A Wild Week for the Future of Cryptocurrency Exchanges’ Regulation
Cryptocurrency exchanges and their security have been a hot topic this year, as we end 2018 with an estimated $1.1 billion dollars in stolen crypto funds from security breaches.
As we look forward to what will likely be a watershed year for the cryptocurrency and blockchain industries, however, this week has proven to be a one-step-forward, one-step-back period for the wacky world of crypto exchanges.
Let’s start with the old: A South Korean court acquitted crypto exchange Bithumb on Monday, local press reported, after an investor sued for losses incurred by the estimated $355,000 hack of the exchange in November 2017.
30-year-old civil servant and crypto-investor Ahn Park alleged in the suit that hackers accessed his account and liquidated the full sum in fiat, later exchanging it for Ethereum.
Park argued that the exchange should be held accountable for the breach on the same terms as fiat exchanges — a point which the judge rejected in the final ruling:
“In general, virtual currencies cannot be used to buy goods and it is difficult to guarantee their exchange for cash because their value is very volatile. [Cryptocurrencies] are mainly used for speculative means, [and it] is not reasonable to apply [Korea’s] Electronic Financial Transactions Act to a defendant who brokers virtual currency transactions without the permission of [South Korean regulator] the Financial Services Commission.”
Bithumb, in particular, has suffered from multiple security issues over the past 18 months, including a mass data leak in October 2017 and a high-profile hack in June of this year, leading to some estimated $17 million in total losses.
But while the judge’s ruling, in this case, is a positive move for the exchange after a year of chaos, it’s a step backward for establishing legitimacy for the cryptocurrency industry in Asia-Pacific.
It should be no surprise, then, that cryptocurrency exchanges in Asia are having a difficult time procuring insurance for their business and its clients.
“Most institutionally minded crypto firms want to buy proper insurance, and in many cases, getting adequate insurance coverage is a regulatory or legal requirement,” Henri Arslanian, PwC fintech & crypto leader for Asia, stated to FirstPost. “However, getting such coverage is almost impossible despite their best efforts.”
Arslanian and other experts cited in the report paint a disturbing image of a chicken-and-egg-like dynamic when it comes to cryptocurrency exchange regulation. Financial professionals, insurance providers, and other regulatory professionals have expressed interest in digital assets — but are holding back on regulating them due to the increasing number of hacks in the industry. This, in turn, likely leads to more hacks — as providers are free to secure (or not secure) their crypto exchanges, wallets, or custodial services as much or as little as its founders warrant. Money laundering will also continue to be an issue for as long as the market remains unregulated — but that very lack of regulation is off-putting to insurance providers.
Japan, on the other hand, continues to be more forgiving to exchanges in the name of normalizing the cryptocurrency industry this week, after local news media report that its Financial Services Agency (FSA) will issue a license to hacked exchange Coincheck.
In January 2018, Coincheck’s vaults were drained of some $533 million worth of assets after hackers stole the private keys for the hot wallets where NEM tokens were stored. Coincheck later revealed that they had been using a simple hot wallet — not even one secured by multi-sig — before the attack.
Post-hack, most exchanges shutter — but Coincheck, surprisingly, has embarked on a campaign of resilience and rebuilding. In November, Coincheck reinstated all 9 cryptocurrencies available on the exchange. This week’s license issuance seals the deal not only for Coincheck to make a comeback, but for the Japanese exchange market as well: Tokyo’s got your back.
Whatever 2019 brings for the blockchain world, one message is clear: whether you’re an end-user or a forward-thinking financial institution, securing crypto assets is important. In the Wild West of the cryptocurrency market, it’s not a matter of who has the biggest gun — it’s a matter of who has the most hack-proof solution.