The Wall Street officially opened Bitcoin spot ETF trading in January 2024, coinciding with the Bitcoin halving event. As of February 22, it has attracted an influx of $5.2 billion, reigniting public interest in the crypto bull market. For most users, exchanges serve as the first gateway to understanding cryptocurrencies. Learning how to select a secure and reliable exchange while effectively diversifying risks becomes the inaugural lesson in crypto investment for both traditional finance investors and the general public. This article will use CoinEx as an example to help you quickly grasp the "gold standard" of asset security in exchanges—how leading exchanges like CoinEx employ innovative security strategies and technologies to safeguard user assets.
Preventive Mechanisms: Cold Wallet + Hot Wallet Dual Architecture
Cryptocurrency exchanges act as custodians of users' digital assets (similar to bank accounts). Throughout the history of exchanges, there have been numerous cases of embezzlement and hacking, resulting in user asset losses. Consequently, jurisdictions such as Japan, the EU, Singapore, and Hong Kong have established regulations governing how exchanges custody digital assets.
- User assets must be isolated in cold wallets with internal control mechanisms.
- (Chain News Compilation｜Global Regulatory Developments – A Cross-Continental Crypto Legal Map)
Cold Wallet Storage for Majority of Assets Enhances Overall Security
Cryptocurrency exchange wallets (akin to bank vaults) that remain frequently connected to the internet are vulnerable to hacker attacks, leading to significant financial losses—exemplified by the infamous case of Japan’s Mt.Gox exchange, which suffered massive Bitcoin losses due to hacking.
Take CoinEx as an example:
- The majority of user assets are stored in cold wallets, which keep private keys on offline devices, shielding them from unexpected cyber threats.
- Even offline cold wallets may face risks such as internal embezzlement or operational errors.
- CoinEx’s technical team developed a cold wallet security alert system and multi-signature mechanisms to mitigate risks posed by individual personnel.
- Independent hardware key verification and strict whitelist mechanisms ensure only authorized personnel have access, with real-time monitoring for abnormal transfers or withdrawals.
Strict Management of Hot Wallets Balances Efficiency and Security
While cold wallets secure largely static assets, users still require frequent fund movements. Thus, all exchanges maintain hot wallets to meet high-frequency liquidity needs. A robust exchange’s ability to manage hot wallets safely becomes a critical evaluation criterion.
Past incidents in Japan (e.g., Coincheck, Bitpoint) involved wallet control failures. The industry has since adopted stricter standards:
- CoinEx’s hot wallets use online multi-signature approval, requiring consensus for fund transfers.
- Operations are conducted in trusted execution environments, with multi-location backups to enhance disaster recovery.
Disaster Preparedness: Exchange Reserve Funds
Leading global exchanges like Binance, OKX, and CoinEx maintain emergency insurance funds (e.g., Binance’s SAFU, OKX’s Contingency Fund, CoinEx’s Guardian Fund). These funds are sourced from a percentage of trading fees to cover uncontrollable risks.
- CoinEx Guardian Fund allocates 10% of platform trading fees to compensate users in extreme scenarios.
- (CoinEx Commits to 100% Compensation for Recent Attack Losses)
User Trust Mechanism: Proof of Reserves (PoR)
Following the 2022 collapse of FTX, which misused user assets, exchanges prioritized transparency in asset segregation. Many now offer Proof of Reserves (PoR), enabling users to verify reserves-to-liabilities ratios.
- CoinEx provides snapshots of exchange assets and regular wallet audits.
- Users can cryptographically verify via Merkle Trees that CoinEx’s on-chain assets equal or exceed total user assets.
Third-Party Security Alliances
While blockchain grants financial autonomy, it demands heightened asset protection. Hacking remains a critical threat, prompting exchanges to collaborate with cybersecurity firms and regulators.
- CoinEx partners with SlowMist for threat intelligence, AML tracking, and security enhancements.
- An internal Security Committee further bolsters user protection.
Basic Security Conditions for Mainstream-Ready Exchanges
Beyond regulatory frameworks, exchanges often exceed requirements. Key criteria include:
- Cold/Hot Wallet Architecture
- Reserve Funds
- Proof of Reserves
- Security Alliances
However, security compliance doesn’t eliminate all risks. Watch for:
- Exaggerated profit ads
- Multi-level marketing schemes
- Unreasonable deposit/withdrawal restrictions
FAQ Section
Q1: How do I verify an exchange’s Proof of Reserves?
A1: Check the exchange’s official website for Merkle Tree proofs or third-party audit reports.
Q2: What percentage of assets should be in cold storage?
A2: Reputable exchanges typically store 90%+ in cold wallets.
Q3: Are smaller exchanges less secure?
A3: Not necessarily—evaluate their security practices against industry standards.
Risk Disclosure
Cryptocurrency investments carry high risk, with potential for significant price volatility and total capital loss. Assess risks carefully.