Putting a price tag on cryptographic keys
Cryptocurrencies such as Bitcoin achieve what may be the purest distillation of money into information: control over funds is achieved by having control over associated cryptographic secrets, specifically ECDSA private-keys used to sign transactions. If you can sign with a specific key, you can spend the funds at a specific address associated with that key. Multi-signature is an extension of this model where instead of using a single key, possession is distributed into a quorum of M keys out of N. This improves both security— compromising a single key does not allow an attacker to walk away with any money— and redundancy: losing access to one key, say due to hardware failure, does not result in the legitimate owner losing access to their money. (Assuming M is less than N; otherwise the loss of any key is fatal.)
It also creates something of a conundrum for putting a price-tag on one such key for the purpose of threat modeling. What is a reasonable amount for the defender to spend in securing that key? For that matter, how much effort would a rational attacker spend on going after one key? Suppose 300 BTC is stored stored in a 3-of-5 multisig address. Intuitively one could argue the value for each key is exactly 1/3 the balance or 100 BTC. But this naive conclusion overlooks the “criticality” condition involved: any combination of less than three keys is worthless from the perspective of controlling the associated funds on the blockchain. (Assuming they are not also used to control some other address with different M-of-N configuration.) But once that third key falls into the wrong hands, the entire sum can be claimed.
In more concrete terms: suppose a disgruntled insider offers to sell an attacker one of the keys for 50BTC. If individual keys are valued based on their pro rata share at 100 BTC, that would be a great deal. But if the prospective buyer has no hope of obtaining any of the other four keys— perhaps they are managed by more honest employees— that 50BTC spent on attacking the first key will yield a return of exactly zero. There is an all-or-nothing phenomenon at work for all would be adversaries: 100% of resources dedicated to getting hold of the first M-1 keys are wasted unless that final key to reach quorum can be successfully obtained.
This is an unusual property of Bitcoin that is not easily achieved for other commodities it is typically compared to: half a barrel of oil is worth approximately half that of a full barrel. It is not possible to create a configuration of crude oil where three barrels must be consumed at the same time. If a gold vault is compartmentalized into five rooms containing equal amounts of the precious metal, plundering one out of five rooms is still a good outcome for the attacker.
Of course there exist physical objects with supra-linear scaling properties based on quantity: a two-carat diamond is worth more than two individual one-carat diamonds with identical specs. Most physical objects follow this pattern. If a car is chopped in half down the middle, the left and right-sides are not worth half the original value of the vehicle, because neither side amounts to a functioning mode of transportation any longer. But the value of those scattered parts is not zero either. They can be sold for scraps or combined with other interchangeable parts to put together a fully functioning if somewhat unusual vehicle.
It is usually in the mathematical realm that we run into scenarios where objects can be divvied up in a way that creates critical thresholds. For example, it is possible to split a credit-card number into two shares such that either share contains exactly zero information about the original, in a strong information-theoretical sense: even an infinitely powerful computer could not recover the original value from a single share. But the combination of two such “worthless” shares yields the original secret. There is another unusual property of these constructions: not only is combination of shares below the threshold worthless, the only way they can attain any value at all is in conjunction with other shares generated from that particular split. If you have half the components for a bicycle, there is a cottage industry of bike shops and parts suppliers to equip you with necessary missing pieces to assemble a complete bike. But keys in multi-signature configuration can only be combined with other keys in the same group. There is nowhere else to turn.
Multi-signature wallets and accountability
This is more than a philosophical puzzle. At least one multi-signature wallet provider has argued that their company should be exempt from any regulation because they are only providing one out of multiple keys required to control funds, with the remainder controlled by the customer. This is in effect arguing that one key has zero value, as long as the quorum requires multiple keys. The argument rests on the observation that if the co-signing system goes rogue or experiences a security breach, its customers can not suffer any losses: additional private-keys not controlled by that service exist, gating access to funds on the blockchain.
But this argument is easily debunked by a reductio ad absurdum: suppose a customer creates a 2-of-3 multisig wallet and hires two co-signing providers to help manage those funds. At some future date, both providers are compromised by the same attacker who absconds with all funds in that wallet, since he/she is able to sign with a quorum of 2 different private-keys. Is it reasonable for both providers to disclaim liability by throwing up their hands and saying “not my fault, someone else had another key”? A more plausible interpretation of fiduciary responsibility is that both providers are implicated in the loss. Even the original argument is self-negating on closer reading: if the value of a multisig key is so minimal that one need not be concerned about the security level of a service that specializes in managing those shares, why bother with outsourcing to those providers in the first place? One could also store that share under the mattress or write it on a post-it note. It is contradictory to argue that you are providing an essential service—helping individuals or organizations offload the complexity of managing private keys— while also seeking an exemption from regulatory scrutiny because the secret you are entrusted for safe-keeping has no value, in the sense that it can not cause monetary losses by itself.
RSA 2FA breach as precedent
It will likely take a long time before a regulatory framework can answer these questions. Individual court cases could set precedent earlier. None of the publicized cases so far have involved a failure of the cosigning service. In the 2016 Bitfinex breach, BitGo acted as the co-signer in what was described as an alternative design to the traditional “cold-wallet” concept where majority of funds are stored in an offline system. During this incident BitGo API co-signed the multisig transactions used by perpetrators to take bitcoin out of the Bitfinex system. But BitGo has maintained—and Bitfinex has never disputed this assertion— that its API was working exactly as designedAPI was working exactly as designed: properly authenticated calls were made by Bitfinex, or someone with credentials required to impersonate Bitfinex, requesting co-signing of transaction. That episode raised questions about the effectiveness of co-signing, specifically for “online” configurations where a single point of failure exists: the Bitfinex system held both its own signing-key and credentials necessary to instruct the cosigner to sign with a second key. But it does not raise the question of co-signer liability precisely as long as the service was following instructions from “Bitfinex.”
Other examples from past security breaches suggest that providers of “additional” security features can not easily shirk responsibility. RSA Data Security experienced a breach of their SecurID authentication system in 2011, resulting in undermining the security of anyone who relied on RSA tokens as the second-factor of authentication— a widespread radius of collateral damage that included the defense contractor Lockheed-Martin. Following the co-signer logic, RSA could have argued that they are merely providing a second factor of authentication on top of an existing one such as passwords. As long as passwords are not compromised, failure of 2FA alone can not result in bypass of authentication. To its credit RSA did not pursue that line of argument. After an initial period of unconvincing PR, the company began offering replacements to affected users, in keeping with the common sense understanding that 2FA providers have a responsibility to maintain a robust solution. It is unlikely that co-signing services will be held to a different standard.