Global Crypto Exchanges Bank-Level Security Is A Myth Following Unsolved Hacks

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After a difficult year 2022, the crypto sphere has seen another of its juggernauts get in trouble with the law. Global crypto exchange Coinbase has come under fire for claiming it has “bank-level security” while its customers’ accounts were allegedly hacked and looted. We hear from the legal team taking action against Coinbase as well as industry experts on trust in crypto exchanges and the “correct” response to a hack.Generating Trust in Crypto

After the peak in November 2021, when Bitcoin reached its highest value yet (~$68,000), cryptocurrencies followed a downward trajectory. Although we saw glimmers of hope, the trend remained negative. Yet despite the Terra and FTX debacles, alongside reports of hacks, crypto adoption continues. In fact, according to MerchantMachine, crypto usage is expected to increase by 14.9% worldwide by 2030.

With its ever-increasing popularity, users need to feel they can trust cryptocurrencies, and especially the exchanges where their assets reside. However, it’s hard to do that when reputable names in the space, like Binance, Poly Network, and Axie Infinity, have all suffered incredibly large and impactful hacks over the course of the year. The latest to be added to the list is Coinbase.

Complaint filed against Coinbase

According to a new lawsuit filed against Coinbase, three individual parties were banned from their accounts for no reason. When they tried to ask Coinbase for help, they were redirected from one complaint screen to another, unable to speak to anyone. The parties claim that their accounts were hacked by hackers, resulting in a combined loss between the parties amounting to over $214,000. These claims were reported in Bloomberg but were not confirmed by Coinbase to the Fintech Times.

This alleged hack follows an incident in 2021 when Coinbase admitted hackers stole the accounts of at least 6,000 customers.

Attorney Matt Borden said, “The plaintiffs represent a larger group of people who were victimized by arbitration clauses that prevented them from taking the crypto exchange to court. It is not just a type of one-time hack. People are starting to come out of the woodwork to share their similar experiences. »

Legal sources have suggested that two separate cases have been filed: a class action lawsuit, which means Coinbase must repair the damages of the hack, reimbursing plaintiffs for the amount lost. An injunction, which means Coinbase cannot “falsely advertise” that its products have “bank-level security” when individuals’ accounts have been broken into and looted

One of the plaintiffs’ attorneys spoke to the Fintech Times about two solutions to the injunction. These would involve either removing the so-called “bank-level security” false advertising OR improving the security systems so that the claims are true.

He also went further in the reasoning behind the class action. Under US law, if a bank account were hacked, the bank would be responsible for repairing the victim. Because of Coinbase’s position as a financial institution, he and prosecutors believe it should abide by the same law and, in turn, return the value of assets.

We contacted Coinbase for comment on the lawsuit but did not receive a response.

Crypto trust in danger

The long-term impact of this will not be as damaging to cryptocurrencies as it is to Coinbase’s image. Those who are still interested in crypto will likely go to another exchange, one that can guarantee their assets are protected. However, it is possible that if there had been better communication and dedication to resolving Coinbase’s issues following the alleged hacks, there might not have been a lawsuit.

So what is the appropriate response to a hack?

Clear communication between the exchange and all customers (affected or not)Bradley Dizik, Executive Vice President, Emerging Issues + Technology at Guidepost Solutions

Bradley Dizik, Executive Vice President, Emerging Issues + Technology at Guidepost Solutions, a global security, compliance and investigations consulting firm, said: “The best practice for incident response is to immediately diagnose the extent of the cyber -intrusion, to investigate potential losses and immediately execute controls to best mitigate additional losses.

“The exchange should provide all of its customers, not just those affected, with a letter notifying them of a breach and then publicly commit to conducting a risk assessment of its information security controls, immediately executing a risk remediation plan that addresses all serious and medium risks of information security vulnerabilities.

“The exchange must also commit to implementing an information security control environment that complies with a known security framework such as ISO 27000, NIST or another framework and even go so far as to seek certification. Finally, the exchange must undergo an assessment to ensure compliance with relevant regulations such as those that apply to exchanges registered with the New York Department of Financial Services.

The Root CauseMax Galka, CEO and Founder of Elementus

Max Galka, CEO and Founder of Elementus, an organization that helps others harness the power of blockchain, said, “First, find the root cause of hacking and do what is necessary to protect people. customer assets. Also be transparent with customers and communicate the severity of the hack and any additional steps that can be taken to protect customer funds (eg what is a call to action for your customers).

“Finding the root cause of a hack involves the ability to analyze blockchain data and often makes sense of extremely complicated transaction flows. Hackers attempt to obfuscate this chain of events, which requires expertise and sophisticated tools. Working with a company that has this expertise in blockchain data and investigations is essential.

The same level of confidence as the banks

Naturally, when large sums of money or savings are at stake, clients want to ensure that their assets are protected at all costs. Recently, due to the rise of fintechs, customers are beginning to trust the placement of their funds in financial entities other than banks. Look at neobanks for example. According to Statista, there are 24.9 million accounts in the United States alone with forecasts suggesting that number will reach 39.1 million by 2025.

With that in mind, it’s no surprise that users are starting to trust crypto more. Especially since Blockware Intelligence has predicted that Bitcoin adoption alone will reach 10% worldwide by 2030.

But should exchanges have the same level of trust as a bank? In short, the industry’s answer is “no”.

Spencer Soloway, Horizen Lab VP of Marketing

Spencer Soloway, VP of Marketing at Horizen Lab, a blockchain company, explained, “At the end of the day, crypto exchanges, whether centralized or decentralized, are not banks. While consumers should feel comfortable buying crypto from reputable exchanges, they do not offer users FDIC protection, and people need to understand the risks involved.

“The now age-old maxim is ‘not your keys, not your coins’. While it’s understandable that self-care can be a confusing topic (and comes with its own set of risks), I would suggest users seriously consider and educate themselves on the options available!

Centralized exchange regulation issues are a problemBob Ras, co-founder of Sologenic

Hacks weren’t the primary cause of asset security in crypto exchanges, for Bob Ras, co-founder of Sologenic, a blockchain-powered network for securities tokenization. He noted the importance of decentralized exchanges over centralized exchanges when it comes to regulatory concerns:

“Hacks in crypto exchanges have taken over malicious activity in the industry, as many centralized crypto exchanges have collapsed due to poor asset management, inconsistent evidence reporting on reserves and, in severe cases, out of sheer disregard for user funds by the centralized entity behind the exchange.

“So yes, in the current climate, it is exceptionally dangerous for customers to treat centralized crypto exchanges like serious banks because, despite the possibility of a hack, their funds are insecure due to a lack of executives. regulations concerning the protection of client assets.

“Therefore, I encourage centralized crypto exchanges to not only continue to work with reputable auditors, but also to consider showing proof of solvency. This formula includes both proof of reserves and proof of liabilities. We we desperately need to restore the credibility of our beleaguered industry, and while hacks often go out of control, we have the power to control how exchanges interact seamlessly with their customers.

“Affirming customer confidence is paramount if we are to see a healthier crypto market emerge from this low point. In general, Decentralized Exchanges (DEXs) are the future of crypto trading and much more secure solutions, where all clients are in complete control of their own assets without the need for a third party in the middle, which can potentially increase the risk of hacking and insolvency. ”

Francis Bignel

Francis is a journalist and our senior LatAm correspondent, with a BA in Classical Civilization, he has a specialized interest in North and South America.

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