Earlier this year, the U.S. House of Representatives issued its annual Joint Economic Report, which included an entire section dedicated to blockchain and cryptocurrency. According to the report, the potential for digital currency theft “remains a problem,” although this isn’t due to the inherent structure of blockchain.
“No evidence exists of anyone hacking blockchain’s underlying protocol, but digital currencies are still vulnerable to theft,” the report elaborates. “Users keep their currencies on digital ‘wallets’ stored as files on a computer. For many, this could be a technical barrier deterring them from directly using the tokens.”
As the report notes, centralized exchanges and internet services emerged to solve this hurdle where users can buy, sell and store their virtual currency. However, using an exchange to store ones’ digital assets increases the risk of theft.
“When individuals keep their digital asset in a single ‘wallet,’ the only way to access it is by knowing their private key,” the report continues. “But with online exchanges that pool multiple assets into much larger ‘wallets’ to facilitate trading, many people will have access to those funds… Users in a cryptocurrency exchange must remember that they are putting their trust in the security of that entity in a manner similar to depositors in early banks.”
Indeed, cyber criminals have targeted a wide range of cryptocurrencies in recent years. Examples of high-profile digital heists in 2017 included $7.4 million of Ethereum (ETH) stolen during a CoinDash ICO, 36,000 tokens worth $8 million looted from VERI, $30 million of Ethereum lifted from Parity (followed by a $280m Ethereum wallet hack and freeze later that year) and $68 million in investor funds swiped from NiceHash. Digital intruders also hijacked Bithumb’s (a cryptocurrency exchange) user database to steal Bitcoin worth billions of South Korean won (₩), while a gang of cyber raiders compromised Tether’s treasury wallet and made off with $30,950,010 USDT.
Perhaps not surprisingly, cryptocurrency thefts are continuing apace in 2018, with Coincheck confirming a $530 million loss to cyber criminals, Coinsecure India reporting a $3 million Bitcoin theft and even a high-profile Crypto YouTuber inadvertently broadcasting a $2 million hack during a livestream.
As the Joint Economic Report cited above notes, “users in a cryptocurrency exchange must remember that they are putting their trust in the security of that entity in a manner similar to depositors in early banks.” From our perspective, it is therefore essential for exchanges to secure customer cryptocurrency – before, during and after a transaction.