In the turbulent cryptocurrency market, digital currency exchanges, as the key hub linking investors and blockchain assets, should shoulder the heavy responsibility of secure custody, transparent transactions and compliant operations. However, in actual development, many major exchanges have repeatedly exposed scandals, from large-scale theft of coins to poor management of customer funds, platform price manipulation, insider trading and profit transfer. These bad deeds have continuously eroded investors' trust in exchanges. This article will review and classify the historical problems of some digital currency exchanges, so that investors can see the dark history and deep hidden dangers behind these platforms.
1. Fund security and coin theft
The way to hold digital currency is very different from bank accounts. Bank accounts can be secured by retrieving passwords, locking accounts, etc. However, there is no central agency to help you retrieve passwords or lock accounts for digital currency cold wallets. In layman's terms, the control method is to keep a fixed and unchangeable password in secret. Once the password is leaked (for example, if it is photographed), or the custodian steals, or the custodian dies, it will cause huge losses.
Typical cases:
Mt. Gox incident (2014): As one of the largest bitcoin exchanges in the early days, Mt. Gox once accounted for 70% of the global bitcoin trading volume. However, due to chaotic internal control management and opaque fund custody, the platform claimed in 2014 that it had lost about 850,000 bitcoins (worth about $450 million at the time) due to a hacker attack, and eventually went bankrupt and liquidated.
Bitfinex and Multiple Hacks (2016): Bitfinex suffered a major hack, with approximately 120,000 Bitcoins stolen, with a market value of over $70 million at the time.
Coincheck theft (2018): Japanese exchange Coincheck lost around $500 million worth of NEM in 2018, one of the largest cryptocurrency thefts in the world at the time.
Binance Exchange Theft (2019): The world-renowned exchange Binance suffered a hacker attack, 7,000 bitcoins were stolen, and the loss was approximately US$41 million.
Upbit exchange theft (2019): 340,000 Ethereum were stolen from the South Korean exchange Upbit, with a loss of more than $49 million.
DMM Bitcoin Exchange Theft (2024): 4,502.9 bitcoins from the official wallet of Japan's DMM Bitcoin Exchange were illegally transferred, resulting in a loss of approximately US$305 million.
Note: Although the exchanges claim that such incidents were caused by theft by hackers, it is actually difficult to verify whether the funds were transferred privately by insiders or even by the actual controller of the exchange himself.
2. Client funds are “misappropriated” for high-risk speculation, or simply run away with the funds
Typical cases:
FTX Collapse (2022): As a world-renowned trading platform, FTX experienced a huge liquidity crisis at the end of 2022 and then collapsed. Its internal financial reports and investigation reports showed that customer funds were suspected to be transferred to its affiliated company Alameda Research for high-risk investments and expenditures.
QuadrigaCX "Secret Key Mystery" (2018-2019): The founder of Canadian exchange QuadrigaCX passed away suddenly, leaving behind a mystery: the private key of the exchange was allegedly held by only him, resulting in the inability to withdraw approximately $190 million in customer assets. A regulatory investigation also found abnormalities in the fund accounts.
PlusToken platform runaway incident (2019): PlusToken used high returns as bait to attract a large number of investors, and eventually took away about 40 billion yuan in digital currency, causing losses to many investors.
FCoin exchange shutdown incident (2020): Founder Zhang Jian announced that due to insufficient funds, he was unable to repay user withdrawals, involving user funds of approximately 7,000-13,000 bitcoins. He issued an official announcement and ran away.
Voyager Digital bankruptcy (2022): Voyager filed for bankruptcy in July 2022 due to its investment in the high-risk cryptocurrency hedge fund 3AC, which resulted in huge debts that could not be recovered. At the time of bankruptcy, the estimated liabilities were between $1 billion and $10 billion, and there were more than 100,000 creditors, but most of the "creditors" were ordinary customers, that is, platform users.
Massive bankruptcies in 2022: Due to a sharp correction in cryptocurrency prices, many high-risk speculative cryptocurrency platforms went bankrupt, including Celsius Network, BlockFi, Babel Finance, etc.
During the years when the cryptocurrency market was frenzied, many trading platforms were born. Most of them either ran away with the funds or went bankrupt due to high-risk speculation, and the platform users suffered greatly.
3. Other Misdeeds
Currency price manipulation suspicion: Most large exchanges have been accused of inflating trading volume, plugging (rapidly raising or dumping the market) and other means to influence market prices, allowing the platform to secretly profit or provide convenience for specific accounts. Some even directly use plugging, flash crashes and other methods to fabricate prices and cut off all the assets of leveraged users.
Insider trading rumors: some exchange employees or senior executives learned in advance that a certain token was about to be listed, so they bought it at a low price in advance, and then sold it after the price soared after listing, making a lot of profit. Ordinary investors were "harvested" due to information asymmetry.
Suspicious stablecoins: In order to connect fiat currency and digital currency, many companies have launched stablecoins that are pegged to the US dollar at a "one-to-one" ratio. In theory, each stablecoin should be backed by an equivalent amount of US dollars or other safe assets. But in reality, companies that issue stablecoins often do things behind the scenes.
USDT is issued by Tether, which often claims that "each USDT has a corresponding US dollar or equivalent asset in a bank account". The New York Attorney General's Office once accused Tether and its affiliated exchange Bitfinex of secretly using USDT reserves to fill the deficit for the latter. In the end, Tether and Bitfinex agreed to pay the settlement and promised to improve information disclosure.
BUSD (Binance and Paxos) was asked to stop issuing due to regulatory issues, which shows that regulators are increasing their scrutiny of the reserve proof and compliance of stablecoins.
As a new type of investment and speculation platform, digital currency has become a tool for many speculators to quickly collect money and run away due to its convenient feature of transferring assets across borders. The lack of supervision has provided great convenience for lawbreakers. Ordinary traders should always beware of these risks.
