Bitcoin is a “bearer instrument” and, as such, it can only be spent by using secret (private) keys; if they are lost or stolen, there is no way to recover the associated Bitcoins. Safe management of the secret keys is therefore of paramount importance for Bitcoin holders, but such activity requires sophisticated technical skills and domain knowledge.
Secret keys are usually stored in “wallets”; however, “hot” (online, internet connected) wallets can be hacked, “cold” (offline, internet disconnected) wallets can be lost or stolen, and the passwords needed to gain access to wallets can simply be forgotten.
Consequently, individuals may be uncomfortable dealing with their Bitcoin holdings; even more if they consider issues such as inheritance and personal safety. Institutions too, they have the above security issues; moreover, they are often required by law and/or internal regulation to entrust the management of Bitcoin holdings to a specialized service provider. That’s why there are specialized companies offering professional Bitcoin custody services.
This is why CheckSig has decided to undertake a totally different approach designing its patent-pending transparent open protocol for Bitcoin custody.
CheckSig’s custody protocol is transparent by design
Our guiding principles
There are four main events happening in our custody process: deposit, withdrawal, proof-of-reserve, and disaster recovery. Before describing them in detail, it is important to know that three main parties are involved:
Furthermore, CheckSig custody process uses two wallets:
Both wallets are comprised of professional-grade hardware security module (HSM) devices, provided by leading manufacturers: currently, Ledger (the most reputable specialized vendor) and CryptoAdvance/Specter (the most technically advanced one).
HSM devices are used to provide the digital signatures required for a Bitcoin transaction. A HSM contains a secure element that perform the signatures using the secret keys without exposing them outside its own boundaries, so preventing the stealing of the keys even if the device is used in an unsecure or compromised environment.
In essence, deposit is very straightforward, with the Client just moving Bitcoins to an “address” provided by CheckSig and corresponding to the Frozen Wallet.
In case of a new customer, before sending the Bitcoins it is necessary to sign a custody contract with CheckSig that, in turn, will comply to its “Know Your Client” and “Anti Money Laundering” duties.
When the coins are received in the Frozen Wallet, CheckSig traces their origin in order to verify if they have been involved in any illegal activity. CheckSig does not accept “fiat” currencies (e.g., Euros) or crypto-assets that are not Bitcoins (e.g., Ether). If a Client does not have Bitcoins, she must first purchase them on a crypto-exchange. When Bitcoins are in the Client’s possession, if he is not sufficiently familiar with the technical aspect of transferring them, he will be assisted in the process by CheckSig customer care personnel.
The withdrawal of Bitcoins back to the Client(s) usually happens on a monthly basis and it is free of charge; if they are urgently needed, an “instant liquidity” withdrawal is possible but with a charge.
The withdrawal process cannot be performed by CheckSig without involving the Federation, to reduce the risk of internal CheckSig wrongdoings. At the same time, the Federation cannot initiate a withdrawal process, only CheckSig can.
The withdrawal consists of two distinct Bitcoin transactions:
Differently from all other custodians that have access to all the assets all the time, CheckSig has direct access to Bitcoins only during the withdrawal process and only for the amounts being withdrawn. This being the only residual attack surface of the custody process, the withdrawal is insured by SATEC Underwriting (Cattolica Assicurazioni).
The “proof-of-reserve” is provided periodically as evidence to clients and auditors about the amount under custody and, crucially, to prove that CheckSig has not lost control of the Bitcoins being held in the Frozen Wallet.
On a periodic (usually monthly) basis, using the first transaction of the withdrawal process, the Bitcoins that have not been requested back by clients are moved from their current “address” within the Frozen Wallet, to another new “address” still within the Frozen Wallet. This spend-to-self transaction, being confirmed by the Bitcoin network, is public on the Bitcoin blockchain and is documented on the CheckSig website as “proof-of-reserve”.
A disaster recovery procedure is activated when:
A recovery transaction requires the digital signatures of two out of three (2-of-3) CheckSig recovery agents, provided using HSM recovery devices, each held in a different safety box in a different bank in a different city. More specifically, there are two different kind of recovery transactions: