A Deep Dive into Blockchain and Crypto Exchange Security

Over the last 15 years, blockchain and its associated technology have become widely known, accepted, and most importantly, trusted by crypto investors and enthusiasts. 

The use of exchanges, wallets, and other online platforms to transact crypto has grown. Unfortunately, so has the volume and sophistication of attackers interested in gaining unauthorized access, disrupting transactions, and stealing assets.

Crypto exchanges are not inherently blockchain solutions themselves and do not have the same security measures built in. So it’s critical for crypto exchanges to integrate strong security measures into their platforms to deliver the safest experience for their users.

What Is Blockchain Security?

A blockchain is a public, distributed record of transactions that employs cryptography (encoded information) to ensure its records can’t be altered or destroyed. 

There is no central authority, such as a bank or government-controlled entity, overseeing the blockchain, so cryptography is central to maintaining its security and integrity.

Public Blockchain

Anyone can join, contribute to, and access a public blockchain, also known as a permissionless blockchain. Bitcoin and Ethereum are examples of public blockchains.

Because these blockchains are essentially open-source software, a community of developers and contributors continually review and improve the codebase, including its security features. 

However, “open to all” means that malicious actors might also be exploring the code for any vulnerabilities. 

Private Blockchain

Also known as a permissioned blockchain, a private blockchain restricts access to the blockchain. Because private blockchains are often created and utilized by private companies, each user must be identified and authenticated. 

The security measures of public blockchains vs. private blockchains are similar to those of open-source software vs. proprietary software. 

Open-source ecosystems bring the benefits — but also risks — of involving the community at large. However, proprietary software with access controls can only be revised by approved companies or individuals, who might be limited in their knowledge or experience.

Types of Blockchain Security Breaches To Be Aware Of 

Despite the integrity of cryptography and distributed ledger technology, public blockchains can still be vulnerable to cyberattacks by those seeking to exploit the consensus mechanisms (often proof-of-work) of blockchains. These are the most common types of blockchain security breaches you should know about.

Sybil Attack

A Sybil attack involves a single or group of malicious actors attempting to control multiple nodes, often by creating fake participants, in order to create fake transactions.  

51% or Double-Spending Attack

This type of threat involves a single attacker or group of attackers banding together to form a mining pool that carries out more than 50% of the mining for a blockchain. On a public blockchain, this can be dangerous, as the group of attackers can try to control the digital currencies, tokens, or assets created.

For large, mature blockchains like Bitcoin and Ethereum, a Sybil or 51% attack would be difficult, given the quantity of assets required.

Phishing

Phishing continues to be one of the most popular forms of fraud. Security software firm Kaspersky uncovered that, in 2023, more than 709 million phishing attacks were blocked — an increase of 40% from 2022.  

Cyber-attackers often pose as trusted friends, family, colleagues, managers, or authority figures to steal an individual’s personally identifiable information (PII) or account credentials. 

These “traditional” phishing techniques also carry over to crypto. Malicious actors could use the same social engineering tactics to gain access to account holders’ private keys.

Blockchain Network Congestion

In this type of attack, hackers will prevent a number of validators from confirming a suitable number of transactions, leading to delays, downtimes, and instability. This intercepted traffic can be diverted somewhere else or replaced with traffic from a group of malicious actors, such as in the Sybil attack referenced above.

How Blockchain Builds the Foundation of Crypto Exchange Security 

Blockchain technology underpins the entire framework of crypto exchanges, but vulnerabilities do exist. Blockchains are still software code and are subject to the same challenges as any other codebase. 

Additionally, cryptographic algorithms can vary widely among blockchains, and effective key management is essential.

However, there are some unique features that support the security elements of transactions and contracts on the blockchain. 

Cryptography

Transactions are secured with complex codes to ensure data integrity and user authentication. Often considered a “secret handshake” only authorized parties can perform, the public key infrastructure (PKI) of the blockchain gives asset owners a private key to safeguard their assets, while the public key is utilized for transactions. 

