Big cryptocurrency heists are raising concerns about whether digital currencies are safe to invest in. It emerged this week that and trading service ZB Exchange has paused withdrawals after a A similar amount was , and just two months ago, . So just how safe are bitcoin and other cryptocurrencies?
How do cryptocurrencies work?
Cryptocurrencies are essentially digital currencies that operate free of central control or the oversight of banks or governments.
Instead, they rely on peer-to-peer software and various types of cryptography. For a diverse bunch of libertarians and technology advocates, this represents a great opportunity, which is one reason why El Salvador has adopted bitcoin as an official currency.
Advertisement
This lack of central control also brings downsides. If you accidentally send a payment to the wrong person, lose your password, fall victim to theft or accidentally throw out a hard drive containing your savings, there is nobody to turn to for help. If you with family or in a will, then those coins are likely to be lost forever.
Are cryptocurrencuies hackable?
There is a lot of variation in the workings of different cryptocurrencies, but the cryptography behind many coins – including bitcoin – is based on the SHA-256 algorithm designed by the US National Security Agency. Cracking this to steal currency is all but impossible. There are more possible private keys that would have to be tested (2256) than there are atoms in the universe (estimated to be ).
Even quantum computers – which have the potential to disrupt cryptography entirely – are currently deemed to be a million times too small for the task.
The vulnerability to hacking tends to lie in the infrastructure that has built up around cryptocurrencies.
These digital assets can be stored in two main ways: in wallets that you control personally or in exchanges that act a little like banks. The former means that you are in control, which means your security is as strong or weak as you make it. The fundamental technology that runs the currency is strong, but if your computer is hacked, you could still lose your funds. What’s more, a broken hard disc or a house fire could also see you permanently out of pocket.
When it comes to exchanges, there have been several high-profile cases of bitcoin exchanges being hacked and funds being stolen. Unlike with banks, there is often little recourse or chance of compensation. The security of an exchange is hard to assess, although there are large players like PayPal in the market, because these websites can, in truth, be operated by almost anyone.
Jake Moore at cyber security company ESET says the potential rewards for hackers are “eye-watering”, so attacks will just be a fact of life. “Exchanges are like keeping your money in a bank and relying on the bank’s protection to keep it safe, whereas hosting your own wallet is like storing your money at home in your own safe,” he says. “Both have potential problems, so it is best to store cryptocurrencies across a few platforms to cover all bases and steer away from the possibility of losing all funds in a single attack.”
There are also various technologies built on top of cryptocurrencies – such as blockchain bridges, which allow – that have varying levels of safety.
Can “lost” coins ever be recovered?
Some coins are lost forever. In 2013, Welsh computer engineer James Howells threw out a hard drive that contained 8000 bitcoins. For most of the year of his loss, bitcoins traded for well under £500 a piece, but nowadays such a stash could be worth some £150 million. Despite his trawling through a vast landfill site to find the drive, his chances of ever recovering it are very slim.
If your cryptocurrency is stolen, however, technological and legislative hurdles may also prevent police forces getting very far in any investigation. As of the start of this year, UK police forces had seized a combined £300 million in cryptocurrencies – a not inconsiderable sum, but probably only a tiny fraction of the funds being used in the UK for illegal purposes. There are indications that security services like MI5 and MI6 are also investigating cryptocurrencies and they probably possess more advanced technological capabilities, but they are unlikely to trouble themselves with simple cases of fraud.
Because of the murky and international world of hacking, lost funds are unlikely to be tracked down and even less likely to be recoverable.
Is regulation needed?
Nigel Green, chief executive of financial services firm deVere Group, says more regulation is necessary to protect customers and exchanges need to be held to the same standards that traditional banks are. While , the ephemeral nature of cryptocurrencies means they can be based anywhere and aren’t necessarily easy for a state to sanction if needed.
“Nearly all foreign exchange transactions go through banks or currency houses, and this is what needs to happen with cryptocurrencies,” he says. “When flows run through regulated exchanges, it will be much easier to tackle potential wrongdoing, such as money laundering, and make sure tax is paid.”
In the meantime, there are things to look out for when choosing an exchange, says Green.
“Most offer basic protections like two-factor authentication, others will need official identification such as a passport or driver’s licence to open a new account. Some also have authentication codes required when you buy or sell, or if you make major account changes,” he says. “Plus, you should see which company owns the exchange. Is it well established? Is it a global company that can handle complicated issues across multiple jurisdictions? Is it experienced in both fintech [financial technology] and traditional financial services? Is there a proper client service department to deal with any issues quickly and effectively?”
In reality, cryptocurrencies are a risky bet. While regulation is slowly creeping in across the world to govern exchanges, no government or single entity can ever fully control a technology that was designed to avoid exactly that.
