Over $150 million in funds were compromised in a recent security breach of an Asian cryptocurrency exchange when one or more hackers obtained secret keys to the exchange’s hot wallets.
Сryptocurrency wallets remain vulnerable to hacking, even with measures taken to minimize the risk. Here are the measures typically employed:
- Cold and hot wallets – Most of the funds are kept in a cold wallet that is protected by increased security measures. For example, the wallet is not connected to the internet and is not used in frequent, routine transactions. The hot wallet is theoretically open to attack and stores only a small portion of the total funds, preventing the destruction of the company if lost in a hack.
- Multisignatures – Where technologically possible, wallets are set up to use multisignatures, and the keys for signing are dispersed. To withdraw funds from such wallets, you would need confirmation from several unrelated people or systems.
- Monitoring – If a hack has occurred, it needs to be noticed and responded to as fast as possible. A timely response can stop the hack and minimize losses.
- Anti-money-laundering measures – If the hack has already happened and the funds have been withdrawn, there is a chance of recapturing or freezing part of the money. This requires a coordinated response from the companies and participants in the community.
The money-laundering process is especially interesting and unusual in the crypto world compared to the traditional world of finance.
When the theft is from a bank account, the criminal will try to weave a complex web of transfers, through various countries and payment systems, to complicate efforts to freeze the funds. Any bank and payment system can block the account or even cancel transactions, and it’s important how quickly the transactions and accounts the criminal uses can be tracked and how well financial institutions cooperate with each other to fight money laundering. The most important factor is the ability to freeze funds, which is almost always an option in the world of traditional finance.
When the theft is in cryptocurrency, there is a common belief that it’s impossible to stop or even track the subsequent movement of cryptocurrency funds, but that’s not quite the case. Just like in traditional finance, the criminal will try to make complex transactions as fast as possible, to make tracking and freezing the funds harder.
