Throughout the past six months, seven crypto exchanges have reported large-scale hacking attacks in the tune of tens of millions of dollars, with the most recent platform to suffer a security breach being GateHub.
As the global crypto exchange market continues to see an increasing number of security breaches leading to the loss of user funds, investors may become reluctant to rely on centralized exchanges to store funds.
GateHub — 18,473 accounts affected
As reported by Cointelegraph on June 6, the United Kingdom and Slovenia-based crypto exchange GateHub reported the loss of nearly $10 million worth of XRP.
In an update published on June 7, the GateHub team noted that an unidentified hacker used a sophisticated method to gain access to a database holding users’ access tokens and steal their funds. In the aftermath, GateHub said:
“Through a well-orchestrated attack, the perpetrator gained access to a database holding valid access tokens of our customers. We detected an increased volume of API calls (using these valid access tokens) coming from a small number of IP addresses.”
The exchange told its users that it will cooperate with its internal response team, law enforcement agencies, third-party professional security and forensics teams, and investigative authorities to analyze the breach and to potentially find the individual or a group responsible for the breach.
Insurance is just as important as security measures
Over the years, despite the efforts of exchanges to ramp up security measures and improve internal management systems, hackers have been able to deploy more sophisticated and advanced technologies to gain unauthorized access into corporate wallets and user accounts.
In some instances, as seen in the case of Binance’s $40 million security breach, it is difficult even for the biggest crypto exchanges in the world — with in-house security experts — to prevent unexpected breaches.
However, it is possible for exchanges to set up systems that allow for the speedy recovery of user funds.
Related reading: The Cryptopia Nightmare Drags on as Liquidators Struggle to Reimburse Hacked Users
Binance, for instance, established the Secure Asset Fund for Users (SAFU) in July 2018 to compensate users in the unlikely event of a hacking attack. Binance said in July 2018:
“Starting from 2018/07/14, we will allocate 10% of all trading fees received into SAFU to offer protection to our users and their funds in extreme cases. This fund will be stored in a separate cold wallet.”
Two types of wallets exist in crypto: hot wallets and cold wallets. Hot wallets are wallets that are connected to the internet and that are easily accessible. Cold wallets are wallets stored offline and are used by major exchanges to securely store reserves of cryptocurrencies like bitcoin.
Cold wallets cannot be hacked because they are not connected to the internet — and as such, exchanges hold the overwhelming majority of their reserves in cold wallets.
Still, despite having advanced security measures in place, hot wallets can be vulnerable to attacks, so it is ideal for an exchange to establish an insurance fund that is equivalent to the amount held in its hot wallet to prevent a security breach in the future affecting the exchange’s operations.
Such a practice does not prevent an exchange from suffering a hacking attack, but it minimizes the magnitude of an incident’s impact on the exchange and facilitates the recovery process to be more structured and apparent.
The largest crypto exchanges in the global market — the likes of Binance, Coinbase and Gemini — have either obtained insurance from third-party service providers or have internal insurance funds in place to compensate users, should an unexpected incident arise.
Coinbase, for example, notes that it maintains a reserve that is larger than its online storage with third-party insurance. The insurance document of Coinbase reads:
“Coinbase maintains commercial criminal insurance in an aggregate amount that is greater than the value of digital currency we maintain in online storage. Our insurance policy is made available through a combination of third-party insurance underwriters and Coinbase, who is a co-insurer under the policy.”
Gemini obtained the insurance services of Aon and the Federal Deposit Insurance Corporation in October 2018, and Yusuf Hussain, Gemini’s head of risk, said at the time:
“Consumers are looking for the same levels of insured protection they’re used to being afforded by traditional financial institutions. Educating our insurers not only allows us to provide such protections to our customers, but it also sets the expectation for consumer protection across the crypto industry.”
Communication between exchanges is crucial
Since hot wallets or online storage can become vulnerable to security breaches, it is of the utmost importance for exchanges to establish a line of communication with other platforms to trace and potentially freeze transactions when suspicious funds begin to move.
