Exchange says it will repay customers after $500m crypto heist

January 28, 2018

A Japanese cryptocurrency exchange said it would repay customers after suffering one of the biggest heists in human history.

Coincheck said its systems were penetrated by a hacker in the early hours of Friday morning. The intruder made off with 523m units of the cryptocurrency XEM belonging to 260,000 customers.

The $500m hack shows the vast sums being made and lost in the cryptocurrency boom, the vulnerability of decentralised money to theft and the Wild West criminality that is possible in the new world of blockchain.

“I deeply apologise to the customers we have troubled,” said Yusuke Otsuka, chief operating officer of Coincheck, as the young founders of Japan’s second largest cryptocurrency exchange struggled through a tense press conference.

The scale of the theft is comparable to the £292m ($414m) City bonds robbery in 1990, the $500m Gardner art heist the same year or the approximately $500m bitcoin hack that led to the 2014 collapse of cryptocurrency exchange Mt Gox.

In a website announcement on Sunday, Coincheck said it would repay holders from company funds at a rate of ¥88.5 per XEM, indicating it would try to stay in business. The valuation is less than the ¥104 price the day before the hack or XEM’s current trading price of ¥112.

Coincheck said it was still deciding when and how to repay. The net worth of Coincheck, and hence its ability to cover the debt, is unclear. The exchange’s future may depend on whether other customers demand to withdraw their funds.

“They basically lost half a billion dollars worth of XEM,” said Jeff McDonald, vice-president of the NEM Foundation, which issued XEM. “If they had a billion dollars in the bank they’d be able to cover the losses pretty easily. I don’t know how much money they have.”

NEM is one of a number of second-generation blockchain systems designed as a platform for companies to build applications. XEM, pronounced ‘Zem’, is its built-in digital currency.

Mr McDonald ruled out a “hard fork” to recover the stolen coins. In a hard fork, developers roll back the state of the blockchain to before the disputed transaction. The old blockchain still exists, but if users adopt the forked version, the theft becomes irrelevant.

“We don’t consider that to be an option at all because the NEM system is working correctly,” said Mr McDonald.

The NEM Foundation has instead moved to “tag” the stolen coins, making them similar to banknotes with recorded serial numbers and thus hard for the hackers to use. “We’re currently reaching out to exchanges to try and halt any deposits that are made with those XEMs,” said Mr McDonald.

Coincheck said the stolen funds were stored in a so-called “hot wallet”. A hot wallet is a computer connected to the internet and thus accessible to a hacker. Best practice in the industry is to keep most funds in a “cold wallet” held offline.

Coincheck said it had reported the theft to the police and Japan’s Financial Services Agency. According to local media, the FSA has ordered all the country’s cryptocurrency exchanges to check their security, and may issue a business improvement order to Coincheck.

Japanese private investors were at the heart of a tenfold surge in the price of bitcoin, the original cryptocurrency, during 2017. Japan is one of the few countries to authorise and regulate cryptocurrency exchanges.

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