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QuadrigaCX, the largest encryption exchange in Canada, has lost more than $ 190 million in user funds and can not reimburse its users.
As CCN reported on Feb. 1, QuadrigaCX's founder and CEO died in India with exclusive control of the company's cold wallets containing over $ 150 million in cryptocurrency like Bitcoin and Ethereum, and $ 40 million in cash stored in a third party.
How do the world's largest digital badet markets, such as Binance and Coinbase, store funds to avoid a tragic situation like QuadrigaCX?
The CEO should never have a single access to Crypto on an exchange
A common criticism of the Canadian stock market, which now faces the risk of bankruptcy and bank failure, was its structure.
Meltem Demirors, an executive at CoinShares, said QuadrigaCX lacked planning for continuity and a reliable structure.
In the highly unlikely event that a key executive or key member of an exchange would go away, the business should still be able to manage and protect users' funds.
"Beyond horrifying. QuadrigaCX, Canada's largest foreign exchange exchange: its founder suddenly dies, no one has a private key in his wallet, fiat balances are inaccessible. Operational security and continuity planning are essential for a company and for an individual, "she said.
Changpeng Zhao, CEO of Binance, the world's largest volume-based cryptographic exchange, said exchanges should use a multi-signature system to control a cold wallet.
Source: blockchaintransparency.org
In Bitcoin, a multi-signature portfolio allows multiple users or organizations to hold private keys in the wallet.
Funds are only available when all or most keys are combined, depending on the structure of the multi-signature portfolio.
"It's sad," said CZ, referring to the QuadrigaCX case. he added"There are many ways to split private keys or sign up to 3/5, 5/7, etc. Never neglect security. Similarly, never let the CEO carry private keys. Bad on many levels. Personally, in good health and with the intention of living longer and prospering. "
For an exchange, the protection of user funds and the security of internal management systems must be prioritized over any other area of activity.
Many of the largest stock exchanges in the global market use a carefully defined strategy to govern cold storage portfolios to ensure the safety of users' funds.
In December 2018, Coinbase, a leading trading center in the United States, transparently disclosed the largest ever encryption transfer involving its portfolio, providing a rare glimpse of its system.
Prior to transferring its cold funds, the Coinbase team said it planned months before the event to eliminate any potential technical problems.
Previously, Coinbase stored user funds in a refrigerated wallet, placed in a safe. As the size of the stock market increased, the company needed to reorganize its storage to make it a more secure and efficient system.
Source: Coinbase.com
The Coinbase team explained:
We started planning months before the move date and involved almost all the Coinbase teams in the process. We conducted risk badessments, developed monitoring plans, and conducted migration tests until we were confident that the live migration would proceed smoothly.
The negative effect of QuadrigaCX on the crypto industry
Nathaniel Popper, a reporter for The New York Times, said.
Mount QuadrigaCX's Gox-esque business may have damaged the reputation of the industry as well as companies such as Coinbase, Binance and Gemini, which devote a significant portion of their resources to protecting users' funds and the establishment of industry standards.
We lost the $ 150 million of cryptocurrencies we held for customers because our founder died and he was the only one with pbadwords for the wallets. Welcome to the financial future! https://t.co/81auPh1lxZ
– Nathaniel Popper (@nathanielpopper) February 1, 2019
Already, in important markets such as Japan and South Korea, cryptographic exchanges have a reputation for being vulnerable to hacking attacks and fraudulent operations due to past events.
These cases demonstrate that the cryptocurrency sector is still in its infancy. Over time, as industry adopts better practices, the infrastructure and internal management systems of the exchanges should improve.
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