Crypto Exchanges’ Key Security Threatened by Quantum Computing

A widely used method that crypto exchanges rely on to generate deposit addresses while keeping private keys offline could break if blockchains migrate to post-quantum cryptography, according to new research. This foundational security model is employed by platforms like Coinbase and Binance to protect customer funds.

Researchers at the startup Project Eleven argue the current architecture may not function under some post-quantum signature schemes. The system, standardized under Bitcoin Improvement Proposal 32, or BIP32, allows new public addresses to be generated from a public key alone.

Consequently, the private signing key can remain securely offline in cold storage. “That means any system that needs to generate fresh receiving addresses—exchanges, payment processors, custodial services—can no longer do so from a public key alone,” Project Eleven CTO Conor Deegan told Decrypt.

Under such a model, the private key would need to participate in every derivation for new addresses. This requirement eliminates the clean separation between hot and cold storage that BIP32 provides today.

The team has published its findings and released a prototype wallet designed to restore this functionality. Their construction recreates non-hardened key derivation using quantum-resistant techniques.

However, Bitcoin does not currently support the ML-DSA signature scheme, meaning a protocol upgrade would be required. Meanwhile, similar wallet constructions could potentially be implemented on Ethereum using its account abstraction features.

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