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Do we really own our digital money?

Posted: 16 September 2022

photo: Pete Linforth / Pixabay

Do we really own our digital money?

An interview with Max Chrost - partner at Wallet Recovery Services (wrs.finance), a company that specializes in recovering lost Bitcoin and Ethereum wallets.

Agnieszka Kożańska: The more the crisis consumes people's money, the more interested we are to protect it. It is also quite obvious nowadays that paper money is gradually giving way to digital currencies. Will each of us need a digital wallet soon?

Max Chrost: It is the trend that leads us to use digital solutions to manage the flow of value of money or cryptocurrencies. This is happening simultaneously in two spheres as central banks are actively working on developing CBDCs. And yes, it looks like cash circulation will be significantly reduced or even eliminated in the coming years.

On the other hand, having cryptocurrencies it is necessary to use a non-custodial wallet to fully benefit from what blockchain technology gives us. It is complete control, privacy, and security.

It is the fear of losing money permanently that keeps most people from using electronic devices to store them. Large-scale hacking attacks on exchanges and platforms greatly affect our imagination.

There are many reasons why crypto users store their funds in exchanges, thus abandoning hardware wallets. Among the main ones is convenience - people simply do not want to take the time to buy, configure, handle and secure their assets using a hardware wallet. In addition, stored on an exchange, funds can be traded quickly between different cryptocurrencies. For people who perform many transactions every day, using a wallet to do so means an obstacle.

Another factor is the small value of the funds a user manages compared to the price of the hardware wallet. For many it is a 10-20% ratio, which makes them rule out buying options. People are also unaware of the risks of storing funds in an exchange. They perhaps have never experienced anything unexpected or are on the market too short to remember collapses like Mt.Gox.

In your opinion is it just the lack of knowledge, poor technology confidence or is there more to it?

It is a kind of paradox that those who use wallets not having a basic knowledge of how private keys, mnemonic words, address generation, or passphrase work, are even more endangered. They expose themselves to a relatively greater risk of irreversible loss than when money is stored in an exchange.

Daily, we work with clients who have lost access to their cryptocurrency wallets through forgotten passwords or passphrases. Unfortunately, there are many cases in which we are totally unable to help. Complete absence of data, e.g. lost mnemonic words or a wallet reset, means that your funds are lost forever.

This proves that the consequences can be the same as ignorance in storing funds in an exchange.

Bitcoin users often say not your keys, not your crypto. Does it have any special meaning in your work?

This is absolutely true if we use exchanges or other centralized solutions. In those cases we do not have control over the keys to the funds we trade on those platforms. There is also another problem. Every incident related to the hacked exchange or custodial wallets creates many misconceptions in the mainstream media. It's because ordinary people used to think that it is something with the security of the blockchain itself, which is improper.

Such incidents usually happen because of inappropriate private keys management. The use of non-custodial wallets also generates risks related to the loss of the wallet itself, and then we come to the rescue, which may or may not be successful.

However, this should emphasize that the situations in which clients come to us do not happen spontaneously but usually are their fault resulting from a lack of knowledge or insufficient awareness.

The number of digital wallet users is expected to surpass 4.4 billion by 20251. Which wallet would you recommend to those who are about to choose or exchange for a new one?

I think you need to answer some questions by yourself before deciding on a particular wallet. What size of funds do we want to manage? Do we want to diversify them into several wallets? Or do we plan to hold the funds long-term, etc.?

It's extremely hard to exhaustively answer this question because this is a river topic, with many variables to consider. What can be generally stated as a fact, choosing a hardware wallet is the best choice regarding potential risks.

History teaches that software wallets and those that store keys on their servers are many times more susceptible to the actions of bad actors. In addition to the wallet, backup management for our mnemonic words is equally important. Not everyone is aware of this, but in the event of a loss of words that come into the possession of a third party, that third party can import our wallet on a new device at any time and access the funds.

In conclusion, besides the wallet, we should take care of the safe place for stored mnemonic words.

What does the recovery process look like?

The first step is gathering all the data on the specific problem. Based on this, we can estimate whether there are any chances of recovery.

If there is a chance, we can receive the data after signing the contract and start our work. As long as we fail to recover the funds, there is no cost to the customer. If recovery is successful, we charge a success fee.

Although the situations in which customers lose access to their funds are very different, we can distinguish the common denominator of their cause: mismanagement of seed phrases / private key backup.

Thank you for sharing your knowledge with us, Maksym!