Digital and Crypto Asset Information Security Evolution

As originally posted at: https://rsmus.com/insights/industries/financial-services/digital-and-crypto-asset-information-security-evolution.html

Financial services institutions face evolving security challenges as digital assets become mainstream investments. JP Morgan's JPM Coin announcement signals that blockchain-based digital securities will increasingly shape the financial landscape, requiring firms to develop new security protocols.

A new architecture with new security requirements

Bitcoin introduced a novel system for transferring value using distributed systems, economic incentives, and cryptography. Digital securities function as bearer instruments — value transfers irreversibly upon exchange, unlike traditional equities and bonds. This creates heightened risks from increased digital access and transaction speed.

Strong security is vital as transactions are irreversible

Software wallets manage digital asset transactions through private cryptographic keys that authorize account access and public keys that serve as transaction addresses. "If you don't hold the private keys, you don't actually own the assets," according to blockchain community wisdom. Whoever possesses the private key can transact, and since transactions cannot be reversed, key control is paramount.

Options to mitigate risk

Financial institutions should implement "cold storage" — keeping private keys offline and disconnected from the internet. Additional security layers include encryption, physical protection, and multi-signature requirements. The blockchain itself doesn't distinguish between hot and cold wallets; security relies on owner-implemented controls.

The tradeoff between security and convenience

Enhanced controls burden daily operations, while insufficient controls invite theft. Institutions should evaluate asset sourcing, optimal storage strategies, direct versus third-party holding, and assurance requirements to develop appropriate security solutions balancing protection with operational efficiency.