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Employer Allegedly Loses $76 Million Worth of ETH to Private Key Backup Failure

The Israeli cryptocurrency custody company, Fireblocks, is currently facing a lawsuit filed against it by Swiss-based crypto staking platform, StakeHound, for allegedly causing it to lose over $75 million worth of ETH.

In a recent report, StakeHound claims that it has lost access to a digital wallet containing more than $75 million worth of ETH that it kept under Fireblocks’ custody.

The Story

According to StakeHound, the issue had emanated from negligence by a Fireblocks employee who had allegedly not backed up the private keys to the digital wallet. The keys were deleted, making StakeHound unable to access the contents of the wallet.

The company said,

“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.”

The digital wallet in question contained about 38,178 ETH, which is worth $76,172,746 at the time of writing.

Fireblocks’ Response

Faced with this lawsuit, Fireblocks has denied the accusations and the company’s CEO Michael Shaulov said that the entire claim is very far from the truth.

” The plaintiff’s entire claim is incorrect and the entire sequence of events described is detached from reality, and if there was negligence it was from the plaintiff’s side… We were involved in the process and we provided the software. They gave us a key that was not part of the system and they had to pass instructions to use it, and we tried to help them but they decided to file a lawsuit.”

Shaulov explained that the lost keys were generated by StakeHound and kept with Fireblocks for safekeeping. The crypto staking platform had allowed its users to stake on the coming Ethereum 2.0, locking up their ETH assets until the Ethereum 2.0 network upgrade.

However, one downside is that the staking operates with the Boneh-Lynn Shacham (BLS) network, which is currently not supported by Fireblocks’ system.

Therefore, the keys were not managed within the Fireblocks platform. When it noticed some irregularities in the BLS key during a regularly scheduled disaster recovery drill, it immediately suspended the affected addresses and alerted StakeHound.

Fireblocks works with Coincover, a company that backs up these private keys offline. However, due to a confidentiality agreement, Coincover could not open the keys set to it and it turns out that the ones it had allegedly received from Fireblocks were the wrong keys.

Just recently, Fireblocks had raised $113 million from top VCs in a Series C funding round 

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