Bitcoin security is not impenetrable. Each Bitcoin has a private key. If anyone hacks into an exchange — or your pc — and gets the private key, the Bitcoin is gone. The theft is untraceable if the thieves are clever enough to not transfer it to another exchange using a current account. That is how Bitcoin wasgoed designed and is one of its perceived benefits — anonymous and potentially untraceable exchange.
This article is the third te a series examining the regulation of Bitcoin te Australia. It looks at what the Australian Government is (or could be) doing to improve Bitcoin security for investors.
Hacking and theft of Bitcoin is a serious criminal activity, but it occurs every day around the world and there shows up to be little the authorities can do about it. Spil thieves are often overseas, tracking down the culprits has proven virtually unlikely for current law enforcement authorities. Chic from some isolated cases, law enforcement uncommonly catches Bitcoin thieves.
So while governments are cracking down on legal exchanges with enlargened regulations, they seem very slow te developing systems to protect people against the real criminals engaged te online theft and hacking of accounts. Governments emerge to have no systematic process to track criminal theft of Bitcoin and other cryptocurrencies. If you have your Bitcoin stolen, you are on your own.
This is a real punt without a legal or practical solution other than keeping your Bitcoin safe te a secure wallet or on an exchange with a secure track record. Governments should be working with exchanges to develop Bitcoin consistent industry-wide security protocols that provide standardised and regulated protections from hacking.
One fruitful area of government intervention would be ter stopping Bitcoin theft. For example, if exchanges cooperated te developing a system tracing individual Bitcoin transactions that would make profiting from hacking firmer for thieves and criminals. Therefore, if a theft occurred, the government could trace it inbetween exchanges. However, this seems a long way off spil it does caress against the privacy and security goals of the Bitcoin community – thesis kinds of oversight measures may not occur without coordinated international government activity.
The Big Problem of Fractional Reserves
However, what if your Bitcoin are not stolen but just not there ter the very first place? This is a potentially thicker threat to Bitcoin security than theft. Something few governments have attempted to address is the problem of “fractional reserve” Bitcoin exchanges. The same problem is partly why the government regulates banks.
Banks are tightly regulated because they are the only institutions permitted to lend out money they have received on deposit. Banks are permitted to state that you have “$20,000” te your savings account, when ter fact there is no physical money backing up that statement. They can lend that money out under “fractional reserve” banking. The $20,000 is actually not sitting there waiting for you. Spil soon spil it hits the account, it is available for the bankgebouw to lend out. This fractional banking has bot legal since at least the mid-19th century.
Fractional reserve banking only becomes a problem when many people want to pull money out of their bankgebouw at the same time. Then people find out that the “$20,000” ter their account can vanish very quickly. However, banks are permitted to do this, provided they obey with stringent regulatory supervision by the central banks and government authorities like the Reserve Canap of Australia and the Australian Prudential Regulation Authority.
Most of the time, thesis regulations work. Sometimes, like during the height of the GFC, they do not. That is when you find out the “$20,000” is not there at all.
Bitcoin Exchanges and Fractional Reserves
There are presently no regulations that require Bitcoin exchanges to have 100% reserves of Bitcoin. Strafgevangenis voorwaarde they open separate wallets for each customer. Instead, exchanges can pool Bitcoins te a single wallet and simply allocate numbers to individual customer accounts. This creates a danger that the Bitcoins will not be there when you go to withdraw.
Some of the better exchanges such spil CoinTree offerande “proof of solvency” which means users can verify that their Bitcoins exist at any time. However, many other exchanges do not provide this service. Their customers rely on the exchange to “do the right thing” and actually purchase Bitcoin on their behalf every time they transact with the exchange.
If you are suspicious of any exchange, you can lightly transfer your Bitcoin to another exchange or your individual wallet. This can toebijten instantaneously. Therefore, the risks associated with fractional reserve exchanges are minimal. However, the Mt. Gox case, where an exchange defrauded its own customers, also illustrates that exchanges can go rogue.
Investors should only use well-known exchanges with a track record of Bitcoin security and be ready to samenvatting their Bitcoin should they detect trouble.
Investors Have Little Protection
If a Bitcoin exchange engaged te fractional reserve trading and many customers asked to download their Bitcoin at the same time, this could cause chaotic trading similar to what happened during the GFC.
Unluckily, you would be unlikely to have any recourse. Any exchange that advertised they were storing your Bitcoin and did not produce your Bitcoin when asked could arguably be engaged ter misleading and deceptive conduct. However, it would likely fall brief of criminal conduct.
At this point, you would end up spil an unsecured creditor with a voorkoop against the exchange but little else. Without specific proof of fraud, the exchange would not have done anything illegal. The exception is where an exchange makes specific assurances ter the terms of the exchange that they will keep your Bitcoin specifically te your dedicated wallet. Again, CoinTree is one exchange that does this.
However, many other exchanges do not. Furthermore, financial regulators do not monitor exchanges, making problems stiffer to detect. If any exchange crashes and many people want to pull Bitcoin out at the same time, it will be very interesting to see how the exchanges cope.
Regulations should require exchanges to either provide proof of solvency or state very clearly ter their terms of service that they operate under a pooled wallet. This should be a regulatory requirement once the government accepts that Bitcoin exchanges need specific Australian Financial Services Licence (AFSL) requirements. Unluckily, even if Australia did develop such regulations, they would not apply overseas. Many people trade on foreign exchanges, so Bitcoin security will always be uncertain.
If you are investing ter Bitcoin, you should always develop your own security protocols, including monitoring your chosen exchange for signs of trouble.
Governments have bot slow to regulate exchanges. Ter particular, they have not acted to protect consumers from fractional reserve trading. The Australian Government should require Australian-based exchanges to either hold a 100% Bitcoin reserve or alternatively proclaim that they are engaging te fractional reserve trading.
LegalVision has an extensive network of cryptocurrency specialists. If you need assistance with ensuring your exchange or business gives customers adequate Bitcoin security, call LegalVision’s Fintech lawyers on 1300 544 755 or pack out the form on this pagina.