Another group of hackers successfully compromised a cryptocurrency. This time, BITPpoint users fell victim, with 55,000 of them losing an estimated $32 million. The attack is the latest in a series on cryptocurrencies, which should fill consumers with trepidation. What can we learn from these attacks?
BITPoint lesson one: cryptocurrency is very vulnerable
In July, BITPoint’s Japanese cryptocurrency exchange stated it lost $32 million to hackers. The company detected an anomaly in its Ripple remittance and later determined that Ripple tokens were compromised. The firm then shut down transactions on its network.
Cryptocurrencies, which once were deemed to be hacker-proof, have sprung a number of leaks. As this option gained acceptance, cash volumes have risen. Hackers have been drawn to these exchanges, searched for software bugs and had success. In the first quarter of 2019, criminals stole $356 million, with breaches suffered in exchanges throughout the world.
BITPoint lesson two: cryptocurrency is not insured
Currency is typically insured by the financial institutions that hold the money and the national governments where the institutions reside. Neither group applies to cryptocurrency. The issuers are not diversified financial institutions but often vendors with a single product. Currently, national governments stay away from any direct involvement in the emerging market. Private insurers, such as XL Catlin, Chubb, and Mitsui Sumitomo Insurance, have started to emerge. Because the market is in a nascent stage of development, their rates are high and coverage scattershot. The end result? In most cases, the tokens are not insured.
BITPoint lesson three: victims’ rights are tenuous
What happens to victims in these cases depends on many factors, few of which the consumers themselves control. Restitution processes are covered in the long, complex agreements that consumers sign (and often do not read) when they become members of an exchange. The vendors’ lawyers craft these documents, so they are heavily weighted in their favor.
In terms of protection, vendors are swayed more by public relations fallout than from legal obligations. They need individuals and corporations to feel safe about their exchange in order to continue operating their business in the future. So, suppliers have compensated users for their losses. Most pay them back in cryptocurrency: BITPoint paid its customers in cryptocurrency at a 1:1 ratio. Option two, which is less popular, is exchanging the lost cryptocurrency for traditional money, say US dollars.
BITPoint lesson four: cryptocurrency safety net is missing
Like many security produces, blockchain was designed to prevent crooks from accessing information on the front end, basically preventing them from entering the system. Not much help was given to tracing transactions once a breach occurred. Consequently, blockchain transactions cannot be reversed. While tools are starting to emerge that help manage the interactions, again their ability to backtrack is currently quite limited.
The best option for recovering the money is coordination among cryptocurrency exchanges. They identify the crooks when they try to trade in the stolen tokens. In BITPoint’s case, about $4 million was recovered and the company is still looking for more.
BITPoint lesson five: crime does pay
The global nature of cryptocurrencies makes catching the bad guys a challenge. Individuals and companies can set up shop anyplace around the globe. Typically, the first line of defense is the local jurisdiction, but few police departments are able to respond to such problems. National law enforcement departments have more resources to handle these transgressions. In the United States, the Federal Bureau of Investigation has been at the forefront of addressing the problem. In 2015, the agency formed a cryptocurrency department and has been working on more than 100 open cases. But to date, crypto criminals have eluded the law.
Consumers are adopting cryptocurrency. Despite initial promises of being hacker-proof, vulnerabilities are occurring and cryptocurrency is being stolen. Consumers feel the impact because the support infrastructure is just starting to take shape. Consequently, individuals need to be very cautious when investing in these exchanges. The potential for foul play is increasing, and the possibility of a quick and equitable resolution is slim.