Hot or Cold Wallet: Which is the Better Option for Crypto Storage?

In our third post in the series on Central Bank Digital Currency (CBDC), Art Stewart, Global Head of Sales & Marketing at IDEX Biometrics, talks about the best option to be used for crypto storage – is it hot or cold wallet.

Digital transactions are really convenient – how did we ever shop without them? But bank cards and payment portals remain the only ways to instruct banks to transfer “real” money. A true digital currency, on the other hand, is real money: you transfer it to another person just as you might hand over a coin or banknote. One benefit is the avoidance of payment processing overheads (bank charges) and delays (clearing); but where can you safely keep digital assets?

So far, the most popular digital currencies have been block-chain based cryptocurrencies like Bitcoin and Ethereum. Most suffer from serious limitations as everyday forms of money; transactions are slow, fees are high, their value is volatile and there have been numerous thefts.

Those thefts are significant: in 2019 alone, $534 million was stolen from the Coincheck exchange, $195 million from BitGrail, £37 million from CoinRail, $30 million from Bithumb and $50 million from Upbit, while at least five other exchanges disappeared with customers’ assets.

It seems that storing hard-earned digital dollars in an internet-connected device are about as safe as entrusting them to a bank in the days of Jesse James. We need a better approach before central bank digital currencies (CBDCs) become mainstream.

Hot wallets or cold wallets?

Hot wallets come with significant limitations. Firstly, storage and retrieval add significantly to their workload, latency, and overheads. Secondly, transactions always need an internet connection because of the decentralized way that most block-chains are verified.

In contrast, a cold wallet is a form of storage that safely records digital capital without exposure to the Net. Cold wallets provide a number of significant benefits. They represent stored value and enable you to keep your cryptocurrency with you in the same way that you keep cash in a physical wallet. There is no exposure to or reliance upon an internet connection. Cold wallets are compact which means that you can carry them comfortably and discretely.

With the widely publicized security vulnerabilities of hot wallets, more and more crypto users are turning to cold wallets in order to minimize any security exposure to crypto theft or, indeed, other internet-based risks.

A biometric payment card is the cold wallet we need

A “CBDC” is a digital currency issued by a central bank, such as the Bank of England. You do not need the internet for verification, the bank knows the unique digital footprint of each token it issues. Most CBDC currencies will simply be representations of existing national currencies, and therefore benefit from their value stability and legal oversight.

When you combine a CBDC with a biometric payment card, things get really interesting. A biometric payment card incorporates a fingerprint scanner, so it only works in the hands of its verified owner. The bank’s systems can, therefore, verify both the currency and the owner tendering it. As a result, your digital wallet cannot be stolen by any online nor old-fashioned offline thief. The most you could lose is the plastic because your wallet balance can be confirmed by the system that records each transaction.

Biometric authentication provides both vendor and customer with confidence in the value of what is exchanged – something that neither credit cards nor bitcoins ever really delivered.

The previous post in our series on Central Bank Digital Currency (CBDC) explains how China became the leader in digital currency electronic payments.