Recent Exchange Hacks and Why Insurance Matters
Foul play exists in all industries and cryptocurrency is no different. With a currency that exists on the internet, hackers will try to steal it. This is inevitable. Fortunately, cryptocurrency is exceptionally secure. Cryptocurrency exchanges, on the other hand, are not as secure.
Crypto security is hierarchical. The three layers involved are protocol, exchange and personal wallet security. This hierarchy means that if a user has an issue at the coin protocol layer, they will be compromised, regardless of how secure their second and third layers are. At the same time, the complexity of the protocol level means it’s harder to find an issue like a DAO hack than finding a vulnerability at the lower layers like exchanges and wallets. That is why hackers target exchanges – it’s the most efficient way for them to steal one’s money. Protocols are hard to hack, and wallets are too distributed, leaving them with exchanges which are a good fit for them.
Let us look into why exchanges are so hackable. It is a rather simple reason. Any crypto exchange is a centralized centre point of failure. It is vulnerable by design. They are, in essence, centralized web applications with functions to execute transactions and one or a few big crypto wallets inside. Exchanges are prone to the same kind of security problems as that of all other websites. All the usual application aspects such as frontend JS, mobile app, terminals and such on the client-side, and APIs and data repositories on the back end need to be protected.
That being said, there have been several cases of cryptocurrency exchange hacks in recent times. Hackers have stolen vast sums of money in the form of various cryptocurrency exchanges hacks.
Instances of Hacks in Recent Times
Some of the recent incidents of hackers making their way into exchanges are as follows:
Bithumb: $30 Million
According to CoinTelegraph, Bithumb’s hack took place on June 19, with about $30 million in tokens stolen. Although the exchange has assured customers that they will see no impact on their wallets, as it has pledged to repay any lost coins, Bithumb has not come out unscathed. Bithumb was formerly the sixth-largest exchange around the world based on trade volumes but has now plunged to 10th place.
Coinrail: $37.2 Million
Bithumb’s rival Coinrail, a South Korean exchange was hacked just over a week before Bithumb. The culprits took about $37.2 million worth of digital currency. The bulk of tokens stolen were those of Pundi X and Aston coins. Around 11% of Bitcoin’s total value was lost in the immediate aftermath of the hack. However, it remains unclear to what degree the Coinrail hack had an impact on this fluctuation. The exchange was shut down for some time to repair the damage done by the breach.
BitGrail: $195 Million
Italian exchange BitGrail was hacked in early February, with team members claiming that $195 million in the token nano was stolen.
Coincheck: $534 Million
The Japanese exchange Coincheck suffered an attack which cost it 523 million NEM coins valued at about $534 million. This was again, a hot wallet related theft. This hack was larger even than the notorious Mt. Gox hack. Coincheck however, survived the hack and continues to operate, although it was eventually bought by a traditional Japanese financial services company called Monex Group.
The Importance of Insurance for an Exchange:
As cryptocurrency markets mature, they will attract players from other industries. The insurance industry is one such industry.
Presently, the cryptocurrency business, which mostly consists of startups and exchanges, is not large enough to provide feasible revenues for the insurance industry. Based on the information that is available publically, even North America’s largest cryptocurrency exchange Coinbase holds only 2% of its coins insured with Lloyd’s of London. These coins are held in hot storage wallets. The rest are stored in cold wallets, and not much is known about their insurance status.
Crypto insurance becomes essential, when you consider the instability and volatility of the cryptocurrency ecosystem. The skyrocketing valuation of bitcoin and other cryptocurrencies has caused massive thefts of online wallets and exchanges.
Cryptocurrency markets have been compared to the Wild West due to the lack of regulation. They allow for transactions to be made relatively quickly and cheaply, and there are tons of such benefits. However, it has downsides as well. Cryptocurrency theft is a huge risk.
This is primarily why crypto-insurance is essential.
Crypto insurance is precious for a crypto exchange as it does more than just insure them. Take Zipmex as a leading example, with insurance backing the exchange we have added peace of mind and legitimacy. In today’s world, that is so full of scams, being supported by insurance assures consumers that an exchange is legitimate.
Insurance that covers cybercrime is not enough. Crypto insurance specifically is important as cybercrime insurance does not cover cryptocurrency losses.
Having insurance helps exchanges such as Zipmex build better ties with fiat finance banks. This is important because banks are an essential factor when it comes to the functioning of exchanges. Only through them can exchanges provide ways for customers to deposit government-issued currencies and buy cryptocurrency using bank cards.
All this being said, it is not easy for all exchanges to get their hands on crypto insurance. Several factors come in the way. Most often, the biggest issue is the cost. Crypto Insurance can be rather expensive, costing up to several times the cost of typical business insurance.
Applying for insurance can be somewhat time-consuming and can involve a lot of red-tape. Insurance coverage is also often limited. Firms sometimes offer only cold storage wallet insurance and such, which can be rather pointless to some exchanges.
In essence, there are a lot of security threats when it comes to cryptocurrency. Exchanges can be hacked, and this can cause huge losses. A solution to this is insurance. When exchanges like Zipmex are insured, they can better protect their assets. In case of an attack, they would be covered. However, due to a variety of reasons, lots of cryptocurrency exchanges are not covered by insurance, so it is essential to do your research before using an exchange. Find one that is backed by insurance. It is highly recommended, especially with such a volatile and risky business such as cryptocurrency.