A digital signature is a cryptographic mechanism used to validate the authenticity and integrity of digital data. This includes such things as a message, software, or digital document.
Essentially, it is the digital equivalent of a handwritten signature or a stamped seal. However, a digital signature offers far more inherent security. In many countries, a digital signature is legally binding in the same way as a traditional handwritten signature.
How Digital Signatures Work
Digital signatures are based on public-key cryptography (PKC), which is used to generate two keys that are mathematically linked: a public key and a private key. The keys can be used for both data encryption and digital signatures.
As an example, let’s assume ABC Mortgage Company is creating a document requiring Jane’s signature. The mortgage company uses its own private key to encrypt (secure) the necessary electronic documents. The only way to decrypt (access) the documents is with Jane’s public key. Jane provides an electronic signature, and the transaction is complete.
Digital signature technology is only effective if all parties in the transaction trust that the individual (or company) creating the document was able to maintain the integrity of the private key by keeping the key secret. Let’s return to our example involving ABC Mortgage Company. Jane is trusting that the mortgage company did not allow a third party to gain access to the private key. If the key is compromised, fraudulent digital signatures could be created in the name of the private key holder.
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Classes of Digital Signatures
There are three different classes of digital signature certificates. Let’s briefly review each class.
These digital signatures provide a basic level of security. They are used in environments with a low risk of data compromise. Class 1 signatures cannot be used for legal business documents because the validation process does not meet the high level of security required for such documents.
These digital signatures provide a moderate level of security. They are used for both businesses and individuals. Authentication of a class 2 signature would include verifying the individual’s signature against a pre-verified database such as Equifax, TransUnion, or Experian. Class 2 digital signatures are used for such things as e-filing of tax documents, insurance documentation, mortgage applications, loan documents, and other paperless banking.
These digital signatures provide the highest level of security. Class 3 signatures require a person or organization to appear in front of a certifying authority to prove their identity prior to signing the document. These signatures are used in cases involving high-value transactions or where a high level of fraud exists. Examples include e-auctions, court filings, e-ticketing, and highly secure government documents.
Digital Signature Versus Electronic Signature
There seems to be some confusion between digital signatures and electronic signatures. Although the two terms sound rather similar, there is a distinct difference between digital and electronic signatures. Let’s review the details.
A digital signature is a technical term based on a cryptographic process that is used to authenticate a sequence of data. As we discussed earlier, digital signatures are based on public key cryptography (PKC).
An electronic signature, also known as an e-signature, is a legal term that is defined by lawmakers through the legislative process. In fact, the United States Congress officially defined an electronic signature as, “An electronic sound, symbol or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.”
The main takeaway from this rather definition is that a digital signature can also be an electronic signature. But an electronic signature is often not a digital signature. A digital signature can provide cryptographic proof that a document was signed. However, an electronic signature cannot provide the same guarantee. This explains why not all electronic signatures can be digital signatures.
Digital signatures are used to sign and authorize cryptocurrency transactions. In terms of Bitcoin, digital signatures are particularly important because they protect the BTC owner by allowing only the holder of the private keys to access the crypto.
A digital signature is another example of how technology has completely changed the way consumers interact with businesses and with other consumers. A few decades ago, the idea of using an electronic device to replace a hand-written signature would have been unthinkable. Advances in technology continue to move forward, despite our occasional reluctance to embrace new technology. We can only imagine where technology will take us a few decades from now.
Brief Summary of Digital Signature
- A digital signature uses cryptography to validate the authenticity and integrity of digital data.
- Signatures are based on public-key cryptography (PKC).
- PKC is used to generate two keys that are mathematically linked – the public key and the private key.
- The keys are used for data encryption and digital signatures.
- Digital signature technology is only effective if the integrity of the private key is maintained.
- There are 3 classes of digital signature certificates.
- Class 1 certificates are used in environments with a low risk of data compromise.
- Class 2 certificates are used for e-filing tax documents, insurance, and banking documents.
- Class 3 certificates require a certifying authority to verify physical identity before signing.
- A digital signature can also be an electronic signature.
- An electronic signature is not necessarily a digital signature.
- Concerning blockchain, digital signatures are used to authorize crypto transactions.