Coinbase, the largest cryptocurrency exchange operating out of the United States, is working to expand trading services on its platform. Earlier this week, the U.S. Patent and Trademark Office granted the exchange patent protection for a new Coinbase feature – a secure Bitcoin payment system.
Coinbase’s Bitcoin Payment System
Coinbase’s patented system allows users to make direct payments in Bitcoin from the wallets they maintain on the exchange. Coinbase customers will not be required to manage a private key to send and receive Bitcoins from their wallets. While high-profile hacks have raised serious concerns about exchange wallet security in the past, Coinbase’s patented technology is designed to prevent security issues from arising.
Coinbase has been taking security measures very seriously in recent months. In July, the exchange opened a custody service designed to provide data storage to institutional investors. And in the digital storage business, security is the highest priority.
Security Benefits of Coinbase’s Multi-Layered Encryption
Users access Coinbase’s payment system using what the exchange has deemed a “key ceremony.” Key ceremonies involve bundles created for custodians, each of which are individually encrypted with passphrases. Every bundle will have a master key share, which must be combined with other master key shares to make an operational master key. This multi-tired secure encryption design protects every checkout made on Coinbase’s payment system, and the exchange claims that it is far more secure and convenient than user-managed private keys.
Coinbase developed a semi-decentralized, multi-tiered encryption approach to protect users from hacks without burdening them with the responsibility of private key management. Additionally, since Coinbase will maintain control over payments made on its system, the exchange can “freeze” the system in response to a security breach or technical issue. When Coinbase freezes the payment system, no transactions can be carried out until the key ceremony takes place.
The reason why Coinbase is launching a payment system that relies on a new type of security API is due to the risk of wallet key theft during cryptocurrency transactions. When a cryptocurrency user is checking out on a merchant page, he or she must disclose the wallet key to finalize the transaction. Coinbase’s key ceremony provides a solution to this risk by requiring users to encrypt passphrases in shares that are then re-combined into an operational masterkey. The masterkey generates an encrypted private key at checkout and then another decrypted private key for signing transactions.
Cryptocurrency Security Solutions
Despite the significant security benefits created by private-key encryption, cryptocurrency markets have been plagued by hacks, cyberthefts, and accidental losses. Much of this loss can be attributed to issues regarding private key management. Coinbase’s multi-tiered, semi-decentralized wallet security solution represents a step forward in cryptocurrency security.
With growing cryptocurrency markets badly in need of better wallet security options, we will see whether more tech entrepreneurs will develop solutions that will compete with Coinbase’s key ceremony approach. However, until then, Coinbase may be establishing a new position in the expanding cryptocurrency payments market.