• Hot wallet hacks are the most common type in the Wild West crypto world - and the latest one cost Binance over $40 million USD

  • As one-stop-shops for listing, trading, custodianship and settling, big exchanges like Binance are highly centralized and tempting targets for hackers

  • In contrast, traditional financial institutions split roles and security protocols among different organizations - a decentralized setup that increases investor security

  • Is trading cryptos on regulated stock markets the answer to bitcoin hacks like the one on Binance?

By: Marko M. Hafez, Co-Founder and President

Due to the recent hack at Binance, one of the largest crypto exchanges in the world, investors can’t withdraw or deposit funds - a major inconvenience. Why did Binance block these transactions?

Because hackers got away with over $40 million USD from a single hot wallet (just 2% of Binance’s total bitcoin holdings), prompting the exchange to put a temporary freeze on all 100% of its user accounts.

I guess a few bad apples really do spoil the bunch.

Our modern financial system has many checks and balances, separating stock exchanges (where trading happens) from depositories (where assets are stored and settled) from brokers (who deal with investors).

But it took decades for that system to mature and develop to the point that investors have the level of protection from theft and scams that they enjoy today.

In contrast, the crypto community is younger than the Marvel Cinematic Universe. While it’s built on some cutting-edge tech, it operates a lot like the wild, wild west.

Actual footage of a crypto heist. via GIPHY

Metaphorically speaking, crypto exchanges and the hot wallets they maintain are about as secure as old-timey banks where bandits can just kick in the wooden door, take what they want, and ride their horses off into the sunset.

Investors deserve better.

Centralization means the hackers win

As my business partner mentioned in his post the other day, hot wallets will always go up in flames. That’s the nature of wallets being managed online, no matter how much private key encryption is in place.

Centralization just makes the job even easier.

One organization handling every aspect of the financial transaction life cycle means one point of attack for hackers and more risk for investors.

Considering that the whole point of cryptocurrencies is security (among other benefits) through de-centralization, this model is unintentionally hilarious.

So, is Binance safe?

Look, credit to Binance - they didn't make this hack easy.

It took a lot of waiting, researching, planning, and coordination to pull off, and all for just 2% the exchange's bitcoin holdings. And Binance also maintains a Secure Asset Fund for Users (SAFU) to cover instances like this, although it’s entirely self-funded.

What if the hackers stole more money than Binance had in its rainy day fund? Applause to Binance for trying to protect its customers, but SAFUs are no substitute for a solid insurance policy.

With the crypto industry’s difficulties in establishing relationships with mainstream banks, most insurers aren’t comfortable providing the coverage investors need.

Binance clearly has its heart in the right place. But operating as a centralized, full-service organization means it may never be able to save enough money to cover substantial losses, and will always be a tempting target for enterprising hackers.

Why not trade crypto on the stock exchange?

The problem was technology. The crypto community started from scratch with revolutionary blockchain technology while the traditional financial ecosystem is saddled with legacy systems.

And this is where Blockstation comes in, providing a technology layer that enables the traditional ecosystem to trade cryptos like it does any other security.

We believe in decentralized cryptocurrencies, and their power to democratize money.

We believe in making it easier, faster and cheaper to send funds to anyone, anywhere in the world, at the lowest cost possible.

And we believe in providing traditional financial institutions with the technology they need to list, trade, sell, store, and settle crypto transactions while maintaining a decentralized setup with multi-sig cold storage to make it impossible for hackers to get in.

Oh, and 100% insurance on all digital assets. Just in case.

(Did I mention that investors can now sign up to trade BTC and ETH on our platform? Just saying.)

Safe, happy crypto investors. via GIPHY

So, hooray for crypto on the stock exchange?

Look, going through so many different industry players will never be quite as efficient as a single point of contact, but how much security should crypto investors be asked to sacrifice in the name of convenience?

If you ask me, not nearly as much as they’re required to today.

Technology can do a lot to keep things moving quickly for investors, and that’s exactly what we think we’ve achieved on the Blockstation trading platform: a great balance between security and convenience for the benefit of investors everywhere.

What do you think? Are decentralized institutions the best way to provide security to crypto investors? Let us know on social media using #Blockstation.