HomeBlockchain DLT Digital wallets for cryptocurrencies: main characteristics, types and use 28 April 2022 Blockchain DLT Let’s talk about a very important dynamic, trying to limit the technicalities of which the blockchain topic is littered, taking for granted the knowledge of certain elements that can be deepened elsewhere (see, for example, the important contribution by Roberto Garavaglia in paragraph 7 of the Quaderni di Ricerca Giuridica n.87 published by the Bank of Italy, which explains in a precise and exhaustive manner the elements and characteristics that make up the vast world of the blockchain). The cornerstone is the digital wallet, a wallet that is a digital or physical instrument, which has the task of storing, guarding and making inviolable the information that allows the holder to have the pair of cryptographic keys necessary to carry out cryptocurrency transactions on the blockchain network. We wonder if it is essential to use digital wallets to carry out cryptocurrency transactions and, if so, which one is best suited to our needs. How can it be managed? What security can be achieved?
Keys and digital wallets
A blockchain cryptocurrency transaction is based on asymmetric cryptographic systems based on a public key infrastructure (or PKI Public Key Infrastructure), which involves the use of a pair of keys: one public key it’s a private key. From the private key, generated with a system that guarantees randomness, the public key is derived. To carry out a cryptocurrency transaction such as Bitcoin, for example, it is necessary to generate addresses (the so-called “bitcoin addresses”), derived from the public key. The bitcoins transferred in a transaction performed on the Blockchain are destined to these addresses. Private keys are the unique data held by those who can arrange cryptocurrency transactions and are composed of a unique set of secret alphanumeric characters used to digitally sign transactions.
A private key is therefore a sort of “proof of ownership” that allows those who know it to have, or spend, the cryptocurrency; it must therefore be preserved with great care and absolutely cannot be disseminated and shared with others. The digital wallettherefore, it was conceived as a safe space in which it is possible to store the keys (public and private) that allow you to access your cryptocurrency resources on the blockchain network.
Losing access to the digital wallet and consequently to the private keys would mean losing access to your resources on the blockchain and therefore to the cryptocurrency you have.
Digital wallet: public and private key
In public key cryptography, the data sent to the recipient’s address (derived from the public key) is encrypted with the recipient’s public key.
This system ensures that the intended recipient (a person who has the corresponding private key) is the only person who can read the message. The mechanism confirms the confidentiality of the communication between two parties. In public key cryptography, the private key can only be used to decrypt data encrypted with the corresponding public key. Similarly, data digitally signed using the private key can only be verified using the corresponding public key.
Digital wallet: hot o cold?
Having analyzed the importance and function of the keys, it is essential to have a place to keep these codes safe. To make this procedure feasible, a myriad of digital wallet suppliers have been created whose task is to hold the decryption keys as securely as possible. It is important to know that there can be two types of defined digital wallets hot oppure cold.
Hot wallet
Web-based wallets, those that can be used by smartphones or desktops are called hot wallets. Digital payments: the challenge in the field of Artificial Intelligence An advantage of hot wallets is ease of use. Being always online, it is not necessary to switch from offline to online to carry out a cryptocurrency transaction, significantly reducing transaction times.
Cold wallet
Cold wallets, also called hardware wallets, are physical tools, such as USB sticks, containing the codes necessary to operate. These physical media allow you to be the only legitimate holder of the private key.
The problem with cold wallets is that to be used they necessarily need a device (usually a computer) to which the hardware device (USB key or other device) can be connected.
With the use of the cold wallet you will have to move the necessary amount of cryptocurrency to a hot wallet and then carry out the transaction. Users who hold large amounts of cryptocurrency will typically not keep significant amounts of cryptocurrency in hot wallets due to the distrust of insecure platforms prone to cyberattacks. On the other hand, a cold wallet is also subject to risks of theft or loss, of course the use and access to a hardware wallet are subject to strong PINs or passwords. Hardware wallets are designed to be immune to hacking. Even when a hardware wallet is connected to the computer or connected via Bluetooth, depending on the storage method, the funds stored on the drive are difficult or even impossible to steal. Such a defense is possible by the fact that while it is connected to the Internet, the signature of the transactions is performed “on the device” and only then is transmitted to the network via the Internet connection of the computer. This “signature” allows the recipient to be assigned ownership of a cryptocurrency transaction. Since private keys never leave the device, even if latent malware on the computer attempts to steal funds by maliciously “signing” a transaction initiated within the hardware wallet, it would not be the correct signature, so the transaction would not would be successful.
Gli exchange provider
Very often it is necessary to transform digital currencies into fiat currencies (i.e. fiat currencies), such as the euro, the pound sterling, the US dollar (to name just a few examples). To do this you need to use a digital currency exchange platform which allows you to buy, sell and deposit cryptocurrencies. Registering with the platforms that carry out these operations is not particularly simple, as it implies the execution of specific Adequate Verification processes which such platforms are obliged to under the anti-money laundering and anti-terrorist financing regulations. It is possible to buy cryptocurrency directly from various platforms using your credit card or current account (SEPA or extra-SEPA transfers and, for platforms that provide it, also SEPA direct debits). But beware: as always, we must not let our guard down when it comes to money or its digital derivatives, even more so when it is treated in new ways, difficult to understand and with little-known interlocutors. When looking for exchange platforms, one of the first and most important checks is to verify the credentials and certifications they hold. This step will allow us to understand if they are regulated by a central authority or if they are offshore or unregulated entities and therefore not subject to rigorous controls. When a company is regulated by an entity outside national or EU law it becomes impossible to make any legal recourse in case its funds are compromised in any way.
The register for exchanges in Italy
As often happens, politics and regulations are not as fast as technological innovation and the introduction of laws, rules and controls comes late compared to the technological and economic context. Finally, also in Italy, following the entry into force of the implementing decree of the EU Directive 2018/843, the first register for exchanges operating in our country was established. For the first time in Italy, a system will be set up through which operators in the cryptocurrency sector will be surveyed, through a compulsory registration in a register and a consequent communication to the OAM or the body that groups the operators of financial activities and credit brokers operating in the markets having as their object the virtual currency. The text of the document shows the obligation to notify for registration even when “the activity of service providers relating to the use of virtual currency and digital wallet service providers, including foreign ones, is carried out remotely , according to telematic methods, in the territory of the Republic, possibly also resorting to websites, applications that offer the aforementioned services in Italian ”. This architecture will allow the MEF (Ministry of Economy and Finance) to always have an updated view of the panorama of the platforms of the exchange providers operating in Italy. In fact, the law provides for the transmission by the OAM to the Ministry of Economy of a half-yearly report “containing aggregate data relating to the number of service providers relating to the use of virtual currency and digital portfolio services registered”. The monitoring will make it possible to identify potential cases of abusive exercise of the activity and consequently to adopt the appropriate countermeasures and protect the unsuspecting users of the services. Bibliography N. 87 – The new frontiers of banking and payment services between PSD 2, cryptocurrencies and the digital revolution – Legal research journals, Bank of Italy, Various authors, September 2019 – Chapter 7 – Purpose, functioning and type of use of Blockchain, Garavaglia R. https://www.bancaditalia.it/pubblicazioni/quaderni-giuridici/2019-0087 DIGITAL360 Semiannual 2022: discover all the news Administration / Finance / Control