Cryptocurrency exchange Coincheck’s hack causes $400 million loss
Coincheck, one of Japan’s biggest cryptocurrency exchanges, recently disclosed that it had lost at least $400 million worth of NEM coins to hackers. The exchange’s network was hacked on Jan. 25, and the attack went unnoticed for eight hours, according to Engadget.
This gave hackers enough time to transfer around 500 million NEM coins, one of the lesser-known cryptocurrencies, illicitly off of the exchange from a “hot wallet,” a type of storage that allows easy spending of cryptocurrency via the internet.
Due to the unpredictable fluctuation in cryptocurrency value, the exact amount of money stolen is not precisely known or constant, but Coincheck and outside sources have estimated it to be above $400 million.
Following the hack, the popular cryptocurrency exchange suspended trading in all tokens besides Bitcoin, suspended all withdrawals and stopped deposits into NEM coins, according to Bloomberg.
Coincheck has promised to partially refund the 260,000 cryptocurrency investors affected by the theft, using its own capital, at a rate of 82 U.S. cents for each coin.
The Coincheck hack is the largest cryptocurrency theft on record, surpassing the $400 million in bitcoin stolen from the Mt. Gox exchange in 2014.
Many cryptocurrency exchanges operate with little to no regulation, and many have neglected essential practices that are standard in a professional financial services firm, such as cybersecurity.
As a result, these exchanges have suffered numerous outages and hacks as Bitcoin and its ilk have risen in both value and prominence.
The exponential growth of these coins has seemed to pique the interest of thieves, as the frequency of hacks against cryptocurrency exchanges has increased in recent years.
According to CNN, last month, South Korean bitcoin exchange Youbit filed for bankruptcy after being targeted by cybercriminals twice within a few months. Hackers also stole $70 million worth of bitcoin from NiceHash, a digital currency trading platform based in Slovenia.
“Caveat emptor,” said Yvonne Zhang on a panel about the future of cryptocurrencies, in an article for Bloomberg. “The ‘investors’ that did not do due diligence and take time to understand what they’re trading in, both venue and subject matter, face unhedgeable risks. If they continue to ‘trade’ the same way knowing the murky nature of this market, they’re gambling.”
However, national governments do not seem to agree with this idea. They believe protecting the consumer is best, as they attempt to figure out how to regulate this cutting-edge industry. Each country is taking a different approach to the problem.
China is home to the world’s largest community of Bitcoin miners, but the country is trying to halt cryptocurrency activity.
Last year, the government banned ICOs, initial coin offerings, which are the equivalent of initial public offerings for new cryptocurrencies.
It called on Chinese-based exchanges to stop trading in cryptocurrencies, and laid out various proposals to discourage bitcoin mining, an energy intensive process integral to bitcoin, according to Bloomberg. Chinese companies abroad are also subject to the country’s domestic ICO ban.
Now, the Chinese government wants to target online platforms and mobile apps that allow centralized trading of cryptocurrency. China is not against cryptocurrency; the People’s Bank has run trials of its own prototype coin, according to Bloomberg. Bitcoin and its peers, however, present both risk in the financial markets and another means of moving money out of China, which the government wants to prevent.
The U.K. Financial Conduct Authority, the country’s largest regulator, has warned investors that if they invest in bitcoin, they should be prepared to lose their entire stake.
In contrast, last year, Japan’s government officially recognized bitcoin as a form of currency, and began to license cryptocurrency exchanges, according to CNN.
Japan is one of the world’s biggest markets for cryptocurrencies, and policymakers have created a licensing system to increase oversight of local exchanges as a result.
By introducing licenses, they are trying to avoid the Mt. Gox exchange collapse that affected cryptocurrency markets worldwide in 2014. The company went bankrupt, and its users still have not been compensated. Mt. Gox was based in Japan.
According to Bloomberg, Coincheck was “four months past its deadline for receiving a license necessary to operate, as part of Japan’s new legislature to vet and audit cryptocurrency exchanges. It was allowed to continue operating while awaiting a decision from the Financial Services Agency.”
The agency is getting ready to penalize Coincheck in relation to the hack. Japan is one of the more pro-cryptocurrency countries among the G-20, so it will be interesting to see how regulators act in response to this hack.
A previous version of this article misquoted Yvonne Zhang's statement.