Cryptocurrencies such as Bitcoin and Ethereum are emerging from the dark side of the web. These currencies have multiplied in number and increased tremendously in value despite their volatility.

However, sad experience has taught storing crypto safely in online exchanges is risky at best. In the infamous case of Mt. Gox, almost $500 million worth of bitcoin was hacked. Some of it seems to have emerged in the hands of potential thieves, but there’s still mystery surrounding the incident. Many other hacks of exchanges have occurred since Mt. Gox, leading to a scramble to find more secure ways to manage cryptocurrency.

The super-hacks have shined a spotlight on the issue of custody. As Philip Martin of Coinbase, a large cryptocurrency exchange, stated in a recent Wired Magazine interview,

“Cryptocurrencies have a threat model that’s fundamentally different from what’s come before. We’re taking the lessons from the past about physical security and blending them with well-structured cryptography.”

Crypto investors are understanding that a diversified approach to storage is wise. They are turning to cold storage (offline storage) for at least a percentage of their coin as a way of managing their risks of loss.

Many are finding that the simplest way to avoid the threat of losing digital coin to a hacker is to move it to an offline storage device, called a “cold wallet”. At the same time, the 128-bit encryption codes that permit access to the currency (especially the private key) have to be securely stored where they can be retrieved.

The moment digital files or keys are transferred to a physical medium, whether it’s a device or plain paper (which may be a legitimate way to store an encryption key), custody is the crucial issue. Many of the same risks exist for offline cryptocurrency as apply to other easily transported high-value items like gems.

The encryption keys add a layer of complexity. There are two high-value items, the currency and the key that accesses it, that must be transported and stored separately in a way that they can be rejoined when the legitimate owner wants access.

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This is one of those things that seems so obvious that you would have prepared for it. If you are the only one who has the encryption keys to a big stash of cryptocurrency, wouldn’t you take precautions to mitigate the possibility of your death?

In what must be one of the worst nightmares of cryptocurrency investors, news sources report that Canadian firm QuadrigaCX exchange CEO, Gerald Cotton, died in India on December 9, 2018 of complications of Crohn’s disease. He was reportedly the sole possessor of encryption keys to currency worth somewhere between $135 and $150 million. If these keys cannot be recovered, the company and the investors who trusted in it may simply have lost the digital money.

There have been very large losses from cryptocurrency exchanges before, but they have been due to hacker attacks that succeeded. Coindesk, a large American crypto exchange, reports that 2018 saw by far the largest losses of crypto due to hackers breaking into exchanges. They warned against keeping ‘hot’ wallets (coin storage) on the exchanges because the hackers were winning the technology race at the moment. The article argues that using hardware wallets (offline devices to store currency) “gives you the highest protection level.”

It is not clear in reports on this widely-circulating story whether Cotton kept the currency on hardware devices, or if he was just in sole possession of the encryption keys. Regardless where the digital coin is kept, you must have the keys to access it. The keys themselves must be stored in a secure fashion, with a method for retrieving them. Cotton’s wife claims that she has searched diligently for the keys to no avail—highly skilled coders are seeking ways to regain control of millions of dollars, with no success to date.

There has to be a plan.

Further, hardware keys in themselves are not the final security solution. Once encryption keys and/or currency are transferred to any offline medium, you have created an item that in itself is both valuable and vulnerable. Like jewelry or cash, offline stashes of cryptocurrency or the keys to access it become easily transported, high value assets.

Like jewelry or cash, offline crypto storage raises issues of transportation, hand-offs in the chain of custody, and storage security. All of these steps are exposed to significant risks of loss.

Some may look at the QuadrigaCX episode and conclude that cryptocurrency may be too risky for legitimate investors, and not ready for prime time. In the early years, crypto was often used in dark web transactions for drugs and money laundering, and there is a case to be made that it cannot function in a normal economic environment.

However, a greater certainty is that the crypto dream of creating a purely “free” means of exchange beyond the reach of any government is not without significant problems. Standard fiat currencies exist within structured sets of rules that track and evaluate transactions that provide some security. Money transport and storage businesses operate within these systems using carefully crafted risk management protocols to mitigate known threats.

Crypto may need to develop similar rules and work within fiat systems and/or adopt physical security similar to cash—to get the same level of security. To realize the potential advantages of cryptocurrencies for ordinary economic transactions, there needs to be a much higher level of control.