How To Prevent The Trillion-Dollar Heist

If the trend continues, the world is likely to witness an unprecedented scale of theft — one that could rival or exceed all previous heists combined.

One might say that both the benefit and the curse of Digital Assets is in their nature. Digital assets, like Bitcoin, are referred to as ‘bearer assets,’ meaning that the owner of the private key controls the asset — similar to how holding a physical gold bar makes you the owner of it. This characteristic offers financial self-sovereignty, allowing individuals to manage their financial transactions and data independently of banks or governments. However, this also significantly increases the risk of theft, as control of the assets is tied directly to possession of the private key, and if the private key is lost or stolen, the assets are gone — forever.

Unlike gold, digital assets are highly portable, making them easy to steal (awaiting the audit of Fort Knox). The recent $1.5 billion hack of ByBit, one of the largest cryptocurrency exchanges, serves as a stark reminder of the significant security vulnerabilities that exist in this space – it is quite unlikely that this will be the last heist or the largest for that matter.

If you’re a proponent of digital assets, like I am, and believe that their adoption will continue to grow due to the proliferation of ETFs, increased regulatory clarity, and even nation-states considering digital assets for reserves, then it’s clear that attacks on individuals and institutions holding these assets will grow as well. The risks are not just growing in size but are becoming increasingly sophisticated. Hackers are evolving faster than the systems meant to defend against them. As digital assets gain traction, these attacks will become more complex, and the stakes will rise higher than ever before. The ‘honey pot’ is getting bigger — possibly leading to a trillion-dollar heist in the future — unless we take action now.

If we don’t start preparing for these risks now, the scale of future heists could dwarf anything we’ve seen before.

The difference from TradFi

In traditional finance, exchanges never hold customer assets directly; they are stored with regulated custodians. But cryptocurrency exchanges often hold assets on behalf of their customers. For example, Coinbase manages over 2.4 million Bitcoin, worth approximately $245 billion, with the top 10 cryptocurrency exchanges probably holding north of $1 trillion in assets on behalf of their customers. This unique structure makes exchanges prime targets for hackers. As an industry, we have witnessed this repeatedly, from the infamous Mt. Gox hack in 2014 to Coincheck, DMM Bitcoin, KuCoin and many others, including ByBit as of last week; hopefully, but unlikely to be the last.

Fortunately, the industry is evolving. Independent, regulated custodians are providing a more secure alternative to keeping assets on exchanges. Leading institutions in the digital asset space are already relying on trusted custodians to ensure the security and resilience of their holdings. Komainu, for example, is one of the custodians pioneering off-exchange settlement solutions that ensure assets are securely held in segregated, bankruptcy-remote custody wallets while still allowing clients to access exchange liquidity. We welcome broad innovation in the custody sector as these advancements are critical as the industry matures and regulators begin to take a more active role in safeguarding the space. As I have written before, there are now best practices to securing digital assets for individuals or institutions – these have to become the market standard.

A call to action

The industry must act now, not just as individuals, but as a collective — whether as users, exchanges, or custodians. Let’s take this opportunity to ensure that trusted custody solutions and best practices become the new standard, enforced by both conviction and regulatory measures. The speed with which the industry united to respond to the ByBit hack was a testament to our collective strength, but we must now focus on building robust, long-term, industry solutions to prevent the next massive heist, with trusted custody being the foundational backbone to this industry.

The potential for digital assets to revolutionize finance is limitless, but their success hinges on our ability to protect them. By securing digital assets now, we are not just safeguarding our investments — we are ensuring the stability and growth of the digital asset industry for decades to come.

^{Disclaimer: I currently work at Komainu, a regulated Digital Asset custody service provider}