In the turbulent landscape of the cryptocurrency market, digital currency exchanges, as key hubs linking investors with blockchain assets, should bear the responsibilities of secure custody, transparent trading, and compliant operations. However, in actual development, many major exchanges have repeatedly faced scandals, from large-scale theft incidents to poor customer fund management, price manipulation, insider trading, and interest transfer. These misdeeds have continuously eroded investors' trust in exchanges. This article will review and categorize the historical issues of certain digital currency exchanges, allowing investors to see the dark history and underlying risks behind these platforms.
1. Fund Security and Theft Incidents
The way digital currencies are held greatly differs from bank accounts. Bank accounts can ensure security through password recovery, account locking, etc. However, digital currency cold wallets lack a central authority to help recover passwords or lock accounts. The control mechanism relies solely on securely storing an unchangeable string of fixed passwords. If this password is leaked (for example, captured in a photo), or if the custodian misappropriates it, or if the custodian dies, it can lead to massive losses.
Typical Case:
Mt. Gox Incident (2014): Once one of the largest bitcoin exchanges in its early days, Mt. Gox accounted for 70% of global bitcoin trading volume at one point. However, due to chaotic internal management and lack of transparency in fund custody, the platform claimed in 2014 that approximately 850,000 bitcoins were lost due to a hacking attack (valued at around $450 million at the time), eventually leading to bankruptcy liquidation.
Bitfinex and Multiple Hacker Intrusions (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, 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, leading to the theft of 7,000 bitcoins, resulting in a loss of approximately $41 million.
Upbit Exchange Theft Incident (2019): The South Korean exchange Upbit was hacked, resulting in the theft of 340,000 ethers, with losses exceeding $49 million.
DMM Bitcoin Exchange Theft Incident (2024): 4,502.9 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 that such incidents are due to hacking, it is often difficult to verify whether internal personnel have privately transferred funds, or if the actual controllers of the exchange themselves transferred funds to personal accounts.
2. Customer Funds 'Misappropriated' for High-Risk Speculation or Simply Running Away with Funds
Typical Case:
FTX Collapse (2022): As a globally renowned trading platform, FTX faced a massive liquidity crisis at the end of 2022, followed by its collapse. Internal financial reports and investigations indicated that customer funds were suspected to have been transferred to the affiliated company Alameda Research for high-risk investments and expenditures.
QuadrigaCX 'Key Mystery' (2018-2019): The founder of the Canadian exchange QuadrigaCX suddenly passed away, leaving a mystery: the exchange's private keys were reportedly held solely by him, resulting in approximately $190 million in customer assets being inaccessible. Subsequent regulatory investigations uncovered anomalies in the financial accounts.
PlusToken Platform Exit Incident (2019): PlusToken lured numerous investors with high returns and ultimately ran away with about 40 billion yuan worth of digital currency, causing significant losses to many investors.
FCoin Exchange Shutdown Incident (2020): Founder Zhang Jian announced that due to insufficient funds, the platform could not fulfill user withdrawals, involving about 7,000 to 13,000 bitcoins in user funds. An announcement was made declaring the platform's exit.
Voyager Digital Bankruptcy Case (2022): Voyager filed for bankruptcy in July 2022 due to massive debts incurred from investing in high-risk cryptocurrency hedge fund 3AC, with estimated liabilities between $1 billion and $10 billion and over 100,000 creditors, most of whom were ordinary customers.
2022 Massive Wave of Bankruptcies: A significant downturn in cryptocurrency prices led to the bankruptcy of many high-risk speculative cryptocurrency platforms, including Celsius Network, BlockFi, Babel Finance, and others.
Many trading platforms that emerged during the cryptocurrency market frenzy either ran away with funds or went bankrupt due to high-risk speculation, causing great harm to platform users.
3. Other Misdeeds
Price Manipulation Allegations: Most major exchanges have been accused of influencing market prices through inflated trading volumes, 'spoofing' (rapid price increases or dumps), and other means, allowing the platform to profit secretly or provide advantages to specific accounts. Some even directly fabricate prices using spoofing or flash crashes, extracting all assets from leveraged users.
Rumors of Insider Trading: Some exchange employees or executives may have gained early knowledge of a token's upcoming listing, allowing them to buy low before the listing and sell at a profit after prices surged, while ordinary investors are 'harvested' due to information asymmetry.
Suspicious Stablecoins: To bridge fiat and digital currencies, many companies have launched 'one-to-one' pegged stablecoins to the dollar. In theory, each stablecoin should be backed by an equivalent dollar or other safe assets. However, in practice, companies issuing stablecoins often manipulate their backing behind the scenes.
USDT is issued by Tether and often claims that 'every USDT has a corresponding dollar or equivalent asset reserved in a bank account.' The New York Attorney General's office once 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 partnership by Binance and Paxos) was required to stop issuance due to regulatory issues, indicating that regulators are increasing scrutiny over the reserve proofs and compliance of stablecoins.
As a new type of investment and speculation platform, digital currencies have become a tool for many speculators to quickly raise and run away with funds due to their convenience in cross-border asset transfers. The lack of regulation provides significant convenience for wrongdoers. Ordinary traders should always be wary of these risks.
