Nothing is safe from hackers. Even the almighty blockchain is being consistently targeted and attacked. The more the system grows and adds layers of functionality, the more windows of opportunity are created for hackers. This is incredibly true of exchanges.
Earlier this year, one of the leading exchanges suffered a hack that cost over 40 million dollars and compromised user privacy. This was possible for a number of reasons. In this article, we look at what cryptocurrency exchanges do to protect your investment.
One of the simplest techniques to prevent huge money losses is to apply transaction limits. This means that even if an exchange is compromised, the amount a hacker can withdraw from any account is restricted by the transaction limit thresholds.
Reputable exchanges limit user transactions at no more than a few hundred dollars. This is designed as a failsafe to ensure that if a loss does occur it will not be devastating. Once the threshold kicks in, then additional security is required to make sure that the transaction is legitimately being carried out by the intended party and not by hackers. For this, most exchanges require some form of authentication.
Exchanges like CEX.IO have taken this even further and require full identity verification as well as two-step authentication. Thus, to withdraw money from CEX.IO you will need to go through an extensive check. This includes proving your country of residence, providing identity documents, and validating your payment method. Although this policy might seem strict, it allows the exchange to maintain the security of transactions and avoid any form of money laundering.
We have already touched on this issue in the previous section. The exchange should ask you to create an account and provide personal information in order to transact on the platform. There are many forms of account validation and most exchanges don’t use it to protect your funds. In fact, it is quite normal for exchanges just to use this to harvest user data and generate marketing pitches to promote their products.
To validate your account some exchanges will require something a bit more personal like a photo ID or official documentation. You may have read this is for security purposes but not really understand what those purposes are. Essentially, by verifying your identity in this way the exchange is actually ensuring that you’re not using it for criminal activities.
Of course, some exchanges won’t care about money laundering as huge volumes will be processed through the platform making them a lot of profit. But, operating the exchange in this way puts legitimate users at risk as it could result in the exchange funds being frozen or seized, or even worse, prosecuted.
Another feature that we have mentioned in this article is two-factor authentication. When you wish to transact on some exchange it will ask you to go through a two-tiered security process, which often involves a text with a code being sent to your mobile device.
Two-step authentication is a way to keep data secure and ensure that no unauthorized party can force their way into your account. It has become especially prevalent across cloud platforms and social media platforms, and is now being used more frequently on the best cryptocurrency exchanges.
There are a few other ways that work behind the scenes to protect your money, but you may not be as aware of those as the three methods we have mentioned above.
Working with Regulators
Unfortunately, even the safest exchange is not unbreakable and there are steps that the companies are likely to take toward further enhancing security.
One such step is working with financial institutions and regulators to adopt common financial practices. It is highly likely that as exchanges, the Bitcoin market and trading volumes grow, there will be higher levels of regulation.
Currently, the UK-based platforms are some of the most highly regulated platforms, and thus, their operations are intensely scrutinized. Payment processing across financial institutions undergoes tried and tested procedures. This also exposes institutions to cover costs and liabilities where errors occur.
One really big step that will protect clients’ money is cold storage. This would have a tremendously positive impact on cryptocurrency as we all know not to keep funds in exchange wallets. When keeping coins in cold storage, the money is removed and held in separate accounts from an exchange’s own accounts. This adds an extra layer of security.
This approach to protecting funds is incredibly progressive and it is likely that other similar practices will creep in the industry at some point.
For now, there are some very exciting developments going on that will eventually make the cryptocurrency markets a lot more stable to trade in. The more traders can trust the market, the more investment it will generate.
Exchanges are always looking at new ways to safeguard user funds and ensure that they are adhering to strict EU, UK, and US financial regulation guidelines. However, some exchanges still choose not to work with regulators or choose to operate in low- or non-regulated regions. But, it is also great to see that most exchanges are breaking the mold and acting responsibly!