L5 - Crypto Asset Custody

Question 1

Types of digital assets

Answer 1

Security tokens
Stablecoins
Utility tokens
E-money tokens
Cryptocurrencies

Question 2

Before modern key storage

Answer 2

HSM technology..

Question 3

Traditional asset custodians

Answer 3

• custodians are like vaults holding assets in both electronic and physical form

Question 4

Digital asset custodians

Answer 4

• primary role of safekeeping digital assets

- safe key management (by holding the private key)

Question 5

What is the private key made out of?

Answer 5

Two very large secret prime numbers

Question 6

What is the public key made out of?

Answer 6

The product of those two very large prime numbers used to make the private key.

Question 7

Can cold wallets be costly

Answer 7

yes

Question 8

What is an HSM?

Answer 8

Hardware security module

• physical device that safeguards digital keys
• facilitates encryption, decryption, signing and verification
• private key is generated within a secure device from which it cannot be extracted without damaging the device
• the private key is never exposed, even to the holder of the device, and therefore cannot be copied or hacked.

Question 9

What is the access gateway into decentralized economy.

Answer 9

Non-custodial wallets are the access gateway as users interact directly with smart contracts and not through another middleman.

Question 10

Seed phrase how long

Answer 10

12-24 words generated by the crypto wallet.

Question 11

What is the seed phrase?

Answer 11

Like a master password. As long as it exists you can access your funds.

Question 12

Is the seed phrase the same as the private key?

Answer 12

No the private key allows to sign transactions. The seed phrase allows access to wallet and all private keys in wallet.

Question 13

What does MPC minimize?

Answer 13

The single point of compromise

Question 14

What is MPC

Answer 14

Multi-party computation
Multiple servers host the private key together
Avoids a single point of failure
Enables a custodial solution that is online.

Question 15

Pros of centralised custody

(exchange hosted wallets)

Answer 15

• high convenience and operability

- ease of access

Question 16

Cons of centralised custody

(exchange hosted wallets)

Answer 16

Ease of access but huge counterparty risks with the exchange

• exchange hacks
• mixing of client assets and no clear separation
• counterparty risk of insolvency.

Question 17

pros of centralised custody (third-party custody)

Answer 17

• clearly defined functions and controls
• institutional-level technology and security
• transparency
• regulatory compliance

Question 18

cons of centralised custody (third-party custody)

Answer 18

• fee

- counterparty risk as the custodian is exposed to potential hacks

Question 19

pros decentralised custody (self-custody /non-custodian wallet)

Answer 19

• 100% control over digital assets
• free
• secure

Question 20

cons of decentralised custody (self-custody /non-custodian wallet)

Answer 20

• when access to assets is lost, the assets become irretrievable
• holds responsibility for assets, asset management, and associated risks
• requires expertise in digital assets
• more susceptible to hacking or loss of assets

Question 21

Hardware wallet level of security and ease of use

Answer 21

security: high

ease of use: medium

Question 22

Software wallet level of security and ease of use

Application installed on a device, such as a smartphone or computer

Answer 22

security: medium

ease of use: high

Question 23

Web wallet level of security and ease of use

accessed through an internet browser. Quick transaction and high availability

Answer 23

security: low

ease of use: high

Question 24

Custodial wallet level of security and ease of use

Answer 24

security: high

ease of use: depends on the custodian

Question 25

Largest hacks and exploits

Answer 25

Mt. Gox was a bitcoin exchange based in Shibuya, Tokyo, Japan.Launched in 2010, it was handling over 70% of all bitcoin (BTC) transactions worldwide by early 2014, when it abruptly ceased operations amid revelations of its involvement in the loss/theft of hundreds of thousands of bitcoins, then worth hundreds of millions in US dollars.

Mt. Gox private key was unencrypted and it would appear that it was stolen via a copied wallet.dat
file, either by hacking or perhaps through an insider.

Once the file was hacked, the hacker(s) were able to access and cipher bitcoins gradually from the wallets associated with Mt. Gox’s
private keys without the hack being detected.

Question 26

What provides a legal framework for

crypto-asset markets to develop within the EU?

Answer 26

Markets in Crypto-assets (MiCA) Regulation

Question 27

Why do we need regulation?

Answer 27

• regulatory initiatives lower barriers to market entry
• institutions need more security and clarity.
• helps healthy and sustainable market growth

Question 28

In Germany Digital Asset regulations falls under the authority of

Answer 28

BaFin.