As cryptocurrency is easy to stolen, who will pay for the security of exchanges?

Trias
Trias
Sep 6, 2018 · 4 min read

In the cryptocurrency industry chain, exchanges as core links between projects and ordinary investors, play a significant role in promoting the industry development. With the rise of cryptocurrency, the attacks on exchanges have become profitable.

According to statistics, the success of invading an exchange can bring about 10 million dollars to the hacker. And the uneven means of protection of changes to hackers have brought great convenience, which directly threatens the security to users.

To understand the cryptocurrency exchanges, we could firstly focus on how traditional banks operate. If you go to the bank to deposit a sum of money, the bank will cash the deposit and interest after maturity. During this period, banks will spend most of their money on investments and retain some of their money as a reserve fund. In the US, banks should keep cash in total savings of 3%~10% to respond to requests for withdrawals.

Cryptocurrency exchanges are similar to the banks. Exchanges can temporarily deposit digital currencies such as bitcoins, or conduct a variety of transactions, such as converting bitcoins into legal tender, converting them into other digital currencies, or converting legal tender into bitcoins.

In this way, exchanges have both advantages and disadvantages. One of the advantages is the combination of cryptocurrency economy and the legal tender economy, which allows the two currencies to be exchanged freely. However, it shortcomings cannot be ignored. There are many hidden dangers.

We can take stock of the exchange-thefts that have occurred in recent years:

In 2014, Mt.Gox, the world’s largest bitcoin exchange, was robbed of 850 thousand bitcoins valued at $12billion. Mt.Gox, once the world’s largest bitcoin exchange, closed down because its deposits were due and could not be redeemed. Mt.Gox has been in bankruptcy proceedings in courts in Japan and the United States, and people haven’t yet figured out where their money is going.

In December 2017, the South Korean bitcoin exchange, Youbit, lost 17% of its cryptocurrency and declared bankruptcy after being attacked by hackers.

In January 2018, Coincheck, Japan’s largest encrypted currency exchange, was attacked by hackers, and $530 million worth of NEM was illegally transferred to other exchanges. At one time, the market value of NEM was the eighth in the world cryptocurrency ranking, affected by the theft incident, the NEM fell 20% in five hours, and triggered a general decline in the global cryptocurrency.

Analyzing these incidents, we can find that the security risks faced by exchanges mainly come from the following aspects:

(1) From the exchange platform point of view, because the system BUG, may lead to hacker attacks, resulting in property losses.

(2) Safety of hot wallet. A hot wallet is a wallet that is connected to the Internet. A cold wallet is a wallet that is not connected to the Internet.

(3) In addition, user privacy information is also facing many threats.

For example: hackers use security vulnerabilities to intrude into access to management privileges to steal data or use platform users’ weak security awareness, through phishing sites to deceive users of privacy information.

It is the most fundamental responsibility to protect the safety of user’s assets for exchanges which bears heavy responsibilities. After the security incidents on the exchanges, we see that some exchanges close their door and liquidate their assets directly; some exchanges, in the form of debts, owe customers first and then pay them back with transaction fees.

From the point of view of property rights and legal provisions, cryptocurrency is the assets entrusted to the exchange by the investors, and the ownership belongs to the investors. The exchange is bound to be responsible for the abnormal losses caused during the custody of the exchange. Therefore, the exchange must be put in advance and layout, and actively cooperate with the security team to do a good job in identity verification, transaction security protection, anti-fraud risk control and other aspects of security control.

For individuals, it is recommended to choose large-scale exchanges, invest more in security technology, and have less history of being attacked or even have not been attacked. You can also store cryptocurrency in your own cold wallet, or diversify your investments, even if they seem passive.

Trias

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Trias

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