to conduct ICOs in a secure and compliant way.
However, currently existing (legacy) systems often lack the efficiency needed to handle massive amounts of small-scale investors. Transactions from thousands of participants have to be processed manually, which is not only costly but is also lacking security.
To increase trust and security and simultaneously provide scalability, an enterprise-grade platform has to be developed using blockchain-ready HSMs. It is evident, given the advantages of the process, that many long established players like the big consulting and accounting firms will move into the ICO space and play a dominant role. Securosys started working with an early mover to build a secure ICO platform that takes full advantage of Securosys technologies. In particular, the increased scalability of an automated solution with secure enterprisegrade key management is going to be superior to existing ICO platform systems.
Any blockchain system
While the focus is currently on crypto-currency systems, more and more blockchain systems will evolve for many different markets and applications. These include public and private blockchains as well as permissioned ledgers where the ledgers are shared among invited participants. Such systems will include stock exchanges and commodity trading platforms that will take advantage of blockchain technology. In addition to efficiency gains, this technology facilitates compliance with regulatory requirements.
Currently many existing crypto-currency blockchain systems are being expanded. Improvements include off-network systems to speed up transactions or to reduce transactions costs like the lightning network for Bitcoin. In addition, some crypto finance systems are modified to reduce the power consumption of mining operators – for example by implementing Proof of Stake (PoS) instead of Proof of Work (PoW). In most cases lightning and PoS assets must be held on the node, thus requiring a secured execution platform like the Trusted Execution Platform HSM.