The Pain of Risk Control: The Life and Death Test of Digital Currency Trading Platforms

The concept of risk originates from the Italian word "RISQUE", initially referring to objective dangers in nature. However, in modern society, risk is more reflected as a choice, depending on our degree of freedom.

The famous financial historian Peter Burns pointed out in his classic work that whether it is the rise and fall of enterprises, the fluctuations of the stock market, or wars and economic recessions, these events always occur cyclically but often arrive when people are caught off guard.

For digital currency trading platforms, risk control is a crucial core element. These platforms not only undertake multiple functions such as asset custody, transaction matching, clearing, and information dissemination, but also integrate characteristics of institutions like brokerages and funds, making them a comprehensive center in the financial field.

It is widely believed in the industry that there is a significant lack of risk control in the blockchain sector. This situation has led to tragedies in the industry, such as exchanges being hacked. How to effectively carry out risk control has become a core issue that the entire industry urgently needs to focus on.

Multifaceted Risk Challenges

In the cryptocurrency market, the most influential and difficult to guard against is the systemic risk brought about by policy. Changes in regulatory policies directly affect the overall volatility of the market.

The non-systemic risks that market participants can control include: technical risks related to system security and stability, operational risks caused by decision-making errors, liquidity risks arising from assets not being able to be traded at reasonable prices in a timely manner, trust risks due to the inability to execute withdrawal and transfer operations in a timely manner, and moral hazards that harm the interests of investors in pursuit of maximizing their own benefits.

There are various types of risks, and the risk control department is closely related to all aspects of the exchange. An industry insider revealed that the risk control department holds a high position within the company and needs to continuously monitor liquidity, arbitrage, account anomalies, and other risk projects, while maintaining close communication with other departments.

However, during the rapid development phase of the industry, strict risk control measures often constrain the speed of development. Currently, the overall risk control awareness in the blockchain industry is still insufficient, especially for small and medium-sized trading platforms, which have significant room for improvement in this area.

If the blockchain industry is to truly enter the mainstream, the trading platform, as the core of the industry, must properly address risk control issues.

Asset security is the primary goal of risk control.

According to a report by Chainalysis, the total value of assets stolen from Digital Currency Trading platforms in 2019 reached $283 million. Although it has been nearly 6 years since the notorious Mt. Gox incident, cases of Digital Money "vanishing into thin air" still occur from time to time, and the issue of asset security continues to be a concern for industry professionals.

Many well-known trading platforms have taken a series of measures to ensure the security of user assets. These measures include establishing strict financial audits and real-time monitoring alert systems, employing cold and hot wallet separation and hardware wallet technologies, creating an advance compensation mechanism for users, and setting up user protection funds, among others.

Asset custody is an important means to ensure asset security and is a key link in the transition of the traditional financial industry to the blockchain industry. Some industry experts suggest that small and medium-sized blockchain enterprises lacking sufficient technical capabilities should consider introducing third-party custody services to improve the security of digital asset storage, while also purchasing insurance from relevant institutions.

In addition to external measures, the platform's own moral hazard control is also crucial. Industry insiders suggest that the platform can choose to be as open and transparent as possible, inviting peers to supervise together to reduce the risk of client assets being misappropriated.

Compliance Risk Control: Eliminate the Sword of Damocles Hanging Over Your Head

Digital currency platforms face many uncertainties, and actively embracing regulation and compliant operations is a necessary condition to reduce policy and legal risks. Currently, leading digital currency platforms in the industry have established varying degrees of compliance risk control systems, covering all stages before, during, and after.

Many platforms have implemented a series of compliance measures, such as establishing standardized KYC/AML anti-money laundering systems, formulating strict account opening principles and review standards, applying for relevant financial licenses, accepting supervision from regulatory agencies, and collaborating with compliance companies and consulting institutions globally.

Technical Risk Control: Building a Solid Barrier for Platform Security

For trading platforms, technological security is the most common and critical risk control issue. Even industry leaders find it difficult to completely avoid technological risks, such as the recent DDoS attack incidents that several well-known exchanges have encountered.

To address technological risks, major platforms have invested significant resources in building technological defenses. Measures include quantifying and monitoring market risks for various businesses and implementing automatic strategy hedging, establishing cybersecurity, compliance systems, privacy data protection, and technological risk control systems, as well as hiring leading global external companies for IT audit consulting.

Some platforms have also launched big data risk control security systems based on the characteristics of the blockchain industry, achieving comprehensive real-time risk monitoring from multiple dimensions such as devices, locations, behaviors, relationships, habits, and accounts. Additionally, some platforms have built intelligent detection systems based on real-time data calculations and online machine learning models to assess risks and provide security protection for users and platform assets.

Internal Risk Control: The "Elephant in the Room" That Cannot Be Ignored

According to data from a leading global consulting firm, nearly two-thirds of cybersecurity issues are caused by negligence or misconduct from internal employees. Therefore, internal security management in blockchain companies is more important than external defenses, as most security incidents often stem from collusion between internal and external parties or hackers lurking inside for a long time.

Major platforms generally emphasize the standardization of processes in internal control, as well as clear division of responsibilities, authority management, and regular audit standards. Some platforms have also adopted stricter measures, such as implementing minimization management of permissions and information, establishing risk control committee systems and security incident handling frameworks, and conducting irregular risk control training and internal "phishing enforcement" for employees.

The platform also practices the "Zero Trust Model", assuming that every operation, whether internal or external, may carry risks and requires verification by a real-time risk control system.

Learn from traditional financial experience to enhance risk control levels

The risk control requirements in the digital currency market may be higher than those in traditional financial markets. On one hand, the volatility of the digital currency market far exceeds that of most traditional financial assets; on the other hand, the integration of information flow and capital flow in blockchain payments, along with stronger anonymity, makes it often difficult to recover transferred funds.

Industry experts believe that the blockchain industry can learn from the risk control experiences of traditional finance and the internet sector. For example, how to effectively extract on-chain information and transform it into risk control decision-making indicators is a key focus area for the blockchain industry.

Some experts also suggest that a mature industry structure should separate trading from assets, with exchanges only responsible for matching and clearing, while the settlement, clearing, and custody of assets should be handled by different entities. All parties should jointly audit all accounts and be responsible for their respective parts.

In addition, digital currency platforms need to increase their investment in risk control. According to a research report by Cambridge University, on average only 13% of team members at digital currency exchanges are engaged in security work, and an average of 17% of the budget is allocated to ensure the secure operation of the exchanges. Considering the profitability and growth potential of digital currency platforms, it is clear that more funds need to be invested, more high-level risk control talents need to be recruited, and a more advanced and complete risk control system needs to be built.

As an industry expert stated, the investment in risk control can be seen as an opportunity cost. The stricter the risk control, the more resources need to be invested, and the more business opportunities may be lost, but at the same time, it also reduces the risk of loss of existing assets. For companies that value industry reputation and long-term interests, they will naturally pay more attention to the safety of customer assets.