https://coincodex.com/article/6630/crypto-exchange-security-approaches-and-trends/
Key highlights:
- Centralized cryptocurrency exchanges are facing a number of challenges when it comes to security
- There have been multiple major crypto thefts from exchanges in the last year
- The introduction of AMLD5 and the changing regulatory landscape is forcing crypto exchanges to adapt
Centralized cryptocurrency exchanges are often subject to hacker attacks. There are many cases of cryptocurrency theft from large centralized exchanges, including Binance, Upbit, Bithumb, Cryptopia and DragonEx. When hackers successfully stole Bitcoin from one of the first crypto exchanges, Mt. Gox, the exchange had to shut down shop and declare bankruptcy.
As the popularity of cryptocurrencies popularity grew, so did the need of crypto exchanges to ensure the security of their funds. Nowadays, every major crypto exchange is comparable to banking systems in terms of security but despite this fact, cybercriminals periodically manage to steal funds.
Differences between centralized and decentralized exchanges
Unlike centralized exchanges, DEX platforms do not have a single access center, which by itself ensures a high degree of security. Servers are distributed in different areas, which significantly complicates the hacking process and reduces the risk of theft to a minimum. Wallets of decentralized exchanges belong to users.
This is the main security flaw of DEXes: if users lose their private keys, they will not be able to access their cryptocurrency wallets. Improving security will have a positive impact on the overall industry development and exchanges will no longer be associated with crypto thefts.
Approaches to crypto exchange security
Analysts from the ICORating company conducted a study of crypto exchange security, and the highest A+ rating was not achieved by any analyzed exchange. All crypto exchanges were protected from MITM, POODLE, and Heartbleed attacks.
However, only 37% of crypto exchanges were protected from downgrade attacks, and 60% were protected from clickjacking. The Kraken and Cobinhood crypto exchanges received an A rating - the highest among existing platforms. To ensure security, crypto exchanges store the bulk of their funds in a reserve fund on cold wallets.
OKEx has proposed an initiative to create a single SRO center for crypto platforms. This will be a global ecosystem that aims to develop and implement innovative security standards to increase the crypto market transparency.
The largest cryptocurrency thefts in the last years
Hackers have so far failed to break directly into the largest blockchain networks, such as Bitcoin BTC, 1.46%, Ethereum ETH, 0.20%, Cardano ADA, -0.84% or Litecoin LTC, -0.30%. But with crypto exchanges, the situation is completely different. In 2019, criminals managed to steal cryptocurrencies for a total amount of 164 million dollars.
A major platform that affected by hacker attacks in 2019 was Bithumb. The attackers managed to withdraw $31 million in EOS EOS, -0.01% and XRP from the exchange. This is the second major hack and of theft coins on the exchange‘s accounts since 2018.
In 2019, one of the largest crypto exchanges, Binance, was also hacked. In May, hackers withdrew more than 7,000 BTC, equivalent to $40 million at the time, from the hot exchange‘s hot wallet. For the exchange, the losses were not significant and amounted to only 2% of the total storage. The exchange quickly compensated users for the losses.
However, the attacks on the exchange did not end there. Later, an anonymous user organized the leak of 60,000 verified exchange accounts and demanded a ransom of 300 bitcoins for them.
What will AMLD5 lead to?
On January 10, 2020, The 5th EU Directive aimed at combating money laundering came into force, and some crypto exchanges have already announced their closure in response to the new rules.
Regulatory requirements for crypto exchanges have tightened up, which is why reporting requirements for holders have increased. The 5th EU Directive contradicts the very basis of cryptocurrencies - anonymity and confidentiality of payments. In accordance with AMLD5, crypto platforms must conduct KYC and track all user operations, as well as register with the financial supervision authorities.
On the other hand, the Directive will increase users‘ security, since funds will be legally protected.
Trends and prospects for crypto exchanges
2019 was a key year for the decentralized crypto exchanges development. Major platforms such as Binance and Huobi have joined the movement, launching their own DEX platforms for cryptocurrency trading.
KuCoin CEO Michael Gan said that the future of the crypto market lies in decentralized exchanges. To become more popular, they need to provide the same simple functionality that centralized exchanges have. He also noted that almost all crypto exchanges are currently engaged in DEX development.
Crypto exchanges will launch new tools for trading and diversifying digital assets to attract new players, including institutional investors.
In the next five years, leading crypto exchanges will turn into giant conglomerates and will provide a wide range of services. Peter Ivanov, crypto expert and CEX.io public relations representative, notes that trading platforms together with traditional financial products form a unified ecosystem. Now, large crypto platforms provide various services that expand exchanges capabilities:
- Lending cryptocurrencies to other traders
- Staking and offering dividends for storing coins
- Selling tokens that are guaranteed to be traded on the exchange through IEOs
- Fiat-to-crypto trading
- Crypto portfolio management tools
Another major trend in the new year is stablecoins. The crypto community is waiting for Facebook‘s Libra stablecoin to enter the market. The main concerns of novice users are related to the vulnerability of platforms and high market volatility.
To move the development of the crypto industry further, new products are needed that will allow users to convert fiat currencies into digital currencies quickly and with minimal fees. The regulation of cryptocurrencies is becoming more transparent across the globe and governments are generally positive about the crypto market development.
On March 5, 2020, The Conference.Exchanges will be held in Amsterdam, dedicated to the discussion of key trends in the crypto exchange industry and regulations in the field of cryptocurrencies with leading experts. Due to the constantly changing market, such events are very important for understanding trends, the direction of development, and networking.