The recent bitcoin exchange hack underscores the vulnerability of bitcoin exchanges, an issue that needs to be addressed if bitcoin is to gain a larger following, according to Megan McArdle, a Bloomberg columnist. (McArdle most likely referred to Bitfinex.)
Safeguards have been considered, such as a virtual “exploding dye pack”, but it remains to be seen if such safeguards will be accepted.
It took banks many years to develop safeguards that ultimately made bank robbery undesirable to criminals.
McArdle noted that bitcoins are comparatively profitable for hackers to steal.
Since the early 20th Century, bank robbing has become a less attractive option for criminals because of the safeguards banks have developed, McArdle noted. Banks have used bills marked with exploding dye, armed guards, and silent alarms to discourage robberies. Also, most businesses today follow security practices when accepting large amounts of cash so that if the money has been stolen, it will be easy to find the rightful owner.
Banks have also established systems to protect digital payments that ensure that digital funds are only in one place at a time, removing the potential for double spending.
When a hacker ordered a billion dollars from a Bangladesh central bank earlier this year, the bank was able to cancel the transactions before they completed.
Cyber criminals tried to steal nearly $1 billion from Bangladesh Bank’s account at the Federal Reserve Bank of New York in February and succeeded in transferring $81 million to four accounts at Manila’s Rizal Commercial Banking Corp, according to Reuters. The money was then laundered through the city’s casinos, according to investigators.
Bitcoin, by contrast, is still in the “Wild West” stage, McArdle noted. Bitcoin needs to develop safeguards; otherwise, bitcoin is not likely to attract as many legitimate users. The more vulnerable bitcoin is to theft, the less attractive it is to such users.
Mechanisms such as an “exploding dye pack” have been suggested for the cryptocurrency. The currency’s rightful owner could “undye” the money once recovering it.
Ethereum considered such a solution following a massive theft.
The challenge is whether or not users would accept such measures. One problem is that the security vulnerability is caused by cryptocurrency’s lack of regulation, a feature that also makes it popular with users.
Any attempt to prevent theft will generate opposition. This was the case when Ethereum recently developed a solution to prevent future thefts; the solution (the “hard fork”) split the Ethereum community.
But without finding a way to deter theft, cryptocurrency exchanges are vulnerable to a larger problem: flagging demand from those who worry that their funds could vanish.
Featured image from Shutterstock.