Blockchain Wallets and Key Management Techniques BBLC Practice Questions (Page 9)

Questions 41–45

1. 41expert · hard

   A cryptocurrency exchange is required by its regulator to maintain a 'key management policy' that includes periodic rotation of keys. The exchange uses a multi-signature wallet with keys held by different executives. The compliance team wants to implement key rotation without interrupting operations or requiring a full migration of funds. Which approach is most appropriate?

   • AChange the threshold of the multi-signature wallet from 2-of-3 to 3-of-5 without changing the keys
   • BCreate a new multi-signature wallet with new keys and migrate funds to it, then retire the old wallet
   • CUse a hierarchical deterministic (HD) wallet and rotate the extended public key for receiving addresses, while keeping the same master seed
   • DExport the existing private keys from the hardware wallets and import them into new hardware wallets
   Reveal Solution Discussion Select an answer first
2. 42foundation · easy

   How is a mnemonic phrase typically derived from a wallet's seed?

   • AThe seed is encrypted with a passphrase and then base64-encoded.
   • BThe seed is hashed repeatedly until it forms a readable sentence.
   • CThe seed is split into multiple parts and each part is mapped to a word from a dictionary.
   • DThe seed is converted into a sequence of words using a standardized word list and checksum.
   Reveal Solution Discussion Select an answer first
4. 43application · medium

   A compliance officer at a financial institution is responsible for safeguarding the private keys that control the company's cryptocurrency reserves. The keys are currently stored on an encrypted USB drive kept in a safe. The officer wants to improve the security posture while ensuring that the keys remain accessible for authorized transactions and that the institution can meet regulatory expectations for key management. Which action should the officer take first?

   • AMake multiple copies of the USB drive and distribute them to different employees for redundancy
   • BImplement a multi-signature scheme that requires approval from multiple designated employees for any transaction
   • CMove the keys to a cloud-based key management service (KMS) with automatic rotation
   • DStore the private keys in a password manager with two-factor authentication
   Reveal Solution Discussion Select an answer first
5. 44application · medium

   A developer is implementing a wallet and must generate a mnemonic phrase. The developer's code uses a random number generator that has not been cryptographically secured. What is the most likely consequence?

   • AThe mnemonic phrase will fail the checksum validation
   • BThe wallet will be incompatible with hardware wallets
   • CThe mnemonic phrase will be longer than 24 words
   • DAn attacker who can predict the random output could derive the same mnemonic and steal funds
   Reveal Solution Discussion Select an answer first
6. 45expert · hard

   A company has a multi-signature wallet with a 2-of-3 configuration. One of the three key holders has left the company and taken their hardware wallet. The company wants to ensure that the remaining two key holders can still access the funds and that the departed employee cannot. What is the most appropriate action?

   • AChange the threshold to 2-of-2 using the two remaining keys
   • BAsk the departed employee to return the hardware wallet and continue using the same multi-signature wallet
   • CUse the recovery phrase of the departed employee's wallet to restore their key on a new device
   • DCreate a new 2-of-3 multi-signature wallet with a new key for a new employee, and transfer the funds to the new wallet
   Reveal Solution Discussion Select an answer first