A recent survey by the American Bankers Association confirmed that only 12 % of consumers trust alternative payment providers such as digital wallets (e.g., Apple Pay) to secure their payment transactions. The majority still prefers to use credit cards, mainly owing to security-related issues.
When it comes to cryptocurrency wallets, these concerns are well-founded. According to Reuters, US$1.2 billion in cryptocurrency were stolen since 2017. Only 20% of this amount has been recovered, and law enforcement is yet to find the perpetrators.
Although the use of crypto wallets boomed over the past 18 months, estimates show that only 15-25 million people own such wallets. Some barriers are still present, notably security and ease of use, which I would like to address in this article. Other concerns include regulation and the question of whether the technology is sufficiently robust to provide assurances to users in cases of theft or errors.
A cryptocurrency wallet is a software program that stores private and public keys and interacts with blockchain, thereby enabling users to send and receive digital currency and monitor their balance. In order to use Bitcoin, or any other cryptocurrency, you need a digital wallet. Unlike traditional wallets, digital wallets do not store currency. Currencies are not stored in any single location or exist anywhere in any physical form. All that exists are records of transactions stored on the blockchain. When a person sends you digital currency, he is transferring ownership of the coins to the address of your wallet. To be able to use the funds, the private key stored in your wallet must match the public address where the currency is assigned. If the public and private keys match, the balance in your digital wallet will increase, and the sender's balance will decrease proportionately. A transaction record on the blockchain will display the transaction and your cryptocurrency wallet will indicate a change in your balance. In this way, the digital wallet has become accessible to the masses.
The various types of wallets currently available offer different ways to store and access your digital currency. There are three distinct wallet categories – software, hardware, and paper. They differ primarily in the security standard they offer and their ease of use, as well as in other features. A software wallet may consist of a desktop application, a mobile application or an online service. The standard of security depends on the type of wallet you use (desktop, mobile, online, paper, hardware) and the service provider, but all of these wallet types face serious security challenges. Online wallets are easier to use and transfer cryptocurrency fast, but they are far riskier than offline hardware wallets. On the other hand, the latter wallets are less comfortable to use. Probably the most worrisome feature that discourages people from using crypto wallets is the absence of warranty and support. Unlike standard banks, if your crypto wallet is hacked and your money is stolen, or in case you forget your password, it will be "game over" for you. Your cryptocurrency will be lost forever, and no one will help you with your problem. Admittedly, standard banks are hacked too, but when that happens, the bank, not the customer, will assume full responsibility. Customers may rest assured they will get their money back. No one will reimburse you if your own crypto wallet is hacked and drained. Hackers are very creative and sophisticated, and they will find ways to hack into every type of crypto wallet out there, and forgetting one's password? Well, it happens to all of us.
Today's crypto wallets present a single point of failure: once something goes wrong, there is no way back. We are used to working with the standard banking. All of its deficiencies notwithstanding, it will assume responsibility and customers do not really need to worry if their bank account was hacked or their credit card was stolen. For us as customers, there is no single point of failure in that system.
Is Widespread Adoption Realistic?
For the general public to adopt crypto wallets extensively, the industry needs to develop to a point where customers can use them as securely and as easily as they currently do vis-à-vis the traditional banking system.
I believe the time has come for a new generation of crypto wallets. No more "single point of failure" and no more users left alone. The new generation of crypto wallets should provide bank-like security, service and support, combined with a user experience that will allow ordinary people, who are not necessarily technology-savvy to use it easily, in a way that minimizes their own potential mistakes.
Crypto wallets are, undoubtedly, the way of the future, and not only for today's cryptocurrencies but for many other new types of digital assets. However, the service standards still need to evolve significantly, and the security for this service must improve for crypto wallets to be digestible on a massive scale.
Zohar Rozenberg is VP Cyber Investments at ELRON