A bizarre incident occurred on Binance yesterday that left many traders confused and concerned for the safety of their funds. A single Syscoin (a cryptocurrency worth about $0.25 and ranked #74 on coinmarketcap) was purchased for 96 Bitcoin (or about $615,000). The trade alerted the companies risk management system, which upon further analysis, discovered that it was caused by a number of API users.
Binance halted all trading and withdrawals and also removed all API keys until the situation could be resolved. It was later revealed that the irregular trade was caused by Syscoin’s blockchain becoming temporarily jeopardized.
This irregularity prompted Binance to offer a 70% rebate on the trading fees received between July 5th and July 14th to all Binance users, and to launch a user safety fund called “Secure Asset Fund For Users (SAFU).
The statement put out by Binance’s support team states:
“To protect the future interests of all users, Binance will create a Secure Asset Fund for Users (SAFU). Starting from 2018/07/14, we will allocate 10% of all trading fees received into SAFU to offer protection to our users and their funds in extreme cases. This fund will be stored in a separate cold wallet.”
Binance is receiving praise for their quick response and the launch of SAFU (a name ironically derived from popular meme video about Binance’s security). Their response also leads to questions about what the standard should be for crypto exchanges providing some form of insurance in case of lost funds due to hacks or irregular trades.
Large US based exchanges like Coinbase and Gemini state on their website that only US dollars are FDIC insured (for up to $250,000). Currently, the U.S. government does not provide insurance for any digital assets, which means as soon as you convert any sum of money from fiat to crypto, it is no longer insured by those exchanges.
Furthermore, the few exchanges that have a concrete insurance policy offer very limited cases to make a claim. Insurance is primarily for cases where an exchanges systems are hacked due to no security fault of their own. User who have poor quality passwords and don’t properly follow basic security protocols will most likely not be insured.
The crypto space is still highly unregulated and the frequent news of hacks has made many insurers reluctant to cover exchanges. South Korea in particular has had more than its fair share of exchange hacking incidents, prompting local insurance to cast doubts on their credibility and security.
Currently, only 4 exchanges in South Korea offer insurance; Upbit, Korbit, Bithumb, and Coinone. However the insurance limits on these exchanges are less than $5million, with is barely enough to cover users in the case of a serious hacking incident.
It remains to be seen how exchanges will resolve the lack of trust from Insurers. Binance has wisely chosen to take on the costs of insurance by allocating 10% of their trading fees to SAFU. As insurance companies continue to deliberate on the risks of covering crypto exchanges, it may benefit the exchanges to follow Binance’s example and take on the burden of insuring themselves in order to build more confidence and loyalty from traders.