Cyber threat grows for bitcoin exchanges

Mon Aug 29, 2016 7:34am EDT
 
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - When hackers penetrated a secure authentication system at a bitcoin exchange called Bitfinex earlier this month, they stole about $70 million worth of the virtual currency.

The cyber theft -- the second largest by an exchange since hackers took roughly $350 million in bitcoins at Tokyo's MtGox exchange in early 2014 -- is hardly a rare occurrence in the emerging world of crypto-currencies.

New data disclosed to Reuters shows a third of bitcoin trading platforms have been hacked, and nearly half have closed in the half dozen years since they burst on the scene.

This rising risk for bitcoin holders is compounded by the fact there is no depositor's insurance to absorb the loss, even though many exchanges act like virtual banks.

Not only does that approach cast the cyber security risk in stark relief, but it also exposes the fact that bitcoin investors have little choice but to do business with under-capitalized exchanges that may not have the capital buffer to absorb these losses the way a traditional and regulated bank or exchange would.

"There is a general sense in the bitcoin community that any centralized repository is at risk," said a U.S.-based professional trader who lost about $1,000 in bitcoins when Bitfinex was hacked. He declined to be named for this article.

"So when investing, you always have that expectation at the back of your head. I lost a small amount compared to the others, but I know of traders who lost millions of dollars worth of bitcoins," the trader said.

The security challenge for the bitcoin world does not appear to be letting up, according to experts in the currency.   Continued...

 
A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015.  REUTERS/Benoit Tessier/File Photo