How do cryptocurrency exchanges ensure the safety of customer funds during security breaches?
The recent security breach at CoinDCX did not affect customer funds. I want to understand the mechanisms and policies that exchanges use to protect users in such situations.
Cryptocurrency exchanges are frequent targets for cyber-attacks due to the large volume of digital assets they manage. To protect customer funds even during security breaches, exchanges employ a combination of technical and policy-based measures.
- Cold Wallet Storage: Most customer funds are stored in 'cold wallets,' which are offline and disconnected from the internet. This makes them inaccessible to hackers even if the exchange’s online infrastructure is compromised.
- Hot Wallet Limitations: Only a small portion of funds required for daily operations are kept in 'hot wallets' (online wallets). This limits potential losses in case of a breach.
- Multi-Signature Authorization: Withdrawals and transfers from wallets often require multiple approvals from different individuals (multi-signature wallets). This reduces the risk of unauthorized transactions.
- Insurance Policies: Some exchanges purchase insurance to cover losses from hacks, ensuring customers are compensated even if a breach occurs.
- Regular Security Audits: Exchanges conduct regular security audits, penetration testing, and vulnerability assessments to identify and fix potential security gaps.
- Withdrawal Whitelists and Limits: User withdrawals may be restricted to pre-approved addresses (whitelisting) and subject to daily limits, reducing the impact of unauthorized access.
- Real-time Monitoring and Alerts: Exchanges use automated systems to detect suspicious activity and trigger alerts or temporarily freeze accounts until further verification.
- User Education and Two-Factor Authentication (2FA): Customers are encouraged or required to enable 2FA, which adds an extra layer of security to user accounts.
- Incident Response Plans: Exchanges have predefined protocols to quickly respond to breaches, including temporarily suspending withdrawals and communicating transparently with users.
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a month ago