A multi-party computation (MPC) wallet is being developed as a cryptocurrency wallet that enables the distribution of signing authority to multiple parties. Many vendors are developing MPC wallets based on different cryptographic protocols, which can be readily installed by users, i.e., cryptocurrency exchanges. However, for users, simply introducing the wallet system provided by vendors poses a risk of secret key shares being stolen without their knowledge. We will illustrate methods to secretly steal key shares by exploiting the communication channels with steganography or by modifying the protocol to achieve a fault injection attack. One of the methods is using the error correction capability in QR codes as a covert channel, and another method is embedding hidden bits in the legitimate communication of the underlying MPC protocol. Such attacks can be executed by sophisticated threat actors targeting the vendor’s codebase or through external software dependencies. We will propose measures that user exchanges can implement to address these risks and provide guidance for the secure use of MPC wallets.

We discuss key management for cryptocurrencies from the perspective of security and risk management. While we found many earlier research studies about the implementation and security of wallets, few of them provide a comprehensive analysis of real-world integration as a complex system. We particularly focus on cryptocurrency custodians, who have to tightly control the risk to meet business needs as well as regulatory requirements. Unlike individual use cases, to manage substantial amounts of various assets, they typically need more complex wallet configurations and operations, such as multiple layers of hot and cold wallets in combination with different types of implementations. Therefore, we discuss the suitability of various wallet techniques, including software, hardware, HSMs, smart contracts, or cryptographic methods. We also address several open challenges for custodians mentioned in earlier work. Furthermore, as the ultimate example, we propose Extreme-Cold, a reference cold wallet in an air-gapped environment. It is resistant to side-channel attacks studied in earlier research. The risk assessment we conduct on Extreme-Cold demonstrates the effectiveness of our systematized knowledge.

Virtual assets are globally recognized as a decentralized digital currency system. They are also being used to transfer criminal proceeds. In 2019, the Financial Action Task Force mandated the Travel Rule for virtual asset service providers (VASPs). However, as of March 2024, it has not been fully implemented worldwide due to the Sunrise issue. Complying with the Travel Rule poses challenges such as identifying the recipient VASP from a virtual asset address, proving ownership of the address, and ensuring communication protocols between the VASPs. In this paper, we focus on these three challenges and provide potential approaches for each, along with additional considerations. We have analyzed multiple existing protocols and categorized their characteristics. Our findings revealed that the majority of them are based on an alliance of VASPs, while there are a few solutions that suggest peer-to-peer messaging for every VASP or blockchain as a communication hub. Additionally, we offer insights into open challenges that need to be solved in the long term.