Two high-profile security breaches this week – including the biggest cryptocurrency theft in history – are raising questions on the safety of storing funds in a wallet on a crypto exchange.
A security incident at digital asset exchange Binance on Thursday affected some $6.3 billion in client assets, making it the largest crypto theft on record. Earlier that day, prediction market platform Polymarket temporarily halted trading on its international exchange after a third-party data provider was hacked, resulting in at least $2.7 million being drained from users’ wallets. The company’s international platform operates on the Polygon blockchain.
Experts whom CNBC interviewed said the security incidents on the crypto exchanges aren’t surprising, especially in light of recent artificial intelligence hacking incidents. Most of these experts even said that observers should expect more security incidents, at least in the near term, as that problem worsens.
“I think it’s extremely dangerous,” said Tyler Moore, a cybersecurity professor at the University of Tulsa who has followed the asset class for more than a decade. “I think you should be very wary of leaving any significant amount of funds in an exchange… there are no built-in protections for when these inevitable hacks take place.”
For instance, banking customers can rely on the Federal Deposit Insurance Corporation to insure deposits up to $250,000 per depositor, per insured bank, in the event of an institution’s failure. There is no similar form of coverage available for funds lost from a cryptocurrency exchange, noted Moore.
Industry Perspectives & Recovery Efforts
Binance and Polymarket reassured users that they would make affected investors whole. That’s a sign that users should feel confident in crypto exchanges, according to Ido Ben-Natan, CEO of blockchain security company Blockaid.
“I actually think no users will lose any money,” he said. “Binance has said they’re going to cover everything… I actually don’t think it’s a bad idea for users to put money in these exchanges. These exchanges need to work really hard to make sure they don’t take another hit like this.”
Ben-Natan noted that while he thinks more hacks are likely as the cybersecurity landscape changes due to AI, he said it will only make the crypto industry stronger. As a result, a crypto wallet could ultimately become a safer place to hold funds compared to other options, since the industry will have the experience of how to handle these attacks, Ben-Natan said.
Vulnerabilities on Offshore Platforms
A key point is that while Binance experienced a security incident on its offshore platform, its regulated, centralized U.S. exchange did not have a similar issue. The same was true of Polymarket’s domestic exchange.
U.S. regulated platforms Coinbase and Robinhood were also unaffected by the security breach on Binance, though shares of both fell on Friday in the aftermath.
Market Consequences and Vulnerabilities
A security breach of this reported scale could have significant consequences for the entire cryptocurrency market, not just Binance. The impact depends on whether customer funds are at risk, whether Binance can maintain withdrawals and restore confidence, and whether hackers begin selling the stolen cryptocurrency.
Investors may move money into stablecoins or self-custody wallets, leading to panic selling, increased volatility, more liquidations of leveraged long positions, and temporary downward pressure on BTC. Bitcoin reportedly fell more than 3% during the initial market reaction, while market-wide liquidations exceeded $1 billion.
Ethereum could face additional selling as investors reduce exposure to exchange-related risk, causing higher volatility, liquidations in leveraged ETH positions, temporary weakness in DeFi activity, and increased demand for secure self-custody.
BNB has direct exposure to confidence in the Binance ecosystem and could face stronger selling pressure, reduced investor confidence, lower trading activity, and greater volatility, though a prolonged decline is not inevitable.
Smaller cryptocurrencies can suffer disproportionately when investors become fearful, ranging from moderate Bitcoin volatility to severe losses in small-cap altcoins.
Three Possible Market Scenarios
- Scenario A: Recovery (Bullish): Market stabilizes, Binance restores withdrawals, customer funds remain protected, confidence returns, and crypto prices recover.
- Scenario B: Prolonged Uncertainty (Bearish): More volatility ensues, investors withdraw funds, BTC and ETH experience further selling, altcoins underperform, and market recovery takes longer.
- Scenario C: Contagion (Severely Bearish): Major market sell-off occurs, other exchanges face withdrawal pressure, confidence in centralized exchanges deteriorates, large-scale liquidations happen, and prices experience another major decline.
Current Status and Assessment
Binance's response is particularly important. On October 30, Binance announced that it had set aside more than $6.34 billion to cover the stolen assets and reported approximately $3 billion frozen with partners. On October 31, Reuters reported that Binance had replenished approximately 90% of the stolen assets using company funds. This is replacement of assets, not proof that 90% of the stolen funds were recovered. That significantly changes the potential risk of customer losses, although market confidence remains an issue.
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