What Cryptocurrency Exchange Soundness Metrics Are in Focus After the Binance Hack?

Key Soundness Indicators Include Resources to Cover Losses
"Proof of Reserves Doesn't Mean You Can Withdraw"
Digital Asset Firms Should Also Establish Internal Operational Controls

Binance, the world's largest cryptocurrency exchange, which was hit by a hack, has used funds other than its emergency fund to make up for the stolen assets. This has prompted calls for exchanges to maintain sound financial health and be prepared for hacking incidents.

On November 5, Bitplanet Research Lab, a digital asset treasury (DAT) company, released a report titled "Assessing the Soundness of Cryptocurrency Exchanges: Responses to Large-Scale Hacks and Institutional Operational Risks." The report identified three key indicators for assessing an exchange's soundness: resources for covering losses, its actual capacity to process withdrawals, and its ability to respond to liquidity needs.

Bitplanet said Binance is working to recover its losses but has yet to reach the point where customers can withdraw their assets immediately as usual. On November 2, Binance released proof of reserves (PoR) showing reserve ratios of more than 100% for 10 major assets, including Bitcoin and Ethereum. However, as of November 3, only 23 of the 72 total network combinations for those 10 major assets were available for withdrawals. Bitplanet explained that withdrawals could not immediately return to normal because it takes time to safely transfer funds to hot wallets, which handle external transfers, and complete security checks. It added that proof of reserves is only a procedure for verifying an exchange's asset holdings at a specific point in time and the extent to which they cover customer balances; it does not certify the exchange's total potential liabilities or financial soundness.

Bitplanet outlined five conditions for determining that the Binance hack crisis has been brought under control: whether all assets have been recovered, withdrawals on major networks have returned to normal, the exchange can handle large net outflows, the Secure Asset Fund for Users (SAFU) is adequately funded, and the causes of the incident and the approval system have been addressed. Binance has allocated $6.34 billion in company funds against the approximately $6.3 billion (8.4527 trillion won) in losses from the hack, and combined half of SAFU (7,499 Bitcoin), excess funds in its futures insurance fund, and its own corporate funds to secure 95% of the stolen amount. It is making over-the-counter purchases to cover the remaining 5% in low-liquidity tokens. Bitplanet said, "If withdrawal delays continue for customers who deposited the tokens that have not been recovered, distrust could deepen."

Bitplanet also warned that, with withdrawals available for only 27 assets, a bottleneck could become entrenched, preventing deposited assets from being transferred to safe external custodians. It estimated that approximately 6.32 trillion won has been withdrawn from Binance so far, and said the amount could grow as the scope of permitted withdrawals expands, increasing liquidity pressure on hot wallets. It also warned that SAFU is about half short of its target funding level, which could make it harder to prepare for another unexpected security incident. Finally, it stressed the need for improvements to prevent a recurrence, including addressing the route used in the hack.

Bitplanet also argued that, in light of the incident, companies and institutions holding cryptocurrency should review their internal operational controls, including separating approval authority and establishing emergency withdrawal routes. It highlighted that the incident stemmed not from a breach of the blockchain protocol or theft of private keys, but from the compromise of the exchange's internal operating environment and transaction-signing approval system. The incident showed that if an intruder in an operating system can bypass controls and obtain final withdrawal approval, the damage can spread across the entire system sharing the approval pathway, even if wallets and blockchains are physically separated.

Bitplanet outlined six criteria that exchanges and custodians should review. First, it said approval authority should be separated: access to operating systems must be completely separated from the authority to approve actual asset transfers, and approvers must be independent of one another. It also said multiple approvals should be required for large asset withdrawals or changes to wallet permissions. It recommended limiting withdrawals by accumulating amounts over time or counting transactions, and enabling automatic temporary withdrawal suspensions when suspicious transactions are detected. It said assets should be physically distributed, the share held in cold wallets should be managed, and alternative withdrawal routes and backup liquidity should be secured. It also called for verification of actual payment capacity, internal operational controls, and service continuity following an incident.

This content was produced with the assistance of AI translation services.