Hong Kong Bitcoin Exchange BitFinex Loses Nearly 120,000 Bitcoins in Hack

$72 million worth of coins stolen, Bitcoin price plummets, individual customer accounts hacked despite multisignature protection

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A cartoon thief carrying a bag with the Bitcoin symbol on it
Illustration: iStockphoto

Yesterday afternoon, BitFinex, a Bitcoin exchange in Hong Kong, disabled its customer deposits and withdrawals functions and replaced the trading engine on its website with notification of a major security breach. Later in the day, Zane Tackett, the “Director of Community and Product Development” took to Reddit (under the username “zanetackett”) to confirm that an attack had occurred and that nearly 120,000 bitcoins had been stolen from individual customer accounts.

This latest hack, which amounts to a loss of around US $72 million, is the biggest plundering of a Bitcoin exchange since 2014 when 850,000 bitcoins disappeared from the books during Mark Karpeles’s tenure as CEO of Mt. Gox. As was the case in 2014, the value of the currency is now crashing. The market price of bitcoin, which had begun to steadily increase at the beginning of the summer, fell 15 percent on news of the BitFinex hack.

The statement from BitFinex provides no details as to how the attack was conducted, but assures customers that “the theft is being reported to—and we are co-operating with—law enforcement.”

Statements from Tackett on social media seem to rule out the possibility of an inside job. As a result, much speculation is being placed on the key management strategy that BitFinex had setup with its partner, BitGo, a Bitcoin wallet provider that uses multisignature transactions for security.

Multisignature transactions allow Bitcoin users to assign multiple private keys—the cryptographic proof required to initiate a transaction on the network—to a single Bitcoin address. In order to strengthen security, the keys attached to a multisignature address can be divied up among parties such that no one entity has full license to the spend the coins in that address. The measure is designed to provide an alternative to the single point of failure where one person holding a master key stands to lose everything in the event of a hack. If used correctly, multi-signature transactions can also limit the amount of trust in the relationship between cryptocurrency traders and exchanges.

BitFinex was compelled to set up multi-signature addresses for each of its trading customers after an investigation into its operations by the Commodity Futures Trading Commission. Among other things, the regulatory commission faulted BitFinex for holding client funds in an internal address that was exclusively controlled by the exchange. In order to comply with the Commission, BitFinex turned to BitGo. Each customer was then assigned a separate Bitcoin address to hold their deposits with three keys assigned. One key was held by BitGo. Two were held by BitFinex—one offline and one online. For any transaction to go through, any two of these keys would have to be presented.

As a holder of two of the keys, BitFinex, or a hacker with access to both the company’s keys, could have initiated the fraudulent transactions. Or, the hack could have involved a breach of both the BitGo and BitFinex security apparatus.

However, both scenarios make it clear that multisignature wallets are not a magic solution to the problem of rampant robbery of Bitcoin exchanges. Even the strongest security tools are useless when improperly implemented, as seems to be the case once again.

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