The cryptocurrency market as a whole has seen explosive growth a decade down the line making many lucky investors rich through different innovations, from price surges to NFTs. However, this growth has not been without challenges.
Security remains a significant concern as fraudsters find new ways to hack exchanges and users’ wallets. What makes cryptocurrency wallets a hot spot for hackers compared to targeting individual users is that these exchanges bring for them tons of funds for every successful attack.
Since the creation of the first cryptocurrency, Bitcoin, the cryptocurrency market has seen a rise of fraudulent characters that have gone out of their way to steal crypto assets from users and crypto exchanges. In 2021, more than 32 hacks and fraud cases were reported, which saw over $2.99 billion lost to hackers. Additionally, these cybercriminals have stolen over $19.2 billion from over 60 major crypto hacks in the last ten years.
While some of these assets have been recovered, many are still lost to hackers. Recently, BitMart, a crypto exchange, began reimbursing its users following what many are now calling ‘one of the biggest heists in the market’. Hackers managed to steal its private keys during the event, getting away with $200 million in assets.
How Cybercriminals Hack Crypto Exchanges
The responsibility of keeping crypto assets secure lies with the cryptocurrency exchanger, the user, and other stakeholders in the market. That said, users should take the appropriate steps in ensuring their crypto assets remain secure while at the hands of the crypto exchanger.
The anonymous nature of blockchain that allows users to trade under pseudonyms and usernames remains a primary challenge for crypto exchanges. As a result, these exchanges are forced to carefully balance between being too invasive and demanding when taking appropriate verification procedures.
Cybercriminals have been known to use different methods, including Phishing, ClickJacking attacks, malware, keyloggers, DDoS (Distributed Denial-of-Service) attacks, waterhole attacks, eavesdropping attacks and more. These methods notably target the weak systems within an exchange.
What are the 5 Security Measures to Check for in a Crypto Exchange?
Before jumping into the measures, the first step should be to check for the exchange’s reputation in question. It is essential to check whether or not the crypto exchange has any security incidents and how best they handled the attack.
Using cold wallets for storage: Learning from Coincheck’s incident, that led to the loss of $534 million worth of NEM tokens, many exchanges are now combining hot and cold wallets for storage. Cold wallets provide the best protection against attacks because they are not directly connected to the internet. In addition, these wallets allow exchanges to store a large portion of user assets safely, allowing users access to the liquidity pools within the hot wallets.
An exchange should use hot and cold wallets to balance liquidity and security. Unfortunately, not all exchanges consider the risk involved while transferring assets between cold and hot wallets. Some exchanges, however, know the pending risk and have opted to introduce multi-sig measures when transferring assets.
Multi-factor authentication: Traditionally, many exchanges have two-factor authentications. However, some exchanges are now using three or more layers of authentication. Multi-factor authentication requires users to provide two or more verification factors to access their accounts. The process serves as an additional layer of security over the age-old password system. Though passwords have proven to be quite helpful in preventing unwanted individuals from accessing accounts. However, their efficacy is, for a more significant part, limited.
KYC and AML measures: An exchange should comply with the Know Your Customer (KYC) and Anti Money Laundering (AML). As mentioned earlier, the anonymous nature of cryptocurrencies makes it hard for exchanges to pin out fraudulent characters. However, these exchanges can use KYC and AML measures to eliminate these dubious entities.
According to research data by Coinfirm, about 69% of 26 crypto exchanges in the study do not have transparent KYC procedures. Another study by CipherTrace showed that two-thirds of the top exchanges lack KYC processes while the remaining one-third only have weak KYC procedures. Given the lack of proper guidelines and regulations within the cryptocurrency market, AML and KYC processes go a long way in governing the overall crypto exchange marketplace.
Insurance fund: Despite taking all the necessary precautions, some attacks are inevitable. The best security practice is always to use an exchange with a backup funding system created to compensate users. An insurance fund can be executed in two ways. The first option is to use an external insurance company, while the second option is to use an internal policy.
Security audits: Security audits help keep exchanges in check by ensuring their codes and overall operations are up to standard. Before choosing any exchange, a user should check whether or not the exchange has been audited and how often it conducts security audits. In addition to highlighting security flaws, audits are used in many jurisdictions to help with the regulatory framework. Since the cryptocurrency market is constantly evolving, the importance of conducting constant audits cannot be more emphasized.
In the light of growing hacking incidents regarding crypto exchanges, it is important to be doubly sure that the security system used by them is actually working. Methods like KYC and AML implementation, multi-factor authentication, insurance fund, audit, and cold wallets enhance the security layer of an exchange and enable the users to sleep in peace.
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