Exchange failure: The security risk no one is talking about
They didn’t know until it was too late. In February 2014, the bitcoin exchange Mt. Gox filed for bankruptcy, with an estimated 850,000 bitcoin lost and thousands of customers left high and dry.
Little has changed eight years later. A mere fraction of the lost bitcoin was recovered. Creditors have waited years to reclaim their assets, and bitcoiners continue to gamble with their savings by leaving their coins on an exchange.
At Casa, we believe exchange security risk is underappreciated because exchanges are a single point of failure. Below is an overview of what you need to know about exchange failures to keep your bitcoin safe.
What’s in the fine print?
Recently, exchange juggernaut Coinbase acknowledged in its earnings report it holds more than $250 billion in assets on its customers’ behalf, and customers could lose access to their assets if the company ever went bankrupt.
“…Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” the company stated.
The disclosure made the rounds online, scaring many bitcoiners — and for good reason. If exchange customers are designated as general unsecured creditors in bankruptcy court, they join a long line of people waiting to claim their bitcoin, a process that can get dragged out for years.
Coinbase CEO Brian Armstrong clarified on Twitter that Coinbase currently has “no risk of bankruptcy,” and the disclosure was made to satisfy a requirement from the Securities and Exchanges Commission.
But Coinbase is just one of many exchanges on the marketplace today, and there is no guarantee your exchange is in good working order. There have been dozens of crypto exchange failures over the years due to hacks, accidents, and chronic mismanagement. And you never know when an exchange could restrict withdrawals.
Alleviating exchange security risk is easy. All you need to do is withdraw your bitcoin to your personal wallet where you hold your own private keys, and Casa is here to help. Learn more about our security plans here.
Why is exchange bankruptcy bad for your bitcoin?
For those who prefer to learn the hard way, bankruptcy court is a risky and inefficient way to recover your bitcoin from an exchange.
Bankruptcy is a legal process where an individual or corporation formally admits to a government that it is unable to pay its debts. During bankruptcy proceedings, an exchange lists its assets and liabilities before a court and negotiates a plan to repay creditors at least partially. Below is a short version of how bankruptcy could play out for an exchange:
Judge: How much do you owe?
Exchange: We owe our creditors $500 billion.
Judge: How much do you have?
Exchange: $20 million and some bitcoin Bob and Alice left in their accounts.
Judge: Okay, here’s my plan. We’re going to liquidate those assets and give the proceeds to the creditors.
Sounds messed up, right? Your bitcoin could be at the mercy of a court order if an exchange files for bankruptcy. Unless you’re holding the private key to your bitcoin, your money is up for grabs. Self-custody is the only way to preserve access to your bitcoin.
Control your bitcoin no matter what
At Casa, we help you take secure self-custody of your bitcoin by providing you with multiple private keys. This redundancy is important for protecting your bitcoin.
Multiple keys allow you to access your bitcoin even if a key is lost or stolen, and the setup empowers you to distribute your security risks across locations, jurisdictions, and entirely away from Casa. In fact, we developed a process so you can access your bitcoin without using Casa App or ever dealing with us.
Sovereign Recovery is a set of instructions you can use to restore your keyset, independent of Casa. Using your hardware and open-source software, you can access your bitcoin if Casa ever fails or disappears. That way, you don’t ever have to worry about Casa going out of business. Your bitcoin is safe and fully decentralized — the way it should be. Learn more about how to perform Sovereign Recovery below.
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Not your keys, not your bitcoin
Bitcoin was designed so you could take control of your financial freedom. Claim that freedom today by holding your keys with Casa. Our distributed security model allows you to safeguard your bitcoin against single points of failure, including exchanges. Learn more here.
The Services are a platform for managing cryptographic keys and nodes. The Services are not an exchange for buying, selling, or trading digital or virtual currency or assets (an “Exchange”), and Casa is not a bank or other financial institution. The Services do not and cannot sell, hold, invest, send or receive money or cause or effect any digital or virtual currency or asset transactions. BY USING THE SERVICES IN ANY MANNER, YOU ACKNOWLEDGE AND AGREE THAT (A) CASA IS NOT IN THE BUSINESS OF PROVIDING FINANCIAL, LEGAL, TAX, ACCOUNTING, OR INVESTMENT ADVICE OR SERVICES, (B) NONE OF THE SERVICES ARE INTENDED TO PROVIDE OR CONTAIN ANY SUCH ADVICE OR SERVICES, AND (C) ANY AND ALL SERVICES ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY. Casa urges you to consult a qualified professional for any such advice or service.
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John Tinkelenberg