Demystifying Passkeys in Custodial Wallets: Enhanced Security or Misunderstood Concept?

Custodial wallets, commonly offered by cryptocurrency exchanges and intermediary wallet services, manage users’ private keys on their behalf. This means users don’t directly control their private keys; instead, they are stored and secured on the platform’s system. Within this context, passkeys emerge not as a new type of wallet, but as an advanced authentication method replacing traditional passwords. This article delves into the functionality, benefits, and potential risks of using passkeys in custodial wallets.

How Passkeys Function in Custodial Wallets

Passkeys leverage cryptographic principles to provide a more secure and user-friendly alternative to passwords for accessing custodial wallets. They enable:

• Passwordless Login: Users can access their custodial wallet accounts using passkeys, eliminating the vulnerability of passwords to phishing or brute-force attacks.
• Biometric or PIN Authentication: Passkeys require users to verify their identity through fingerprint scanning, facial recognition, or PIN codes before granting access to accounts or authorizing transactions. This ensures only authorized device owners can access the account.

Binance user setting up a passkey

Major exchanges like Binance allow users to access accounts via passkeys using biometric authentication (Touch ID, Face ID), USB/NFC security keys, or screen lock and PIN. This replaces traditional password entry, significantly enhancing account security. Once set up, users can leverage passkeys across multiple devices, managing them directly through the Binance app or website. This functionality, available since March 2023, mirrors two-factor authentication (2FA) but offers superior security and a smoother user experience.

Debunking the “Passkey Wallet” Misconception

The term “passkey wallet” often leads to confusion. Passkeys are not a distinct wallet type but a security feature within custodial wallets. They enhance account management and transaction security without requiring static passwords. Platforms like Binance, Coinbase, and Bybit have integrated passkeys, replacing passwords or 2FA while maintaining their custodial nature, where the exchange or wallet service retains control over users’ private keys.

Passkey setup is becoming increasingly common across major exchanges

Advantages of Passkeys in Custodial Wallets

Enhanced Security through Biometric Authentication

Passkeys significantly bolster security by never leaving the user’s device or being transmitted over the internet. This resilience to phishing and man-in-the-middle attacks safeguards user accounts. The absence of static passwords eliminates vulnerability to brute-force attacks, mitigating the risk of password breaches and digital asset theft. Furthermore, passkeys reduce reliance on 2FA or OTP codes, which are susceptible to compromise if a hacker gains access to a user’s email or phone.

Improved User Experience

Passkeys streamline the user experience by eliminating the need to remember complex passwords or navigate traditional 2FA methods. Biometric authentication or PIN codes simplify login and transaction processes, making custodial wallets more accessible and convenient.

Simplified Recovery Options

Losing a seed phrase in the crypto world can result in irreversible asset loss. Passkeys offer potential solutions:

• Secure Storage Across Multiple Devices: Passkeys can be synchronized across devices (phones, tablets, computers) and easily recovered through cloud security services like iCloud or Google Drive, ensuring continuous account access.
• Automated Recovery: Lost devices don’t equate to lost access. Users can restore passkeys on new devices through cloud account verification or registered recovery services.

khôi phục passkeySyncing passkeys across devices simplifies recovery in case of loss.

Potential Risks of Using Passkey Wallets

Despite their advanced security features, passkeys present potential risks that users and developers must acknowledge:

Device Loss or Compromise

Losing a device containing a passkey wallet or having it compromised can lead to account lockout and potential asset loss without proper private key or passkey backup measures. System alerts, failed login attempts, and notifications from exchanges or wallets can indicate unauthorized access.

Device Breach or Attack

Malware infections on devices storing passkeys can grant hackers control over linked crypto accounts. Performance degradation, unusual system notifications, and unexpected login requests are potential signs of compromise. Preventive measures include using antivirus software, firewalls, and restricting passkey storage to secure environments, avoiding public Wi-Fi networks.

Lack of Recovery Mechanisms

Without robust recovery options, regaining access to a passkey wallet after device loss can be challenging, especially without a secure backup system for crypto accounts. Utilizing backup solutions like Google or Apple accounts, recovery codes, or provider-supported email recovery methods are crucial safeguards.

Biometric Authentication Vulnerabilities

While convenient, biometric authentication methods used by passkeys are vulnerable to physical device access or data spoofing. Ensuring devices have strong biometric security features, combining biometrics with PIN codes or backup passkeys, and staying vigilant against suspicious activity are essential precautions.

Conclusion

Passkeys are not a separate wallet type (“passkey wallet”) but a robust authentication method integrated into custodial wallets like Binance and Coinbase. They enhance security and user experience without altering the fundamental nature of custodial wallets, where the platform maintains control over private keys. Understanding this distinction empowers users to leverage passkey benefits while mitigating potential risks in managing their cryptocurrency assets.