In the turbulent cryptocurrency market, digital currency exchanges, as key hubs linking investors with blockchain assets, should bear the responsibility for secure custody, transparent trading, and compliant operations. However, in actual development, many major exchanges have frequently been embroiled in scandals, from large-scale theft incidents to poor customer fund management, price manipulation, insider trading, and interest transfer, all of which continuously erode investors' trust in exchanges. This article will review and categorize some historical issues of digital currency exchanges, allowing investors to see the dark history and underlying risks behind these platforms.
1. Fund Safety and Theft Incidents
The way digital currencies are held is vastly different from bank accounts. Bank accounts can be secured through password recovery, account locking, etc. However, digital currency cold wallets lack a central authority to help recover passwords or lock accounts. The control method, in simple terms, relies entirely on securely storing a fixed, unchangeable password. Once this password is leaked (e.g., photographed), or if the custodian embezzles, or if the custodian dies, it can result in significant losses.
Typical Cases:
Mt. Gox Incident (2014): As one of the earliest and largest bitcoin exchanges, Mt. Gox once accounted for 70% of global bitcoin trading volume. However, due to chaotic internal controls and lack of transparency in fund custody, the platform claimed to have lost about 850,000 bitcoins (valued at approximately $450 million at the time) due to a hacking attack in 2014 and ultimately went bankrupt.
Bitfinex and Multiple Hacking Incidents (2016): Bitfinex suffered a major hacking attack, with approximately 120,000 bitcoins stolen, valued at over $70 million at the time.
Coincheck Theft Incident (2018): The Japanese exchange Coincheck lost approximately $500 million worth of NEM in 2018, making it one of the largest cryptocurrency thefts in the world at that time.
Binance Exchange Theft Incident (2019): The globally renowned exchange Binance was attacked by hackers, resulting in the theft of 7,000 bitcoins and a loss of approximately $41 million.
Upbit Exchange Theft Incident (2019): South Korean exchange Upbit was hacked, losing 340,000 ethers, with losses exceeding $49 million.
DMM Bitcoin Exchange Theft Incident (2024): 4502.9 bitcoins were illegally transferred from the official wallet of Japan's DMM Bitcoin exchange, resulting in a loss of approximately $305 million.
Note: Although exchanges claim such incidents are due to hacking, it is actually difficult to verify whether internal personnel have secretly transferred funds or if the actual controlling person of the exchange transferred them to a private account.
2. Misappropriation of customer funds for high-risk speculation, or simply running away with funds.
Typical Cases:
FTX Collapse (2022): As a globally renowned trading platform, FTX encountered a massive liquidity crisis at the end of 2022, which subsequently led to its collapse. Internal financial reports and investigations indicated that customer funds were allegedly transferred to the affiliated company Alameda Research for high-risk investments and expenditures.
QuadrigaCX 'Key Mystery' (2018-2019): The founder of Canadian exchange QuadrigaCX suddenly passed away, leaving behind a mystery: the exchange's private keys were allegedly held solely by him, preventing customers from withdrawing approximately $190 million in assets. Regulatory investigations later revealed irregularities in financial accounts.
PlusToken Platform Exit Incident (2019): PlusToken lured a large number of investors with high returns, ultimately absconding with approximately 40 billion yuan worth of digital currency, resulting in significant losses for many investors.
FCoin Exchange Shutdown Incident (2020): Founder Zhang Jian announced that due to insufficient reserves, they could not fulfill user withdrawals, involving user funds amounting to approximately 7,000-13,000 bitcoins. An official announcement was made regarding the exit.
Voyager Digital Bankruptcy Case (2022): Voyager filed for bankruptcy in July 2022 due to massive debts that could not be recovered after investing in the high-risk cryptocurrency hedge fund 3AC. At the time of bankruptcy, liabilities were estimated between $1 billion and $10 billion, with over 100,000 creditors, but most 'creditors' were actually ordinary customers, i.e., platform users.
2022 Massive Bankruptcy Wave: Due to a significant decline in cryptocurrency prices, many high-risk speculative cryptocurrency platforms went bankrupt, including Celsius Network, BlockFi, Babel Finance, etc.
Many trading platforms that emerged during the cryptocurrency market frenzy either ran away with funds or went bankrupt due to high-risk speculation, causing significant harm to platform users.
3. Other Misdeeds
Price Manipulation Allegations: Most major exchanges have been accused of manipulating market prices through tactics such as inflating trading volumes and 'spiking' (rapidly raising or crashing prices), allowing the platform to profit secretly or provide advantages to specific accounts. They even directly use spiking and flash crashes to fabricate prices, stripping leveraged users of all their assets.
Insider Trading Rumors: Some employees or senior executives of exchanges allegedly received advance notice of a certain token's impending listing, allowing them to buy low before the listing and then sell at a profit when the price skyrocketed, while ordinary investors were 'harvested' due to information asymmetry.
Suspicious Stablecoins: To bridge fiat currency and digital currency, many companies have launched stablecoins pegged '1:1' to the US dollar. Theoretically, each stablecoin should be backed by an equivalent amount of dollars or other secure assets. However, in reality, companies issuing stablecoins often manipulate behind the scenes.
USDT is issued by Tether and often claims that 'each USDT is backed by corresponding US dollars or equivalent assets in bank accounts.' The New York Attorney General's office has accused Tether of secretly using USDT reserves to cover losses for the affiliated exchange Bitfinex. Ultimately, Tether and Bitfinex agreed to pay a settlement and promised to improve information disclosure.
BUSD (launched in collaboration with Binance and Paxos) was required to stop issuance due to regulatory issues, indicating that regulators are intensifying scrutiny over stablecoin reserves and compliance.
As a new type of investment and speculation platform, digital currencies have become a tool for many speculators to quickly raise funds due to their convenient cross-border asset transfer features. The lack of regulation provides significant convenience for wrongdoers. Ordinary traders should always be on guard against these risks.
