Why Preventing a Cryptocurrency Exchange Heist Isn’t Good Enough

Cryptocurrency exchanges have a history of deploying poor security policies and it is claimed that over a third of exchanges were compromised by 2015. Once compromised, the attacker can copy the exchange’s wallet (i.e. a set of cryptographic private keys) and appropriate all its coins. The largest heist so far occurred in February 2014 when Mt. Gox lost 850k bitcoins and unlike the conventional banking system, all theft transactions were irreversibly confirmed by the Bitcoin network. We observe that exchanges have adopted an overwhelmingly preventive approach to security which by itself has not yet proven to be sufficient. For example, two exchanges called NiceHash and YouBit collectively lost around 8.7k bitcoins in December 2017. Instead of preventing theft, we propose a reactive measure (inspired by Bitcoin vaults) which provides a fail-safe mechanism to detect the heist, freeze all withdrawals and allow an exchange to bring a trusted vault key online to recover from the compromise. In the event this trusted recovery key is also compromised, the exchange can deploy a nuclear option of destroying all coins.