Crypto Investing Comes With a Big Risk: The Exchanges

Cryptocurrency traders are learning that where they buy and sell digital tokens can be just adenine hazardous as choosing a coin or picking a price. Investors have lost more than $ 700 million this year in hacks of two major cryptocurrency exchanges. The thefts at Florence, Italy-based BitGrail and Japan ’ s Coincheck bring total investor hack losses since 2014 to around $ 1.4 billion, according to a Wall Street Journal review of holocene hacks. The hacks reflect an oft-overlooked risk of trade in bitcoin and refer digital currencies : While scores of on-line exchanges have sprung up in the past two years as crypto prices surged, they typically bear little resemblance to the well-financed, better-regulated venues that enable investors to buy and sell stocks, bonds and commodities .

Given the peer-to-peer nature of cryptocurrencies, investors don ’ t have to deal directly with exchanges when they buy these assets. But many have done so because exchanges seem safer and more convenient, a sagacity some have come to regret .

Jeff Furman, a 22-year old student at Northern Virginia Community College, said he lost about $ 60,000 worth of nano tokens on the BitGrail substitution in a hack disclosed in February .
“ It ’ s hard for me, ” he said. He sold some nano at a profit but now wishes he had sold the rest. “ I didn ’ deoxythymidine monophosphate heed my own gut. ”
Unlike traditional standard and futures exchanges, whose businesses center on matching up trades for a little fee, crypto exchanges besides safeguard investors ’ virtual tokens. It is a undertaking that many aren ’ t up to, investors and engineering experts say .
“ As cryptocurrencies grow, hackers are going to go after digital wallets ” and exchanges even more, said George Waller, an adviser at security firm BlockSafe Technologies Inc. Wallet companies act as cryptocurrency brokerage house firms and much work close with exchanges .
The two late hacks show the particular vulnerability investors can face when buying unproved, notional tokens on startup exchanges that aren ’ t regulated and derive a big lump of bulk from the new, unseasoned currencies .
The web site coinmarketcap.com tracks data for about 190 cryptocurrency exchanges, but only a handful are regulated in the U.S .
There are established digital-currency exchanges such as Coinbase ’ randomness GDAX, Gemini from Cameron and Tyler Winklevoss ’ Gemini Trust Co., and Japan ’ s BitFlyer that are regulated and employ a kind of security measures. All are regulated by New York submit ’ s Department of Financial Services, which requires measures designed to detect, prevent and answer to fraud and commercialize handling .
There is nothing to compel an exchange to submit to regulations, however, and many don ’ metric ton. furthermore, it is possible to buy standardized trading-program software, meaning all the commute operators have to do basically is come up with a name and logo .
The result is that many new exchanges are plagued by “ cheapjack management and shoddy systems, ” said David Fragale, co-founder of security-services firm Atonomi. A mature financial-services fast, Mr. Fragale said, would implement security controls, risk-management systems, and submission systems. They want to know who their customers are and what kinds of bad activeness is taking place on their platforms.

On many smaller exchanges, that international relations and security network ’ thymine happen, and retail investors are exposing their money to a kind of counterparty risk from the exchanges themselves, said Jonathan Levin, foreman executive of research firm Coinanlysis. “ People preceptor ’ metric ton know how to protect themselves. ”
many of the newer exchanges—BitGrail launched in 2017—hurried to capitalize on an exploding marketplace for smaller, notional cryptocurrencies that big exchanges wouldn ’ metric ton cover, said Charles Hayter, CEO of research site CryptoCompare .
Established exchanges that host banal, options or futures trading face a assortment of federal standards for fair access, cybersecurity and other areas of regulation. They besides work closely with heavily regulated banks or brokerage house firms, which regularly reimburse customers when a hack or technology trouble leads to losses .
BitGrail, run by italian entrepreneur Francesco Firano, was operating without any significant regulative oversight. It focused on nano, a bantam cryptocurrency that began trading in 2015 under the name raiblocks .
For most of its history, raiblocks traded for pennies. then, in December, it surged from around 20 cents to about $ 36. Mr. Firano didn ’ t react to requests for comment .

‘Virtual Currency Girls,’ a Japanese pop group, performing in Tokyo on Feb. 16 at a concert for fans and Coincheck owners.

Photo:

Noriko Hayashi/Bloomberg
Coincheck had applied with japanese regulators for a cryptocurrency-exchange license. In holocene weeks, Coincheck has said it plans to compensate its customers. A spokeswoman for the substitution said this week that “ we are finalizing how we can pay back money for affect customers. ”
Customers don ’ t have to put their money on an commute when investing in a cryptocurrency, the spokeswoman added. indeed, when organized cryptomarkets began appearing, it apparently added a layer of protection and an institutional element to the nascent marketplace. One of the beginning such markets was Mt. Gox, which opened in 2010. Within a few years, it was handling about 70 % of bitcoin transactions globally.

The web site had highly unaccented security protocols, however. In 2014, it announced that 850,000 bitcoin had been stolen, worth $ 450 million at the time. The web site by and by recovered 200,000 bitcoin, which nowadays are worth well more than they were in 2014. Creditors are still battling to recover their lost funds .
—Takashi Mochizuki and Alexander Osipovich contributed to this article .
Write to Paul Vigna at paul.vigna @ wsj.com

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