Coming of age: On the Binance hack

The recent hack at Binance, the biggest theft ever at the world’s largest cryptocurrency exchange, has lessons for India. But Indian policymakers must be careful to learn the right ones. First, it must be understood that the hack is not an indictment of the crypto space itself. Being a crypto exchange did not make Binance more vulnerable than if it were, say, a bank. Hacking is now a daily occurrence across sectors and even small pharmaceutical companies often have to fend off millions of attacks a month. Of course, Binance must look into how it was hacked and prevent a recurrence, but the cat-and-mouse game between hackers and security software developers is a perpetual one. For every million, or even billion, attacks that are stopped, one will inevitably get through. The lesson for Indian policymakers is not that crypto is unsafe in itself; this incident does not prove that. Rather, it is about how Binance prepared for and reacted to the attack. Back in 2018, Binance had set up an emergency fund called the Secure Asset Fund for Users (SAFU) to protect user assets in the event of a security breach or platform-level incident. The fund was created for exactly this kind of incident, and was financed through trading fees that Binance collects from users. Since the $6.3 billion worth of assets stolen exceeded the SAFU’s resources, Binance dipped into its own resources to restore about 95% of users’ assets within four days of the hack.

So, Binance used a stable source of revenue to finance an emergency fund, which it deployed when an emergency occurred. The system worked perfectly, also showing how maturely and responsibly the crypto space can be run. The Indian government and the Reserve Bank of India still view the private crypto space as the Wild West of techno-finance. This is no longer the case. Large crypto companies are employing prudential practices, safeguarding customers, and cooperating with law enforcement agencies. If the fear is that cryptocurrencies are not backed by any asset, then Indian policymakers can choose to allow only stablecoins, which do have real assets underpinning them. Indians are not at higher risk from cryptos than they are from fake stock market scams. The best defence is awareness. By refusing to regulate the crypto space in India and, indeed, taxing it at a prohibitive rate, the government is driving Indians towards either the black market, where such scams proliferate, or foreign exchanges. The government can take a leaf out of Binance’s book and mandate an industry-maintained emergency fund. There is ample international legislation to emulate now. The point is, crypto risks have fallen and adoption is rising. Now is the time to regulate the industry.