Table of Contents
- 1 Crypto Exchange Security: A High-Stakes Battlefield
- 2 Why Crypto Exchanges Are Prime Targets
- 3 How a Typical Crypto Fraud Scheme Works:
- 4 The Data Science Behind Crypto Fraud Prevention
- 5 Factors That Influence a User’s Trustworthiness Score:
- 6 Leçons from a Failure of a Fraud Detection Model
- 7 Beyond Algorithms: Other Fraud Detection Tactics
- 8 1. Pattern Detection
- 9 2. Human Intelligence
- 10 3. Guilt by Association
- 11 Real-World Crypto Fraud Stories
- 12 The Valentine’s Day Massacre
- 13 The SIM Swap Attack
- 14 What Exchanges can do to protect users from self-protection’ of Exchanges?
- 15 Best Practices of the Leading Secure Crypto Exchanges:
- 16 Choosing the Best Secure Crypto Exchange
- 17 The Future of Crypto Security
Crypto Exchange Security: A High-Stakes Battlefield
This month, I awoke at 3 am to an influx of messages. Someone had tried to steal my Bitcoin from my crypto exchange account. Fortunately, the scam was stopped, not by chance, but due to sophisticated security tools that identified the user’s login as a suspect.
This led me to research the security of crypto exchanges. In speaking to people who work in the field, I found that the top platforms are involved in a constant battle against criminals. The platforms’ defenses incorporate modern methods of detecting cryptocurrency fraud AI, artificial intelligence, as well as the human ear to protect cryptocurrency assets.
Why Crypto Exchanges Are Prime Targets
I was first introduced to crypto in the year 2017 (yes it was near the peak, terrible timing). The thing that intrigued me was not just the investment potential, but also the tech itself.
The blockchains that run cryptocurrency are uncentralized ledgers that prevent manipulation. Once funds are removed from your account and are gone, they’re gone. You don’t have customer service to call to get an exchange, which makes crypto a perfect opportunity for criminals.
A person who works for a large platform (who is named Dave) says that the company can stop 40,000 fake transactions daily. What is the main target group? The digital reserves are not the company’s main concern. On the other hand, this is the case with their customers, particularly at their “on-ramps” where the fiat money is exchanged into cryptocurrency.
How a Typical Crypto Fraud Scheme Works:
- Fraudster purchases stolen credit card information ($10-$20 per card ) on the dark internet).
- Makes fake accounts using stolen identities ($30-$50 for each ID).
- The stolen card is used to purchase cryptocurrency.
- The crypto is transferred into a private wallet.
- It disappears before the cardholder realizes it.
Once the fraud is found, the exchange will remain to pay for the losses.
The Data Science Behind Crypto Fraud Prevention
“We’re a financial crime prevention unit disguised as a tech company,” one Data scientist working at an exchange that is mid-sized told me. She is involved in the detection of crypto-related frauds which analyze hundreds of behavior elements to give users the risk score.
Factors That Influence a User’s Trustworthiness Score:
- Keystroke dynamics: How you compose.
- Device fingerprinting is the hardware and the software that you are using.
- Login Behavior – Common access times and places.
- Moving your mouse – how you use it through the game.
- History of transactions – spending and withdrawal pattern.
Every transaction aids in improving the system, making fraudulent detection better over time.
“She stated, “The most challenging job is not creating the models.”It’s trying to balance security and user satisfaction. If you set the sensitivity too high the real user gets stopped. If it’s too low, fraud gets through.”
Leçons from a Failure of a Fraud Detection Model
Another of my friends, Miguel, told me about an incident in his bank when they implemented a brand new system for detecting fraud.
The results of the model, which was a perfect fit in testing and covering 200 factors, were reported by the researcher. “The case was different when we rolled it out alive and twenty thousand Japanese users became fraudsters for no reason” the speaker exclaimed. Why? The training data was not inclusive of Japanese users, which caused their behavior to seem new.
What’s the solution? Shadow deployments — new models run in conjunction with the existing models before being made live.
Beyond Algorithms: Other Fraud Detection Tactics
1. Pattern Detection
A few years ago the exchange was able to observe the sudden increase in new accounts in Florida that were all connected to a local bank. The anomaly led to the investigation of a fraud network that used fraudulent credentials stolen from the bank.
2. Human Intelligence
Despite AI improvements, human analysts are still crucial in identifying fraud. A team of analysts discovered fraud due to multiple fake accounts using similar profile pictures.
3. Guilt by Association
Once a suspicious account has been discovered, the IP address, device, and transaction history are analyzed to determine a connection to any suspect accounts. The flagged scammer could result in dozens of.
Real-World Crypto Fraud Stories
The Valentine’s Day Massacre
The 14th of February saw the exchange was shut down for an operation to defraud customers of $2 million. They had set up numerous fake accounts with image-hopped IDs. What was their mistake? The hackers accessed multiple accounts on the same device and triggered an alarm. Exchanges froze their money and were able to report them to the FBI.
The SIM Swap Attack
SIM swapping has become a major danger. The scammers trick mobile providers into transferring a victim’s mobile number to a brand-new SIM card. This allows them to steal the 2FA code. One victim suffered losses of more than 100,000 dollars before the exchange was able to detect the fraud.
To stop this, secure cryptocurrency exchanges today check if a number has recently been transferred before they allow SMS-based authentication.
What Exchanges can do to protect users from self-protection’ of Exchanges?
Surprisingly, a substantial part of the security budget goes towards protecting users from their errors.
Best Practices of the Leading Secure Crypto Exchanges:
- Cold storage: The majority of money is stored offline and divided into several different locations.
- Advanced authentication SMS verification: is gradually being removed in favor of authenticator applications.
- Monitoring withdrawals: Unexpected huge withdrawals of new devices prompt further verification.
- The exchange can have withdrawal restrictions on new accounts to prevent fraud.
Choosing the Best Secure Crypto Exchange
-If you’re serious about security select an account that requires strong 2-factor authentication (not only SMS). -Introduces delay in withdrawal on new accounts.
-Some teams respond quickly to fraudulent incidents.
-Cold storage is used for the majority of resources.
The Future of Crypto Security
If I asked insiders of the industry about their reasons for staying up all night, they all said it was that they wanted to be authentic.
“The holy grail is verifying a user’s identity with absolute certainty–without making the process frustrating,” Dave stated. “We’re not there yet, but we’re getting closer.”
Solutions that could be considered include:
- Biometrics: Fingerprint and face recognition.
- Behavior authentication: is a method of identifying users by their typing and the way they navigate.
- Multi-layered security: Combining various techniques of verification for effective protection against fraud.
As long as these technologies aren’t fully developed the prevention of fraud in crypto remains a game of cat-and-mouse between experts in security and criminals. One thing is for certain the fight for safe trading in crypto is far from ending.
If you receive an email from your exchange asking for additional confirmation, don’t forget that it’s not a matter of bureaucracy. It’s protection.
