- With a boost in digitization, data has become the new oil.
- There have been many incidents where hackers have snooped into the exchange’s internal systems, leading to the unauthorized withdrawal of user’s funds.
- Sometimes exchanges may not be 100% compliant with rules and guidelines laid down by regulatory bodies.
Cryptocurrency exchanges have captured the imagination of the digital world with their fast settlement of transactions, distributed ledger technology, and a wide range of tradable assets.
Though it suits speculators in a better way and possesses large-scale uncertainty, the demand for such platforms is becoming increasingly high.
Since it deals with a huge volume of transactions and a large number of funds, the exchanges have to comply with KYC (Know Your Customer) guidelines and AML (Anti-Money Laundering) laws issued by regulatory authorities from time to time.
As competitiveness rises, there will be a lot of risks associated with such exchanges.
Some of the major risks that hinder the operations of a Cryptocurrency Exchange are
- Data theft – With a boost in digitization, data has become the new oil. Hackers can exploit vulnerabilities in the exchange’s server and steal the data of its users. These details can then be sold in the dark web, fetching large amounts of money. Viruses and phishing attacks from unknown sources can also lead to data theft. The stakes are huge as the operation of accounts, and management of funds is all done online. Hence, careful consideration needs to be devoted to the process of data collection and in its disclosure to governments and other authorities.
- Swindling of user’s funds – There have been many incidents where hackers have snooped into the exchange’s internal systems, leading to the unauthorized withdrawal of user’s funds. Coins or tokens associated with various crypto assets have also completely vanished. Due to the lack of physical security and real-world identities not associated with accounts and transactions, it has led to new opportunities for people with malicious intent.
- Failure of infrastructure – During the launch of a new coin or a token, there may be an increase in the number of registrations on the platform leading to peak activity. This leads to immense pressure on the server, leading to the possibility of a crash. It would lead to a disclosure of vulnerabilities increasing the scope of risk. Infrastructure facilities have a huge impact on the reputation of the firm.
- Not complying with regulatory authorities – Sometimes exchanges may not be 100% compliant with rules and guidelines laid down by regulatory bodies. It can get complex if the exchange operates in multiple countries simultaneously. This can lead to adverse decisions such as banning of exchanges or blocking of websites in some territories. As a result, it can have an impact on daily operations, especially on transaction settlement.
- The sentiment of traders – Since cryptocurrency exchanges are not under the control of central banks or international agencies, a lack of confidence among traders can affect its value and liquidity. It can lead to the collapse of activities during a financial emergency or any other adverse circumstances.
- Political risk – Governments around the world are tightening the noose around the functioning of cryptocurrency exchanges. While constructive regulation is favorable, outright bans, closing down websites, restricting financial instruments to acquire cryptocurrency is a threat to the industry.
- Loss of keys – There have been many cases where private keys of users were stolen or lost due to malware attacks. This can lead to compromising of an account’s operations and there will be no chance to recover the looted money.
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Some steps to overcome the impact of the above risks are
- Backup of data – Ensure that you store all the user’s data in a vault which is located in a place not connected to the operations. Update the storage systems regularly. Install security measures such as two-factor authentication, end-to-end encryption, and password-protected access. Aim at a quick recovery of data in case there is an attempt at misusing the server.
- External audit – An independent audit by an external agency can bring to light the vulnerabilities in the platform. Track all the unusual activities occurring on the exchange and try to blacklist users who violate the terms and conditions of the platform. Funds can be safeguarded from unauthorized access by distributing it between hot and cold wallets. Hot wallets must be used for quick deposits and withdrawals. Cold wallets can be used for storing the remaining funds which the user wants to hold.
- Monitor the level of scaling – As cryptocurrency exchanges expand to cash in on the valuable opportunities offered in new markets, simulation tests must be conducted to test the effectiveness of the server. Updates can be implemented in weak areas without affecting the functioning of the whole platform.
- Presence of Insurance – By including an insurance facility, funds can be protected from misappropriation and mismanagement. It can mitigate default risk. Attractive packages can be offered along with a complimentary personal insurance policy.
Don’t handover private keys to third parties – Giving private keys to a wallet provider will lead to a compromise in accessing the platform. Ensure that a majority of funds are under the user’s control like loss of private keys means that their cryptocurrencies vanished forever.
Diversify your funds across different exchanges – Users must allot their funds across exchanges to protect themselves from a single point of failure. Even if one exchange happens to wind up their operations due to data breach, it means that the user will not lose all his holdings at one stroke.
Follow all the above guidelines to keep your Cryptocurrency exchange software running in full swing.