Summary of Cryptocurrency and Blockchain Risks, Protections, and the Importance of Audits
Probably the worst hack in history happened recently as around 1,1 billion Euro worth of digital money was stolen by hackers and could be classified as the biggest-ever cryptocurrency theft. Attackers gained control of an Ethereum wallet and transferred its holdings to an unidentified address. The affected company is Dubai based Bybit and the second largest cryptocurrency exchange. The breach happened while the company was making a routine transfer of Ethereum (second largest cryptocurrency after Bitcoin), from its off-line “cold” wallet to its “warm” wallet that covers daily trading. This attack, and other similar cases through the brief history of crypto, raises serious concerns about the security of the cryptocurrency industry as well as crypto platforms that are largely unregulated in contrast to the banks.
Cryptocurrency and Blockchain Risks
Cryptocurrency and blockchain technology present several risks, ranging from technical vulnerabilities to regulatory challenges. One of the primary concerns is security, as blockchain networks, while generally resistant to tampering, are not immune to attacks. Potential threats range from theoretical attacks where a malicious party gains control over the majority of the computer that powers a blockchain, to more practical smart contract vulnerabilities, which hackers can exploit to drain funds. Additionally, centralized exchanges are frequent targets for cyberattacks, as they store large amounts of digital assets and user data.
Types of attacks
Cryptocurrency exchanges and digital wallets are vulnerable to cyberattacks and can be hacked according to the most common types of digital intrusions listed below:
Bridge attack: A bridge attack is a hack targeting cryptocurrency trading services, where cybercriminals focus on the currency while it is being transferred between different blockchains.
Wallet hacking: Users use wallets to store, manage, and transfer their cryptocurrencies. Cybercriminals can exploit software or network vulnerabilities to break into a user’s device, get access to the crypto wallet and steal the currency stored in it.
Exchange hacking: Cryptocurrency coin exchanges are essentially online platforms where users can trade or store their coins. Since exchanges typically hold large reserves of cryptocurrencies, they are a prime target for crypto hacking. Hackers use various types of attacks, such as phishing and social engineering, to steal coins stored in the exchange’s hot wallets.
The most common methods for unauthorized attacks
Phishing attacks: Users are tricked into revealing their private keys, and if a user loses access to their private key for a wallet, the assets are permanently lost. Hence, one of the most common types of digital attacks involves malicious actors sending emails that trick users into revealing sensitive information or downloading malware, which can allow the hacker to access their crypto wallet and steal their assets.
Malware: Since cryptocurrencies and the software that enables them are all based on code, they may contain vulnerabilities that hackers can exploit. They can manipulate the code at any weak point in the crypto infrastructure, for example, hack cryptocurrency exchanges or carry out bridge attacks.
Theft of crypto keys: Cryptocurrency wallets and exchanges require users to use keys to access their coins, and if cybercriminals manage to steal these keys, or passwords that protect the keys, they can easily carry out cryptocurrency hacks.
Regulator challenges and data protection
Cryptocurrency is based on blockchain technology and is a decentralized—and partly unregulated—digital currency. The EU is attempting to introduce standards, but technology is evolving faster than legislation, creating uncertainty. Markets in Crypto-Assets (MiCA) regulation has recently been introduced within the European Union (EU) and the regulation covers crypto assets that are currently not regulated by financial services legislation. MiCA primarily regulates crypto-assets and related services within the EU, however, several areas and assets fall outside of its scope e.g. Decentralized Finance (DeFi), digital currencies issued by central banks and blockchains regarding Bitcoin and Ethereum.
How to protect?
Despite these regulatory efforts, security concerns remain, emphasizing the need for robust protection mechanisms. These include the use of encryption, hardware wallets to secure private keys and multi-factor authentication as well as other strategies to protect users and platforms from increasingly sophisticated cyberattacks.
A critical aspect of ensuring security for the cryptocurrency companies and platforms is conducting audits. These audits involve code reviews, penetration testing, and risk assessments to identify potential vulnerabilities before they can be exploited. Furthermore, an audit of crypto services typically involves a comprehensive evaluation of a company´s operations, systems and processes to ensure compliance with security baselines, external and internal standards.
In conclusion, while blockchain technology offers innovative financial solutions, it also introduces significant risks. Evolving regulatory measures provide essential protection, but individual security practices and thorough auditing processes remain key to safeguarding assets and ensuring the security of the cryptocurrency industry.
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