According to the GateHub team, some of the funds stolen in the $10 million security breach were sent to exchanges such as Kucoin, Huobi and HitBTC, all of which have Know Your Customer (KYC) policies in place. GateHub acknowledged this fact:
“The funds were sent to several exchanges, including Freewallet.org, Changelly, Changenow, Kucoin, Huobi, Exmo, Hitbtc, Binance, Alfacashier and others. We have already contacted each recipient exchange with the aim to freeze and retrieve all customer assets.”
If exchanges have an efficient system to communicate when unforeseen events occur, it becomes possible for them to immediately suspend wallets that received the proceeds from a potential hacking attack and swiftly begin recovering funds.
In January 2018, South Korea’s four largest crypto exchanges — Bithumb, Upbit, Coinone and Korbit — created a hotline for major exchanges to ensure suspicious transactions could be detected and frozen immediately after being disclosed.
Transactions on public blockchain networks like Bitcoin and Ethereum are traceable due to the decentralized structure of the blockchain. Major exchanges are already working with analytics firms such as Chainalysis to maintain a database of suspicious transactions and wallets.
The presence of a hotline among major crypto exchanges in the global market would create a significantly more impractical ecosystem for hackers to distribute proceeds from an attack to various exchanges.
Why systems must improve
In previous years, most crypto-related hacking attacks were suffered by minor exchanges that typically could not afford to have an in-house security team and advanced measures in place.
However, in the past six months, major crypto exchanges such as Binance, Bithumb and Coinmama have all fallen victim to security breaches, all of which have well over hundreds of thousands of users.
Bithumb, which is considered to be one of the two biggest crypto exchanges in South Korea (alongside UPbit), was hacked in March for the third time in two years, in what the exchange suspects to be an insider job.
The Bithumb team said:
“According to the company’s manual, Bithumb secured all the cryptocurrency from the detection time with a cold wallet and checked them by blocking deposit and withdrawal service. As a result of the internal inspection, it is judged that the incident is an ‘accident involving insiders’. Based on the facts, we are conducting intensive investigations with KISA, Cyber Police Agency and security companies.”
Last year, cybersecurity company Group-IB reported that seven crypto exchanges were hacked in 2018, with the largest breach suffered by Coincheck leading to the loss of a staggering $534 million worth in crypto.
Less than six months into 2019, and already six crypto exchanges have been successfully hacked — excluding the CoinBene incident, which some suspect may also be a hacking attack.
Related to this: Major Crypto Exchange in Korea Shut Down in April: 2018 Was a Nightmare for Most
In March, cryptocurrency researcher Nick Schteringard said that $6 million worth of coinbene coin and $39 million in maximine were stolen from the CoinBene exchange.
Blockchain infrastructure firm Elementus said in a report that the funds were quickly sold for ether (ETH) on Etherdelta, fueling the suspicions of investors about the incident. According to the report:
“After leaving CoinBene, the tokens were quickly moved into Etherdelta, where they were sold for ETH. A large amount of funds were also moved into centralized Exchanges, including Binance, Huobi, and Bittrex. The funds continue to move into exchanges as I write this.”
In April, CoinBene stated that the movement of tens of millions of dollars in coinbene coin and maximine coin was due to a maintenance the exchange carried out, denying any cyber attacks on its platform.
A troubling trend?
The worrying trend in the crypto exchange market is that, within the first six months of 2019, the industry has seen the same number of hacking attacks as in the whole of the previous year, and the security breaches in 2019 were mainly experienced by large-scale exchanges.
In the upcoming months and years, the methods and technologies utilized by hackers will continue to become more sophisticated and advanced.
While it is challenging to completely prevent unauthorized access, especially in the case of hot wallets, it is possible for exchanges to have proper insurance, an in-house security team and back-up reserves equivalent to the amount of crypto held in online storage to prevent users from being affected in the event of a security breach.