If you have ever bought Bitcoin, you might be familiar with cryptocurrency exchanges. When choosing a crypto exchange you might consider different factors, such as the exchange pending order depth, the waiting time to deposit and withdraw funds, if they offer a 24/7 customer service etc. But one key element that is often overlooked is the security of the exchange. Are your assets safe on this exchange?
Asset security is an essential consideration for a cryptocurrency exchange, but for the end user, it might not be obvious how to evaluate the overall security of a given exchange. After all, almost every exchange will provide a two-factor authentication mechanism to log in, a pre-approved withdrawal address list, and other basic security measures such as withdrawal limits. But how does the exchange use cold or hot wallets to protect the crypto assets is information that exchanges are not willing to disclose. Even in the possession of such information, it might be difficult for an average user to discern if such configuration or mechanism is safe.
Should then users leave safety to luck and the chance of not being attacked by a hacker? There are actually some simple indications that can help users to make an educated judgment about the overall security of an exchange.
A first indicator is whether an external team has audited the security of the exchange and issued a report about it: Typically exchanges will hire well-known security teams or experts to evaluate the protection of the crypto assets, the exchange structure, etc. Those teams will perform security audits and penetration tests on different parts of the exchange, including key management or the deposit and withdrawal mechanisms, and will also attack the exchange as a hacker would do, to evaluate potential security vulnerabilities. After completing this process, the security consulting team will issue a report to the exchange. If the exchange has performed such evaluations, and they are willingly sharing the results, it can be a good indicator that the exchange is at least prepared to withstand a certain level of attacks, and it is most likely more trustworthy than untested exchanges.
A second and important point is if there is an insurance company willing to provide asset loss coverage.
Many exchange users don’t worry too much about all the security levels or the audits that have been conducted by the exchange, but rather if the exchange can bear an asset loss event and compensate if Bitcoin or other currencies are stolen from the exchange. A secure exchange should have the ability to compensate for losses. In addition to their own funding or the ability of the investors to back up such cases, it is increasingly common to look for an insurance provider to cover such cases.
Insurance compensation for digital asset loss can definitely give users certain assurance that their assets are protected. But in fact, global insurance companies have been hesitant in the past to underwrite coverage for crypto asset loss. The lack of a full understanding of the crypto industry, the high risk and high volatility of digital currencies have been a decisive factor for insurance companies to be cautious before making a clear move into this market.
Only a handful of exchanges and crypto asset custody providers in the industry, like Coinbase, Bitgo, Gemini, Binance, Crypto.com, Civic Wallet and a few others, have been able to secure an insurance coverage or to provide their own to protect their customers from an eventual asset loss. The rest of the companies have remained silent.
The reason for such a small number of insured crypto companies is because these companies are not willing to pay the cost of the insurance, as much as whether the insurance companies are willing to underwrite policies for them. The process to underwrite a policy requires an effort from the insurance company, including performing security evaluation and audits on the insured exchanges and wallet providers, risk assessments, etc. The process can extend for up to 6 months and requires the full cooperation from the exchanges and wallet providers. All these factors can cause that even crypto companies willing to be insured cannot find insurers to provide the coverage for them, resulting in a very limited number of insured companies globally.
From July 2020, crypto asset custody and wallet service provider CYBAVO, with the assistance of Lockton Companies, the world’s largest independent insurance brokerage company, has reached an agreement with a globally known S&P AA-rated reinsurer to provide cryptocurrency insurance coverage to the assets custodied by CYBAVO’s technology.
Thanks to this agreement, customers using CYBAVO enterprise wallet technology will benefit from the insurance coverage. Companies like Taiwan’s largest cryptocurrency exchange BitoEX, Bitopro or Poseidon Network are some of CYBAVO’s customers that will benefit from such coverage.
Learn more about CYBAVO enterprise wallet and the advantages of securing your exchange with our technology. Get in touch today and get a free trial at firstname.lastname@example.org.