Fortifying User Trust: Crypto Exchanges Ramp Up Security Measures

CEXs (centralized exchanges) faced a significant decline in user trust after the collapse of FTX, as per a report by Nansen.

This incident prompted users to demand enhanced security features and transparency. To address these concerns, major industry players like Binance, Bitget, OKX, and others have implemented measures to safeguard their clients and funds.

One of the initial steps taken by CEXs is the implementation of proof-of-reserves (PoR). This involves publicly disclosing an exchange’s reserve assets and providing verifiable evidence that the exchange possesses sufficient assets to support user deposits. Binance’s PoR, available to the public, indicates that it holds around $54 billion in reserve assets, as per Nansen’s findings.

Additionally, exchanges have established protection funds as a safety net in case of exchange failures. By having such funds, exchanges aim to assure consumers that there would be adequate funds to cover deposited assets in the event of a hack.

Nansen’s report reveals that Binance has a protection fund named Binance SAFU, which amounts to $1 billion. OKX comes in second place with a fund of $700 million. Huobi has two funds in place: the Security Reserve Fund and the Investor Protection Fund. The Security Reserve Fund holds 20,000 BTC (approximately $528 million), while the Investor Protection Fund is funded by 20% of the income, which is used for Huobi token buybacks. These tokens are then utilized in the user protection fund.

Many exchanges have started offering Proof of Reserves. Others, such as Binance and Bitget, increased their protection funds

Note that these do not guarantee solvency without a breakdown of liabilities pic.twitter.com/xdOUy2lBbj

— Nansen 🧭 (@nansen_ai) June 15, 2023

However, it is important to question whether the measures implemented by Binance and other exchanges are sufficient to ensure user protection. While these steps are certainly a move in the right direction, they might not be comprehensive enough.

For instance, a PoR does not account for a firm’s liabilities, which is a significant drawback. An improvement would be the introduction of an additional Proof-of-Liabilities mechanism, although this would require off-chain verification through external audits. Nevertheless, audits themselves have proven to be problematic, as highlighted by Nansen, which noted that FTX had undergone two audits before its collapse.

Even with a protection fund in place, it is crucial for exchanges to implement best practices in risk management. These practices may include dispersing cash holdings across multiple locations to minimize the impact of potential hacking attempts. Following the FTX collapse, Binance increased its protection fund’s value from $735 million to $1 billion, while Bitget raised its protection reserve from $200 million to $300 million.

Hence, it is imperative for exchanges to adopt additional measures that enhance user protection and transparency. Many experts anticipate that over time, more stringent protection measures will be implemented to prevent a disaster of the magnitude experienced with FTX.

Author

Alexander Stefanov

Reporter at CoinsPress

Alex is an experienced finance journalist and a cryptocurrency and blockchain enthusiast. With over five years of experience covering the industry, he deeply understands the complex and constantly evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His passionate approach allows him to break down complex ideas into accessible and insightful content. Follow up on his content to be up to date with the most important trends and topics - stay ahead of the curve with CoinsPress.