Decentralization

Because the blockchain operates across a network of thousands of computers, known as nodes, there’s no single point of failure should one or more of the nodes be compromised. The distributed ledger across numerous computers makes it nearly impossible to alter data on a large scale. 

Immutability

Once a transaction is recorded on the blockchain, it’s permanent and unchangeable. This ensures an accurate and tamper-proof record of all activity within the exchange. The blockchain can be considered an immutable logbook documenting every transaction within the fortress walls, with no one able to make changes.

Best Practices for Crypto Exchange Security

While these built-in blockchain security features help safeguard user assets, there are some additional best practices crypto exchanges should follow to protect against breaches. 

Choose a Robust Digital Asset Infrastructure

Selecting a strong digital asset infrastructure is imperative to ensure the highest levels of security and operational efficiency for a crypto exchange.

AlphaPoint’s exchange software offers robust digital asset infrastructure with advanced security measures. Over 150 exchange and broker operators have chosen AlphaPoint’s secure, scalable white-label technology to manage the global trading of cryptocurrencies and blockchain-based digital assets, including security tokens.

Enforce Multi-Factor Authentication (MFA)

Multi-factor authentication is critical for securing user accounts and preventing unauthorized access. Consider offering a blend of methods and changing them periodically to give users a choice and an opportunity to re-submit their credentials. 

Security keys and biometrics (fingerprint, voice) are some of the strongest authentication methods widely used today.

Ensure Compliance With Regulations

In 2023 alone, cryptocurrency and fintech companies were fined $5.8 billion for lax financial controls. Adhering to global and local regulatory standards will protect the exchange and its users from fines and other legal repercussions. 

Though the regulatory landscape is constantly evolving, especially region to region, it’s vital to stay up-to-date on all regulations. This will help you identify potential noncompliance and address it before it results in hefty fines.

Implement Strong KYC and AML Procedures

Anti-money laundering (AML) is a set of policies and procedures to identify and prevent fraud, financial crime, illicit activities, and money laundering. Know Your Customer (KYC) is a subset of AML procedures and generally refers to verifying a customer’s identity to prevent illegal or suspicious activity from taking place. 

Strong AML and KYC procedures ensure that the organization’s assets, including those of its customers, are safe and protected.

Secure and Manage APIs

The rise of API usage has also led to an increase in the number of API breaches. Such breaches occur when unauthorized individuals gain access to an API and the data it contains. 

To prevent security breaches and ensure data integrity, ensure data is encrypted at rest and in transit. Additionally, you should check with the developer to make sure the API follows best practices for versioning, input validation and data sanitization, and API endpoint security. 

Conduct Regular Security Audits

Regular security audits can strengthen an exchange’s security posture and prevent a potential breach. A combination of both automation and engineer-driven oversight, a security audit can identify current and potential vulnerabilities and evaluate the effectiveness of existing security measures. 

A security audit can also include an assessment of current known threats in the marketplace and an evaluation of best practices. This will help you ensure that the exchange is employing the strongest methodologies to protect its assets.

Prepare an Incident Response Plan

A comprehensive incident response plan is crucial for quickly addressing security breaches and minimizing their impact. Typically developed by several departments jointly and approved by senior leadership, incident response plans usually include:

• A breakdown of the incident response team members’ roles and responsibilities
• A business continuity plan
• A list of critical network and data recovery processes
• Internal and external communication strategies

 

Secure Your Crypto Exchange With AlphaPoint

The blockchain itself was built with security in mind. However, customers interact with exchanges using their everyday devices and Internet connectivity. So “traditional” cybersecurity measures need to be in place to protect the assets and sensitive information of the exchange and its customers.

AlphaPoint provides secure, high-performing white-label solutions that power crypto exchanges, brokerages, and wallets worldwide. AlphaPoint has enabled over 150 customers in 35 countries to launch and operate crypto markets through a secure, scalable, and customizable digital asset trading platform. 

Request a demo today to see how AlphaPoint can offer the liquidity and layered architecture your exchange needs to stay secure.