After a week of controversy around its new seed-recovery service, French wallet-maker Ledger has been on a PR offensive, including a Twitter Spaces event with Ledger CEO Pascal Gauthier on Tuesday afternoon and appearance by the same executive on CoinDesk TV Wednesday morning.

The message? Ledger has listened to its critics and is prepared to make changes to its approach.

“Everybody is very sad at Ledger when you yell at us. But it’s okay because we get better and we will always strive to be good servants of the community,” Ledger CEO Pascal Gauthier said during a Twitter Spaces session on Tuesday afternoon.

The yelling in question was the criticism Ledger faced after announcing its upcoming key recovery service. The service will allow users to keep an encrypted backup of their wallets with a set of three custodians, including Ledger itself. Many Ledger users and observers questioned the safety of the proposed service regarding potential hacks, user data leaks and abuse of trust by Ledger itself.

On Tuesday, Ledger published a letter saying that it heard its users’ concerns and decided to change course: it will open-source the Ledger Recover code before launching the service, Gauthier wrote.

In addition to that, Ledger will offer additional security feature to the Recover setup: while the encrypted backup will be stored by three custodians, users will have an option to also create a passphrase, so that even if the custodians collude and recover the private key, they still won’t be able to move funds without the passphrase.

Ultimately, nothing is 100% trust-less for an average user, Gauthier said in an interview with CoinDesk TV Wednesday morning.

“There is always a minimum of trust that you need to have in any hardware wallet that you’re going to use. And we are trying to make the part of the operating system as the one that you have to trust as small as possible and open everything else,” he said.

The decision to open-source the code came as a response to the critics pointing that it’s impossible to audit Ledger’s new feature because the code is not public. However, the open-sourcing pledge comes with a caveat: Ledger will not publish code for all of its firmware for security reasons, the company’s CTO Charles Guillemet said in a Twitter thread.

The smartcard chip in the Ledger wallet, which is where all the operations happen and users’ private keys are stored, have built-in protections against physical tampering, Guillemet wrote. “Because this know-how is the IP of manufacturers, they don’t want it leaked, preventing Ledger’s firmware from being fully open source,” he added.

Ledger will “gradually open-source” most of its operating system, starting with the controversial Ledger Recover feature, Guillemet wrote, but “the other parts will take a little more time since it needs to be refactored to abstract the chip-specific characteristics under NDA from our OS.”

Ledger does not believe that open-source is a “silver bullet for security,” the firm’s co-founder Eric Larcheveque said during the Twitter Spaces. “We chose closed source because we believed it brings a higher level of security,” he added

Guillemet also said that ultimately, even with the open sourced code, users have to trust the wallet manufacturer – Ledger or else – with the safety of their crypto. Otherwise, users would have to build their devices from scratch, including all the physical parts, the code and the compilers turning that code into working apps, Guillemet said, and that’s obviously not an option for the “millions of users” Ledger wants to onboard in the coming years.

For the same reasons, Ledger did not choose to create a completely new product for the users interested in the key recovery functions, instead making it an opt-in upgrade for existing wallets. Some participants of the Twitter Spaces event said this could be a way to avoid the PR disaster Ledger went through over the new feature.

But making a new product for the new feature would be “a security theater,” Ledger’s chief experience officer Ian Rogers said: “I can take a Ledger and put it in a different box with a different name, but it would still have exactly the same sort of potential threat vector.”

That existing wallets can be upgraded for the new feature was the most controversial part of Ledger Recover. Many observers noted that Ledger’s main selling point has been that private keys never leave the device. And now it turns out that the same devices that are not supposed to reveal the private key actually can broadcast the backup to the outside world.

To add insult to injury, Ledger’s Twitter account responded to this saying that “it is and always has been possible to write firmware that facilitates key extraction” in a Monday tweet that caused outrage and was later deleted.

This should not be a shocker, Guillemet explained during the Twitter Spaces, because that’s the way Ledger works: to interact with different blockchains and smart contracts, the wallet’s operating system must access the private key. And the operating system needs to be upgradeable because blockchains themselves also upgrade and implement new features from time to time.

This means that the programs running on Ledger always could have been changed in a way that concerns private key handling – that’s something a user needs to accept by default, and the fact that users did not realize that came as a surprise for Ledger itself, Guillemet said.

Another controversial part of the Ledger Recover is that the service, which is offered as a paid subscription, requires users to go through know-your-customer (KYC) checks. A Twitter user nicknamed @Zk_shark asked whether Ledger will readily respond to any government subpoena requesting data of the Ledger Recover users.

