Cryptocurrencies: how to secure your assets?

Principles of cryptoassets

Security and property: two inseparable principles.

Property is a fundamental right which provides an entity with the possibility of enjoying its assets. To insure property, assets must be secured to prevent abuse of property. Under French law, the government specified in December 2020 that “Cryptocurrencies do not have a clear legal status and are not recognized as financial instruments. As a result, crypto-currencies are not currently regulated. “. However, digital assets are taxable while jurisdiction remains obscure.

Safety and property are two inseparable principles. The fact that cryptocurrencies are virtual assets doesn’t change much. The storage of physical gold is the emblem of financial security. On the one hand, the way of storage is central (trunk, etc.). On the other hand, for large quantities, the storage location is important. Thus, the preferred places for the storage of physical gold are generally Switzerland or Singapore. Legislation in other countries limits market freedoms, and may even leave room for confiscation of assets. Security is a fiscal, material and legal issue. Cryptocurrencies follow similar security criteria for individuals and managers.

Taxation, authorizations and prohibitions

Cryptocurrencies are banned in a few countries, mainly less developed countries or those with authoritarian leanings. These include Bangladesh, Pakistan, Ecuador, Bolivia, etc. However, some countries such as Qatar (against terrorism) or Algeria (against tax evasion), have also banned the holding of cryptocurrencies. Japan or Switzerland are among the only countries to date to consider cryptocurrencies as a legal means of payment.

In addition, a recent OECD report shows that cryptocurrencies are taxed differently. The majority of countries around the world view cryptocurrencies as intangible assets while others view them as financial instruments. Thus, most countries tax cryptocurrencies on estates (France, UK, USA, Korea, Netherlands, Ireland, Iceland, Germany, etc.). In addition, cryptocurrencies are included in the wealth tax in Switzerland, Luxembourg, Belgium, Spain and Norway.

However, tax differentials remain considerable around the world. The tax on capital gains from crypto assets does not apply to Singapore, Switzerland (excluding companies), Portugal, Hong Kong, the Caymans, Germany (more than a year of detention), etc. For many companies, the legal and fiscal relationship of states vis-à-vis cryptocurrency is critical to ensuring the security of assets held.

Ownership and security of cryptocurrencies

In the case of Bitcoin, a cryptocurrency is secured by two digital keys. A first key is public and certifies the uniqueness of the cryptocurrency held in the computer network. Then, a second private key allows the holder to keep his assets and to ensure the “ownership” of the cryptocurrencies in question.

The private key thus allows access to its cryptocurrencies in the wallet. The public key allows the user to be sent other cryptocurrencies, a bit like the RIB for a traditional bank account. A private key is generated randomly, by a sequence of 256 digits of 0 or 1. The conservation of the private key is the whole issue behind the security of cryptocurrencies. The genius of cryptocurrency is to directly merge digital payment systems (transfers, etc.) with the currency itself. In this, cryptocurrencies meet a need for use, encouraging globalization, freedom of agents and decentralization of the means of exchange.

Secure your assets

The different ways to secure your assets.

The issue of security is therefore based on the most optimal conservation of its private keys. One possibility is to use a hardware wallet, that is, a very secure wallet. It is thus possible to keep your private keys on a physical device completely independent of your phone or your computer (“ledger”, etc…). On this device, the private key is then secured by a 4 to 8 digit PIN code. To carry out transactions, all you have to do is connect your hardware wallet on their phone or computer.

Security is also ensured by the use of a 12 or 24 word list. This list of words allows access to the account (recovery of his wallet on an application, etc …). It is therefore imperative to ensure the strong security of this list of words, especially for large portfolios. Some users keep this list of words in safes at home, in a bank or in a non-financial institution.

For application users, some cryptocurrency platforms favor a greater or lesser degree of security (Swissquote, etc.). Application security also determines the overall security of the portfolio, especially among freelancers with medium and small accounts.

The issue of financial security

OTC market: “Over-The-Counter”

The cryptocurrency market naturally faces supply and demand. For most agents, the exchange is done through intermediaries (cryptocurrency investment applications). The OTC exchange is a sandstone exchange, that is to say that the exchange is direct between the supplier and the requester, without intermediaries. As a general rule, the OTC market concerns transactions involving large amounts of several hundred to thousands of Bitcoins for example. The OTC market is therefore reserved for applicants or suppliers of substantial size, carrying out transactions that can easily reach several tens of millions of euros.

The objective of going OTC is twofold. First, it allows contractors to avoid unstable market movement. Then, the OTC market makes it possible to avoid intermediaries and therefore risks related to liquidity and security, as well as transaction costs. The OTC market also offers trading freedoms, because it is often poorly regulated and transparent.

Limits of cryptocurrency security.

The extreme security of cryptocurrencies can lead to complete loss of access to property. The famous story of the German programmer Stefan Thomas has become essential. The latter lost his PIN code and made almost all the attempts before the account was permanently closed. Almost 7,000 Bitcoins are at stake, i.e. more than $ 250 million.

According to Chainanalysis, nearly 3.8 million Bitcoins would be lost due to this extreme security. To date, this corresponds to nearly $ 140 billion in capitalization lost for a Bitcoin at $ 37,000. In the long term, therefore, the success of his investment inevitably depends on the good security of his portfolio.

Beside that, some cryptocurrencies can suffer from digital attacks. Many cryptocurrencies are likely to face this situation. On December 25, 2013, for example, Dogecoin was hacked. Millions of Dogecoins have been stolen due to insufficient wallet security. The security of cryptocurrencies therefore requires the proper management of confidential data and the proper functioning of blockchain systems.

Ultimately, the security of cryptocurrencies is a central issue. It is the cornerstone of the entire cryptocurrency industry that allows property rights, poorly recognized by governments, to exist. On the one hand, for large portfolios, it is important to look at the legislation in each country. Then, the absence of an intermediary gives full responsibility for access to the account to users. That is to say that the security of its crypto assets goes through the conservation of its private key. Ledgers (hardware wallets) can help secure this data completely independently. In addition, it is also important to ensure the security of word lists.

In addition, it should also be noted for large wallets that the security of its wallet is more easily ensured in the context of an OTC exchange. However, limits remain when it comes to the security of cryptocurrencies. Some cryptocurrencies still have low levels of security on their Blockchain network, while other cryptocurrencies suffer considerable losses due to the strong security.

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