In light of the hack on Bitfinex resulting in millions of dollars of loss, a few bitcoin exchanges have spoken up about how they secure customer funds, and why security should always be top of mind when it comes to being a custodian of peoples money.
Coinbase, who has previously said they “securely store about 10% of all bitcoin in circulation” immediately wrote after the Bitfinex hack that “building products that provide safe and easy access to digital assets requires an uncompromising commitment to security.” Digital asset security is a main priority, as they went on to say “we focus on securing the digital asset. Security is not just a feature, process, or team. It is a core part of our company and influences every decision we make.”
As outlined on a high level, Coinbase explained how they are able to achieve the best security through the use of in-house experts. This team of experts helps architect new services, operate through secure workflows, and identify anomalies when they occur. Behind these services this team provides a cold storage solution that stores over 98% of digital assets completely offline to protect customer funds. Coinbase verifies this program using independent third parties. These include independent security audits, a white hat security program, and annual penetration tests.
Coinbase has layered security approach with no single point of failure. This means two factor authentication for everything, and no one person has full access, but rather its split among multiple people in different locations with redundancy in mind. Using two factor tokens, such as a YubiKey is a crucial component to splitting responsibility. Another point of security is that not everyone should have SSH access and if they do, use two factor authentication and use special laptops for SSH access.
Another bitcoin exchange BitX wrote after the hack,
“Our number one priority is to keep our customer’s Bitcoin safe and secure. Our engineering team lives and breathes this, day in and day out. And there is good reason for it. Our reputation depends on it. We aim to be the best and most secure way for customers to buy and store Bitcoin.”
They said that the secret to keeping bitcoin safe is effective key management.
According to BitX, the majority of customer funds are stored in keys that are kept safe in physical bank vaults inside safety deposit boxes, which they call the “deep freeze” storage solution. The deep freeze solution are keys which are multisig, with only specific individuals having access to the safety deposit boxes, and the same person does not have access to more than one safety deposit box. Private keys in the safety deposit box are encrypted, so it is impossible for a bank employee to steal the key.
As part of the multisig solution, BitX uses BitGo to split control of the keys, saying the “only way to spend funds from our hot wallet is if both BitX and our partner authorises the transaction using multisig keys. They also offer additional security measures like daily and lifetime key spend limits.”
In addition to BitX, other exchanges also use BitGo for multisig key security. Bitstamp, which was hacked in 2015, later deployed a new system which uses the BitGo multisig solution. They also announced that they are running on Amazon’s AWS cloud infrastructure, architected to be one of the most secure and reliable cloud computing environments available.
Unfortunately following the Bitfinex hack, it’s not yet clear the implications of how BitGo’s multisig solution played a role, since Bitfinex used BitGo as well to manage one of their keys.
Bitcoin exchange CoinJar also uses a multisig solution, however theirs is built in-house where more than 95% of customer bitcoins are stored offline in multiple high-security locations across Australia.
Other ways exchanges can mitigate security risks
The running theme across several bitcoin exchanges is that security is paramount, however some rely on third-party solutions which isn’t always the best route. As they say, never keep all your eggs in one basket.
Dubai based bitcoin exchange BitOasis who relied on Bitfinex for some of their brokerage functions announced that they had to temporarily disable features on their exchange, as they look for a new partner exchange. This would be a good lesson in reducing risk, rather than relying on a third-party.
Other ways that exchanges can reduce points of failure and increase security is through the use of hardware wallets. European-focused bitcoin exchange CoinMate wrote, “while others are being “hacked” Coinmate customers bitcoin funds are securely stored in BitcoinTrezor.”
Co-founder and director of SatoshiLabs Alena Vranova, the maker of the Trezor hardware wallet, also wrote “People use BitcoinTrezor + don’t have the uncomfort of having to wait when moving btc from a vault.”
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