Why Cryptocurrency Exchanges Keep Getting Hacked: Are Digital Custodians the Solution?

Another week, another hack of a cryptocurrency exchange.  On Friday, Italian exchange BitGrail, confirmed that it lost about 17 million Nano (XRB) tokens with a market value of about $170 Million.  This follows last month’s theft of $530M in digital currency from Tokyo-based exchange Coincheck, which will be hit tomorrow with a lawsuit filed by a group of traders.  These incidents highlight the risk in trading an asset that policymakers are struggling to regulate.  Unfortunately, the cryptocurrency exchanges are expected to remain vulnerable, so thefts and security breaches will likely remain the norm.  Investing in crypto assets is already risky enough due to volatile markets, so it is unacceptable for investors to swallow any additional security risks introduced by the exchanges.

Today, I’m asking everyone to put our collective foot down and stop the complacency.

Despite the increased risk, most crypto investors continue to store their tokens on exchanges, rather than transferring them to a digital wallet.  An overwhelming majority of Coinbase users that I know personally have never transferred a token from their Coinbase-hosted account.  While Ledger recently touted the sale of 1M units in 2017, the reality is that hardware wallets are still too complicated for the average investor to use.  Investors are becoming increasingly frustrated with the technical complexities that come along with securing their investments by managing their own wallets.  Also, one of the industry’s leading software wallets, MyEtherWallet, didn’t necessarily instill confidence into the emerging consumer wallet vertical with last week’s hard fork announcement.

So where do we go from here?

Traditional financial institutions appear unwilling to launch cryptocurrency investment products any time soon, which could lead to standard security practices for the digital asset class.  Early this year, Merrill Lynch blocked its investment advisors and clients from trading in bitcoin-related investments.  Therefore, stock investors are currently “chained” to equities markets due to the nature of the asset class.  Bitcoin futures have helped renew interest in commodities exchanges, but many retail institutions, like Fidelity, do not offer futures trading.  With futures trading a challenge and Bitcoin ETF’s stuck in limbo, retail crypto investors need better options for HODLing.

Digital Custodians to the rescue?

There is a serious issue with consumer education. Many investors aren’t even aware that Coinbase is actually a broker and not an exchange or wallet.  In addition, there is a lack of digital investment products offering safe and easy alternatives to currency exchanges and wallets.  The current market is missing a fundamental piece of the puzzle, which could provide greater security and allow more capital to flow into the space.

Digital custodians could be the answer.  Custodians allow investors to setup third-party management for their accounts.  To take advantage of this market opportunity, Bitcoin IRA recently expanded its existing relationship with custodian, Kingdom Trust Company, to offer cash investment accounts.  The new product, Coin Cash, brands itself as “the first full-service digital currency exchange platform that allows investors to buy, sell, and store digital currencies.”  In January, BitGo, a Silicon Valley cryptocurrency-security startup that serves as a wallet, announced that it had entered into an agreement to acquire Kingdom Trust. (Blockchain Beach had previously reported that Kingdom Trust is one of only two companies offering custodial services for digital currencies).   Post-acquisition, the combined companies plan to offer global financial markets an “end-to-end solution for storing digital currencies, including the legal and compliance controls necessary for mainstream financial portfolios.”

Beyond custodians, what other solutions might be on the horizon?  Enough is enough.  It’s time for us to put our foot down and demand a solution.