He recalled the infamous case of 2018, when Coinbase complied with the IRS’ request to provide data of 13,000 users. Later, 10,000 Coinbase users received a letter from the tax agency suggesting that they might have failed to properly report their crypto-related taxes. The IRS did not disclose the source of the users’ data.

Gauthier’s response was: if you fear this scenario, don’t use Ledger Recover. However, receiving such subpoenas is not something that is bothering the company. “We don’t think it’s very easy to subpoena a service like Ledger Recover,” Gauthier said.

However, he added, “if you want to be absolutely censorship resistant, you should just not activate the function.”

When Ledger, a Paris-based hardware wallet-maker, announced a new key-recovery feature this week, it thought the move would be popular.

Allowing users to recover their private keys – much like you can recover your password if you forget it – would help onboard customers, the company believed. Potential crypto users are known to be turned off by crypto’s unforgiving self-custody ethos (“not your keys, not your coins”). But a key recovery service would offer more comfort.

Immediately, the launch of “Ledger Recover” provoked criticism.

Opponents say that the product isn’t compatible with the concept of a hardware wallet, which promises to ring-fence private keys from prying eyes.

“For a hardware wallet to transmit the seed or shares that can reconstruct the seed over the internet fundamentally alters the security threat model of a hardware wallet,” said Pavol Rusnak, co-founder of SatoshiLabs, which makes a competing hardware wallet Trezor. “In fact, this change is so significant that I’m not convinced it’s a viable solution for a hardware wallet at all.”

The opt-in update, available for Nano X models, allows Ledger owners to use a service named Ledger Recover and share their seed phrase (a sequence of words used to recover a lost wallet) with a set of trusted custodians, namely Ledger, Coincover and EscrowTech. They will store users’ encrypted backups for a monthly fee.

According to the company, this allows users to restore access to their crypto if they forget or lose their seed phrases. By using the service, they would be able to ask Ledger for help, prove their identity and get their private key restored for them.

The critics worry that both the firmware update and the whole recovery setup does not look safe. Ledger insists that things are secure as ever.

CoinDesk looked into how the new feature is supposed to work (as described by Ledger itself) and asked experts what the potential security concerns here may be.

According to Philip Costigan, Ledger communications lead, the new feature does not mean the device itself communicates with custodians over the internet, as the Ledger wallets themselves “have no WiFi or any other internet connection capability.”

To transfer encrypted parts of the seed to custodians, users need to connect their Ledger wallet to their phone with a Ledger app via Bluetooth, Costigan said. The same mechanism is used for approving transactions, when Ledger owners want to spend crypto from their wallets.

Here is how Costigan explains the process: First, users verify their identity with Onfido and Tessi, the two providers Ledger employed for this task, via Ledger’s mobile app.

“Ledger, Coincover and EscrowTech don’t review or hold people’s IDs, it’s done by the technology of the two providers I mentioned above who are experts here,” Costigan said.

After that, the Ledger device gets a prompt to create a backup. Then a backup is created, encrypted, divided into shards using the Shamir’s Secret Sharing technique and transferred to Ledger, Coincover and EscrowTech, Costigan said. Each custodian gets to keep one shard, which are useless on their own.

“All encryption, fragmentation, and decryption of your secret recovery phrase happens on your Ledger on the secure element. So the only thing that leaves the secure element chip, and only after your consent, are the encrypted shards,” he added.

Costigan also underscored that the hardware wallet itself does not store any user’s identity information on it.

When a user requires a recovery, any two out of three custodians will “send fragments back to your Ledger device, reassembling them to build your private key,” the FAQ page on Ledger website says.

The news of the update provoked a storm of criticism from the crypto community, with accusations that Ledger’s new offering contradicts its past statements about keeping private keys off the internet.

In particular, Crypto Twitter piled on the tweet Ledger’s official account posted in November, assuring users of the safety of their devices.

“How can you prove to us the customers that the private keys on the device are not leakable via a firmware update in case someone at the company wants this?” a Twitter user known as @S_Radude asked on Nov. 15, 2022.

“Hi – your private keys never leave the Secure Element chip, which has never been hacked. The Secure Element is 3rd party certified, and is the same technology as used in passports and credit cards. A firmware update cannot extract the private keys from the Secure Element,” Ledger responded.

Users pointed out that the new update does almost exactly what Ledger said they wouldn’t do. There is a caveat: during the recovery process, as Ledger describes it, it’s not the private key itself that is getting extracted but the seed phrase encoding it.

This still sent a worrying signal to the users: what they considered safely stored in a little citadel of their hardware wallet now can leave it and travel elsewhere. What if Ledger decided to just extract and collect users’ seed phrases, without any protection?

“If you can update the firmware to instruct the ‘Secure Element’ to encrypt, shard, and distribute the seed, what stops you from updating the firmware next week to just extract the unencrypted seed,” user @NewWageCrypto asked.

