The recent attack on Liquid Global, a Japanese-based crypto exchange, once again brought the issue of crypto exchanges’ safety into focus.
Crypto has been touted as the safer alternative to FIAT and yet, breaches of crypto exchanges' have continued throughout the years.
In this context, we ought to ask ourselves if our crypto is safe online, and the short answer is – probably not.
There has been a string of successful hacking attacks that have lifted billions off exchanges but many have accepted this to be one of the perils of doing business in crypto.
Yet, there is an explanation why exchanges such as Liquid make a better target for hackers. It's similarly important to understand that hacking an exchange doesn't necessarily mean the exchange is to blame. Hackers target crypto exchanges because the rest of the options are too hard to challenge.
Protocols, notwithstanding Bitcoin and Ethereum's now-fixed vulnerabilities, are almost impossible to hack and wallets are way too distributed to justify the effort expended. With this said, exchanges make a great target for hackers, but getting past that is difficult.
Do Exchanges Advise You to Store Crypto Online?
The short answer is no. No crypto exchange will openly urge you to store your currency online.
Some exchanges do exert more control, but also offer some additional vulnerability. For example, a custodial exchange uses a unique access code to your funds while non-custodial ones put the onus on consumers.
Yet, the most compelling argument for keeping your crypto safe is the very fact that exchanges themselves constantly transfer crypto offline to cold storage. This is the only way, crypto security experts agree, that your crypto is safe.
The main issue with crypto exchanges is that they hold securities on behalf of their customers. Even if you resort to cold storage, a transaction may be caught in the cross-fire and your Bitcoin lost.
Once a Bitcoin key is lost, it's gone forever as someone else now owns the currencies and can trade them. Stock exchanges, for example, only facilitate trading, but they don't hold securities on behalf of investors and traders.
According to Robert Statica, the president at cyber security firm BLAKFX, crypto exchanges are easier to target and are not as challenging to hack. Yet, hackers have recently slowed down, because of the US stepping in to challenge them.
Crypto is usually lost to scams, but some exchanges may be attacked and hacked without any wide-spread ramifications. In fact, individual account thefts aren't too uncommon these days and a recent CNBC report claimed that Coinbase has been the victim of many such incidents.
While the US is hardly capable of ending crypto crime, regulators are looking closer into ransomware attacks, for example, which could be used as the basis of tracking down hackers.
Hackers are also keen on stealing Bitcoin and crypto because it's often anonymous, but the US State Department is already working with the private sector to develop tracking software that could even track anonymous currencies.
In a word, your crypto is probably not safe, but exercising caution alongside an improving regulatory climate will make exchanges safer, simply because governments will be able to trace down the wrongdoers.
Until then, cold storage is your best option – as it has always been.