Cryptocurrencies represent a new frontier for currency and payments. From 2008, when Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System, introducing the world to Bitcoin, to 2017, where it nearly reached $20,000 in value, cryptocurrencies have become a >$300B business. In spite of recent downturn in prices, there are no signs of them fading into irrelevance.
However, with a new frontier comes new danger. As many have moved to cryptocurrencies as alternative investments for their anonymity, decentralized nature, low transaction fees, ease of setting up, and lack of regulation, others are trying to take advantage of that anonymity and lack of regulation. Namely, there has been a wave of thefts in cryptocurrency exchanges.
A Wave of Crypto Heists
Hackers stole 58 billion yen ($534.8 million) worth of NEM coins from Japanese cryptocurrency exchange Coincheck in January 2018. As a response, Coincheck subsequently restricted withdrawals of all currencies and trading of cryptocurrencies other than bitcoin. The management of the exchange said that Coincheck held NEM coins in a “hot wallet,” which describes a digital wallet that is connected in someway to the internet.
In contrast, Coinbase, a leading US crypto exchange, stores 98% of its digital currencies in “cold wallets,” or offline storage. The problem with hot wallets is that the coins stored are only as secure as the exchange’s security. Moreover, exchanges such as Coincheck and Coinbase are not banks, and are not FDIC-insured to protect depositors from losses.
Hiccups on the Company’s End
While some might lay the blame on customers and investors for not being careful enough to secure their own assets, many have placed the blame squarely on CryptoExchanges for not securing their platforms. Italian cryptocurrency exchange BitGrail lost an estimated 17 million Nano coins ($195 million) in February 2018. Since the disclosure of the theft, the value of the coin has crashed from $9.64 as of February 16th to $5.97 (May 16, 2018). BitGrail has announced plans to refund affected customers, stating they will immediately receive 20% of their lost Nano coins, assuring that the remaining 80% will be paid out sometime in the future.
However, investors will have to accept BitGrail’s settlement agreement in order to be reimbursed, thereby signing away all their rights for future legal action. According to an article from The Next Web, users A conversation between Zack Shapiro, a Nano developer, and BitGrail founder Francesco Firano, otherwise known as “The Bomber,” claimed that bugs in Nano’s software allowed coins to be double-spent, or using the same coins for multiple transactions, without the exchange noticing.
Nano developers have rejected the notion, claiming that no double spending was detected on the ledger and have even accused Firano of “having mislead the Nano development team and community regarding the solvency of BitGrail for a significant period of time.” Whosever fault it is, the fact still remains that BitGrail lost a significant amount of their customers assets, to the point where it was even considering an exit scheme and the loss was enough to cause infighting between the founder and his developers.
There is also the issue of BitConnect, a site that promised outsized returns to people who loaned their cryptocurrency to the company. For example, a. What resulted was quite different, with many losing their life savings, ending with BitConnect shutting down. Some in the cryptocurrency community, like Vitalik Buterin, have accused BitConnect of running a Ponzi scheme. Once again, as there are no traditional Cryptocurrency regulatory mechanisms, BitConnect cannot be penalized the way other financial crimes perpetrators like Bernard Madoff have been.
Cryptocurrency is new, and like many new technologies, there are inherent risks. Chief among those risks is an alarming lack of security among cryptocurrency exchanges, particularly among exchanges that use “hot wallets”.
There is also the problem of stability of certain exchanges, such as BitGrail’s loss of Nano coins, and the fact that the developers and founder are at odds over who is to blame over said loss. Furthermore, BitConnect’s disastrous crash left many of its investors penniless, some even to the point of losing their life savings. The lack of regulatory measures that are normally seen with banks makes investment in cryptocurrencies a risky proposition. In order to ensure the future of cryptocurrencies, investing in cryptocurrencies needs to be safer.