Decentralised systems seek to pick up digital trading market share
Cryptocurrency exchanges that promise invincibility against cyber thieves are coming to Asia in the wake of last month’s theft of $530m from Japan’s Coincheck, the world’s largest ever cryptocurrency heist.
The spectre of hacking has dogged the short history of cryptocurrencies and has become a serious deterrent to trading in the market that now has a capitalisation of more than $300bn. Other major recent exchange attacks include that on South Korean Youbit, which lost 17 per cent of its assets in December, and the $450m siege of Tokyo-based Mt Gox in 2014.
“The risk of a major hack is still one of the biggest risks faced by the global crypto community,” said Henri Arslanian, financial technology lead at PwC in Hong Kong. “Don’t think retail investors always understand the counterparty risk they may be facing by leaving their crypto assets on an exchange.”
A new model of exchange claims to solve the problem. Two so-called “decentralised” crypto exchanges — AirSwap and KyberNetwork — will launch this month in Asia on the pledge that they are unhackable. Some investors say they are already moving funds to the platforms.
Most cryptocurrency exchanges perform broking and clearing roles. In doing so, they hold investors’ money in online custodial accounts, in most cases without oversight from regulators.
Because these activities and funds are centralised at just one party, hackers need only attack the exchange to plunder the digital assets. That is what happened at Coincheck last month.
Decentralised exchanges, however, do not hold investors’ funds and therefore cannot become targets of major hacks.
AirSwap, a Hong Kong-based decentralised exchange, launched on February 1. Users of the exchange keep their investments in offline storage devices that are connected to computers when trading. Funds are never held in a centralised account and cannot be hacked, said Sam Tabar, a strategist for the company.
Another feature of decentralised exchanges is that they do not directly process the transactions. Each trade is processed through blockchain-based “smart contracts” that require thousands of different computers to confirm the transaction.
Hacking the smart contracts to steal the coins is almost impossible, said TN Lee, head of business for KyberNetwork, a decentralised exchange based in Singapore that plans to go live on February 11.
“You would have to hack thousands of computers simultaneously and change the record of transaction on each of them,” said Mr Lee.
The new exchanges have seen a limited release so far and traders say the technology is still in an early stage of development, which make them difficult for beginners to use. Other complaints include a lack of liquidity as well as poor anti-money laundering checks.
But cryptocurrency investors say they are already moving trades to the platforms.
“Decentralised exchanges represent the long-term future of the token market,” said Jehan Chu, managing partner at Kinetic Capital, a cryptocurrency hedge fund based in Hong Kong. “Kinetic is already executing limited trades on decentralised exchanges and will continue to accelerate volumes as liquidity and volume increase.”
By Don Weiland in Hong Kong