How can one prove ownership of an asset that is 100 percent digital?
This has been a challenge facing Bitcoin, other cryptocurrencies, and other digital assets created with the blockchain and other distributed ledger technologies. The ownership of such assets is directly linked to the private key obtained by the owner.
In order to prove ownership of Bitcoin or other cryptocurrencies, you need to prove that you know the private key. However, you would not want to reveal the private key, as revealing even part of the private key or an image of the private key could put your ownership at risk. By having the private key — or even part of it and then using sophisticated software to attempt to guess the rest of it — hackers can steal your cryptocurrency.
Therefore, it is not a good idea to share the private key directly in order to prove ownership of your cryptocurrency assets. What other methods exist?
Three Ways to Prove Ownership of Your Crypto Assets
- Transferring a Small Amount of Cryptocurrency
Some individuals and organizations prove ownership by transferring a small amount of their cryptocurrency from a digital wallet to a third party that can serve as a neutral party to verify the crypto assets. However, this method could also be prone to fraud, as there could be compromise in transit, or the small amount could be stolen rather than returned.
2. Generate a Statement from a Cryptocurrency Account
Generating a statement from your cryptocurrency account, exchange or wallet, ideally showing your name, the amount of your holdings, the valuation of your crypto assets in USD, the date(s) of purchase and other information, could also be used to prove your ownership of crypto assets. You could also provide a screenshot. This could be suitable if the other party is familiar with and trusts the security of the digital wallet used.
3. Sign a Message with Your Private Key
The most reliable way to prove ownership of crypto currencies is to sign a specified message with your private key. By doing so, you can prove ownership of your crypto assets without the need to reveal the key or having to engage in a transaction, even a small one (as explained above).
The message can be as simple as, “I own this address,” a show of the public address, and the provision of a valid signature, which essentially proves ownership.
Bearer Assets and Proving Ownership
A bearer asset, instrument or security is one in which no ownership information is recorded and the asset is issued in physical form to the individual who purchases it. The holder of a bearer instrument is the owner and whoever is in possession of the document or certificate authorizing ownership is the rightful owner.
Issuers of a bearer asset keep no record of ownership. This means that that asset is traded without a formal record or system demonstrating ownership. Ownership is transferred by simply transferring the document or certificate from one individual to another. Further, there is no requirement for reporting the transfer.
As unusual as this sounds, bearer bonds were very much in use many years ago by investors and corporate officers who wished to retain anonymity. However, due to the potential for abuse, tax evasion and fraud, it has not been legal to issue bearer instruments in the U.S. capital markets since 1982. Securities now must be registered, not bearer, and the issuing firm must keep records of the security’s owner by law.
A discussion of bearer instruments or assets is applicable when evaluating the security of Bitcoin and other cryptocurrencies because cryptocurrency is a bearer asset: Whoever holds the private key is considered the owner. The blockchain enables self-custody of digital assets: the owner of crypto assets is free to choose from various wallet solutions, and the regulatory environment continues to shift. In some ways, every digital asset owner needs to become their own custodian, which can be frustrating when considering the security of those assets.
This can make it extremely hard to demonstrate proof of ownership should a private key be stolen or lost. This security and custody issue is perhaps one of the biggest reasons why institutional players have been slow to accept cryptocurrency.
The Future of Crypto Ownership
At TransitNet, we’ve set out to create the first offchain title registry of record for digital wallets, in order to create an additional layer of protection for cryptocurrency assets. We are building a comprehensive platform to empower individuals and businesses with the option to create a record of title for their crypto assets.
Interested in being at the forefront of the new crypto infrastructure?
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Blockchain Innovation Group – Proving ownership of cryptocurrencies
Investready – Verifying Crypto Assets
Investopedia – Bearer Instrument