Securing Your Client’s Bitcoins (Part 2)

In Part 1 of this series, we looked at paper wallets. Today I’ll discuss hardware wallets.

Hardware Wallets

Hardware wallets are a very significant upgrade from paper wallets. As I mentioned yesterday, paper wallets are actual sheets of paper with printed public and private keys. Each key pair corresponds to a particular Bitcoin “account,” and the private key allows access to all the bitcoins within that account. There are several significant problems with paper wallets:

  1. Anyone with access to the paper wallet has access to the bitcoins. (You can BIP-encrypt the wallet, but that’s a whole other post.)
  2. You never really know whether a copy has been made from a paper wallet at some point.
  3. To do anything with the bitcoins, you need to load them into an online wallet.

Hardware wallets fix these problems. These wallets are actual, physical devices with the sole purpose to store keys and sign cryptocurrency transactions. Several different manufacturers offer reputable devices, including:

Trezor

trezor

KeepKey

keepkey

Ledger Nano S

ledger

Hardware wallets address the issues with paper wallets in the following ways:

  1. Anyone with access to the paper wallet has access to the bitcoins. (You can BIP-encrypt the wallet, but that’s a whole other post.)  — Hardware wallets use a PIN, so only an authorized user can instruct the wallet to sign a transaction.
  2. You never really know whether a copy has been made from a paper wallet at some point. — Hardware wallets don’t show your private key. They take a transaction, sign it with the private key within their own internal hardware, then export the signed transaction. There’s nothing to copy.
  3. To do anything with the bitcoins, you need to load them into an online wallet.   Because hardware wallets have a connection to your computer (albeit carefully limited to prevent hacking), they can sign transactions without loading your private key to an online wallet.

Author: Michael O'Connor

Michael O'Connor is a Visiting Assistant Professor of Law at Penn State. He teaches in the areas of cyber law, including data security & privacy, cybercrime, and emerging technologies. His scholarship focuses on cryptocurrency and blockchain technology, including securities regulation, money laundering, and other topics. He joined Penn State Law from private practice at the law firm Quinn Emanuel Urquhart & Sullivan LLP, where he was resident in the Washington, D.C., office. Before that, he clerked for the Hon. D. Brooks Smith on the U.S. Court of Appeals for the Third Circuit and worked for another major international law firm. While in private practice, Michael advised clients on legal planning for data breaches, their obligations for safe handling of personally identifiable information, and the legal implications from emerging technologies like Bitcoin, Ethereum, and the blockchain. He applied his technical training to patent cases involving semiconductor design, systems programming, and mobile device architecture. He also worked on multiple cases at the intersection of patent and antitrust law. Michael represented clients in cases before federal courts throughout the country, as well as before the International Trade Commission.​