“Technically speaking it is and always has been possible to write firmware that facilitates key extraction. You have always trusted Ledger not to deploy such firmware whether you knew it or not,” Ledger responded on Wednesday in a tweet that has since been deleted.

But the archived copy of the thread shows that the tweet, which immediately triggered a new wave of outrage, was followed by a clarification: for any update to happen, users must manually approve it.

“Every firmware update requires a PIN unlock device approval, this is the final line that makes it impossible for us to extract your keys even if we had your device,” another now deleted tweet from the company said.

However, the questions still linger: what does Ledger’s firmware actually can do and can users still trust their devices?

Crypto developer and researcher Laurence E. Day told CoinDesk that the core of a problem here is that Ledger’s code is closed source, so nobody can review what the update is actually doing. Blockchain security expert Christopher Allen shared similar considerations on Twitter.

“One of my concerns with the new Ledger Recover service is that they appear to be sharding via Shamir’s Secret Sharing, but doing so in a proprietary way and possibly in a naive fashion. We don’t know, as it is not open source,” Allen tweeted.

For Day, the most worrying part of the situation is an apparent breach of trust between Ledger and its users, triggered by the contradictions in the firm’s statements.

“​​I guess the thing that bugs me here is that there’s this breach of a covenant that seeds would never leave the secure element chip, even though it’s always been possible to do that through firmware (and this remains an option for other hardware wallet suppliers too),” Day told CoinDesk via direct messages in Twitter.

Another issue has to do with privacy. Hardware wallets are typically viewed as a way to store your crypto anonymously, without attaching your name to it.

However, users who opt in for the Recover update will have their identities linked to their crypto wallets, making the experience closer to using a centralized exchange with know-your-customer (KYC) checks.

Head of content for another competitor hardware wallet maker Foundation, going by the nickname Seth For Privacy, tweeted that a setup Ledger is offering means a whole set of concerns for users, including “data leaks, hacks, and government censorship or surveillance.”

“Not only can leaks or hacks occur, the sales of data on users of Ledger would be extremely valuable now and in the future, and any of the ‘authorized third parties’ could decide to leverage your data as an income stream at any moment,” he wrote.

If, in the future, hackers breach Onfido or Tessi, they might get a list of Ledger users, who are likely to own large amounts of crypto (the wallet itself costs about $150 to buy), along with a wealth of their personal data, Seth added.

Ledger has been breached in the past: in July 2020, information of 272,000 users was stolen from the firm, with a series of phishing attacks on users following that breach.

Law enforcement agencies, too, might use the setup to get access to Ledger users’ crypto, Day said: “The three organizations that will hold the shards are known, so they’re liable to get a visit from the feds – so you could argue that by enabling Recover you’re turning your wallet hot even if there are legal steps in between,” he said. (In crypto terms, “hot” wallets are connected to the internet, “cold” are not.)

There is also a danger that, however secure the offered setup is, any system can be gamed, SatoshiLabs’ Rusnak said: “There’s always the risk that someone could use generative AI technologies to impersonate me, obtain my seed shares, and ultimately reconstruct my seed.”

Some commentators on Twitter also voiced concerns that while the feature is optional now, in the future, Ledger might make it obligatory for all devices, for regulatory reasons or else.

Using trusted custodians is nothing new for crypto – in fact, everyone who keeps their coins on an exchange is trusting the exchange like it’s a bank. But hardware wallets embody the “be your own bank” ethos of Bitcoin: that you don’t have to trust an intermediary to keep your money safe.

This means keeping the keys to your crypto on a device that only you control, preferably disconnected from the internet, to avoid the risk of hacking. But this approach requires self-discipline that might feel excessively burdensome to many people. Ledger’s new service attempts to give users some peace of mind, allowing them to recover lost crypto wallets like they would recover stolen credit cards or forgotten passwords (although in a much more sophisticated fashion).

In this sense, Ledger Recover is a kind of compromise between the autonomy of cold storage and the comfort of custodial one: your crypto is on your device, but if you lose it, there is someone to restore it for you. The question is, do Ledger users want that compromise?

“I get the point of why you’d want to offer Recover as a U.X. improvement to mom and pop, but it just feels like a comms screw-up: mom and pop aren’t using these devices anyway,” Day said, adding that hardware wallets users are by default a more sophisticated public.

Ledger, however, believes that moms and pops might just not know they want it yet.

“You’re saying this is not what customers want. Actually, this is what future customers want,” Ledger CEO Pascal Gauthier said during a Twitter Spaces session on Tuesday. “This is the way that the next hundreds of millions of people will actually onboard to crypto.”