Digital currencies, also known as cryptocurrencies, try to present themselves as alternatives to government-issued currencies and gold. But they have several hurdles to clear, and one of them is that the currencies might not be safe. Here’s a story about how some computer hackers recently breached one of the digital currency exchanges and stole hundreds of millions of dollars worth of the digital currency. The exchange said it plans to reimburse the customers, but what happens when an exchange doesn’t have the resources to reimburse customers or chooses not to?
According to Coincheck’s account of the incident, an unidentified thief stole 523 million coins tied to the NEM blockchain project, which were trading at about 94 U.S. cents at the time of the hack. It wasn’t until around 11 a.m. on Friday morning — about eight hours after the initial breach — that Coincheck staff noticed an alert pointing to a sharp drop in their NEM coin reserves.
The thief was able to seize such a large sum in part because Coincheck lacked basic security protocols. It kept customer assets in what’s known as a hot wallet, which is connected to external networks. Exchanges generally try to keep a majority of customer deposits in cold wallets, which aren’t connected to the outside world and thus are less vulnerable to hacks.