The crypto-custody firm claims that it was the client’s responsibility to back up the private keys.
Crypto-custody firm Fireblocks is facing legal action by a firm that claims it was locked out of its wallet containing a substantial amount in crypto assets.
Crypto staking platform StakeHound claims that negligence by a Fireblocks employee resulted in tens of millions of dollars worth of crypto assets being lost without any backup available. Fireblocks is an Israeli-based company that provides custody services for businesses and which is working on speeding up digital transactions.
StakeHound filed the lawsuit at the Tel Aviv District Court on June 22 claiming damages for the lost assets. The wallet in question contained 38,178 ETH, equating to more than $72 million at the time.
The court was told that a Fireblocks employee allegedly failed to protect or backup the private keys to the wallet, which were subsequently deleted preventing StakeHound from accessing its assets. In a statement, StakeHound claimed:
“This is a human error committed by an employee of the defendants, who worked in an unsuitable work environment, did not protect or back up the defendant's private keys needed to open the relevant digital wallet, and for no apparent reason, the keys were deleted, preventing the plaintiff's digital assets from being accessed,”
According to a report in the Israeli media, the company entrusted with backing up the private keys, Coincover, reportedly received the keys but could not check if they could open the wallet due to a confidentiality agreement.
Fireblocks has denied any negligence and said the private keys were generated by the client and stored outside the platform, adding that “the customer did not store the backup with a third-party service provider per our guidelines.”
In a statement on its website, Fireblocks further explained that it cooperated with a request from StakeHound in December 2020 to create a set of “BLS key shares” related to an ETH 2.0 staking project. BLS is the Boneh–Lynn–Shacham cryptographic signature scheme that allows a user to verify that a signer is authentic.
On April 29, the Fireblocks team conducted a regularly scheduled disaster recovery drill and discovered that a set of BLS key shards from the backup could not be decrypted, concluding that the customer had never backed them up.
“No Fireblocks production keys were ever affected, and all Fireblocks customers’ funds are safe, and customer keys are backed up and recoverable,” it stated, adding that it was actively investigating the situation pending a response from the District Court.