Cryptocurrencies have revolutionised financial systems, providing a decentralised, transparent, and fast way to transfer value across borders. However, the anonymity and lack of regulation surrounding them have also opened doors to a variety of crypto crimes. From hacking exchanges to orchestrating fraudulent schemes, cybercriminals have exploited these vulnerabilities. In this article, we will explore examples of notable crypto crimes, the vulnerabilities that enable these attacks, how companies can prevent crypto crime attacks, and the role of insurance in mitigating the impact of such attacks.
Examples of crypto crimes
Mt. Gox Hack (2014): One of the earliest and most notorious crypto crimes was the Mt. Gox hack. Mt. Gox, a Tokyo-based Bitcoin exchange, lost around 840,000 bitcoins, which were worth $460 million at the time. The attack occurred due to the exchange’s lack of robust security infrastructure, including weak wallet management and poor internal controls, making it vulnerable to hackers.
The DAO Hack (2016): The Decentralized Autonomous Organization (DAO), which was designed to function as a venture capital fund, suffered a devastating hack that led to the loss of over $60 million worth of Ether. The hackers exploited a vulnerability in the smart contract code, which allowed them to siphon off funds without triggering security protocols. This incident exposed the risks in using automated smart contracts that had not been thoroughly audited.
The Cryptopia inside job (2021): An employee of the company created copies of Cryptopia’s private keys, saving them to a USB storage device. In total, this employee stole $175,000 worth of Bitcoin.
Vulnerabilities in the crypto space
Cryptocurrency platforms and transactions, though innovative, possess several vulnerabilities that make them attractive targets for cybercriminals. Some of these include:
Lack of regulation: The decentralised nature of cryptocurrencies means they are largely unregulated. This creates an environment where bad actors can operate with little fear of legal repercussions. Regulatory ambiguity also makes it difficult for victims of crypto crimes to recover lost assets or take legal action against perpetrators.
Weak security protocols: Many crypto exchanges and platforms fail to implement robust security measures. Insecure coding, insufficient encryption, and lack of multi-factor authentication (MFA) are common weaknesses that leave platforms vulnerable to attacks. See the examples cited above whereby hackers were able to exploit the vulnerabilities.
Anonymity: While anonymity is a key feature of cryptocurrencies, it also makes tracking and recovering stolen funds challenging. Criminals can hide behind pseudonyms, making it difficult for law enforcement to trace transactions or prosecute offenders.
Phishing and social engineering: Even with secure technology, human error remains a significant vulnerability. Phishing attacks and social engineering schemes target users, tricking them into revealing private keys or passwords, granting attackers access to their wallets.
How companies can prevent crypto crime attacks
To protect themselves from crypto crimes, companies need to adopt a comprehensive approach to security. Some preventive measures include:
Implement strong cybersecurity protocols: Companies should employ robust security measures such as encryption, MFA, and secure coding practices. Regular security audits, vulnerability assessments, and penetration testing can help identify and address weaknesses before they are exploited.
Use cold wallets for storage: One of the best ways to protect crypto assets is by storing them in cold wallets—offline storage solutions that are not connected to the internet. Cold wallets are less vulnerable to hacking attempts compared to hot wallets (online storage), which are more easily accessible by cybercriminals.
Educate employees and users: Phishing attacks and social engineering tactics are common in the crypto space. Companies should educate their employees and customers about recognising and avoiding these attacks. Encouraging the use of hardware wallets and strong, unique passwords can significantly reduce the risk of unauthorised access.
Monitor transactions: Implementing real-time monitoring systems that detect suspicious transactions can help identify potential threats early on. These systems can flag unusual behaviour, such as large transfers to unknown wallets, allowing companies to take proactive action.
How insurance can help when it comes to fraud and hacking
Even with strong security measures in place, no system is entirely immune to cyberattacks. This is where insurance plays a crucial role. There are two key policies that crypto companies need to seriously consider to help protect their assets; Crypto Crime and Cyber Insurance.
Crypto Crime Insurance
The purpose of this policy is to protect companies when they incur three main types of fraud.
- Employee theft: As in the above mentioned Cryptopia example, an employee stole crypto assets directly from the company. Employees have access to the most critical data of the company and therefore most crypto crimes are actually inside jobs.
- Computer fraud theft: This is to cover fraudulent accessing of computer systems and fraudulent alteration of data, i.e. hacking the company to steal crypto assets.
- Fund transfer fraud: This can be done through phishing attacks whereby the perpetrator makes fraudulent instructions to debit an account of the insured company.
Cyber Insurance
This policy is put in place to protect companies in three key areas:
- Coverage to respond to breaches and attacks
Not only does the cyber policy provide incident response services in case of attacks, it also may include ransomware and extortion coverage which is applicable for crypto cases. Companies that fall victim to ransomware attacks have hackers who demand payment in cryptocurrency. This could be recovered by the insurance. It may also provide funds to cover the costs of negotiating with attackers or restoring systems.
- Protection in case the company fails to keep third party data secure
Provides coverage for legal defence, investigation costs and fines and penalties in case of breaching any data privacy laws.
- Recovery for loss of profits due to a cyber incident
It allows companies to claim compensation for loss of profits due to operational downtime caused by a cyberattack. This allows businesses to recover and continue operations without catastrophic financial damage.
While cryptocurrencies offer immense opportunities, they also present unique risks. Crypto crimes like hacking and ransomware attacks are on the rise fuelled by vulnerabilities in technology and regulation. Companies must adopt comprehensive security measures and educate their users to mitigate these risks. At the same time, insurance plays a vital role in providing a safety net, helping businesses recover from unforeseen attacks and ensuring the continuity of operations in an ever-evolving digital landscape.
Working with a broker like Anapi is important to make sure you have the right coverage for your risks, especially when there is no ‘one size fits all’ insurance approach when it comes to new technologies like digital assets. Our team of experts can help guide and advise on how to address the complex and challenging risks your crypto company may be facing.
