Mt.Gox CEO has something to say after Coincheck was hacked for $534 million

Since Coincheck, one of Asia’s largest digital currency exchanges, admitted that $534 million worth of the cryptocurrency NEM was stolen last week, the Japanese government has taken swift action - regulators have ordered Coincheck to improve security, while the Tokyo Metropolitan Police Department has launched a full investigation.

Coincheck became the largest cryptocurrency exchange hacker in history, and its only competitor, Mt. Gox, also based in Tokyo, closed in February 2014 after hackers stole about $400 million worth of bitcoins. The stolen bitcoins were never recovered, and the police were unable to find any evidence.

All this comes after Japan attempted to become the center of the cryptocurrency world. In April 2017, the government declared Bitcoin legal tender, and more than 30% of global Bitcoin transactions are conducted in yen. In September last year, the regulator, the Financial Services Agency, began officially recognizing virtual currency exchanges that meet their standards, and there are now more than 15 registered virtual currency exchanges in Japan. Coincheck was once in the process of applying for registration as an exchange, but the Financial Services Agency warned that its exchange's network security was poor and needed huge improvements.

On January 29, three days after the exchange was hacked, the Japanese Financial Services Agency issued a “Business Improvement Order” to Coinchek. The FSA stated that “an inappropriate management system became standard at the company,” and the order required Coincheck to do the following:

Determine what happened and why the hacker attacked you

Providing an appropriate response to affected customers, including compensation

Strengthen management systems and identify those responsible for system breaches

·Develop a plan to improve the system and develop effective countermeasures to deal with similar incidents

The FSA ordered the company to submit a comprehensive report on its cybersecurity plan by February 13. In addition, the FSA began inspecting all cryptocurrency exchange operators in Japan and would require exchanges to conduct self-inspections if necessary.

Police investigation

According to internal information leaked by the Tokyo Metropolitan Police Department, detectives met with Coincheck employees on January 29 and launched an investigation into whether they may have violated laws related to hacking, theft, and other charges. They also began analyzing the public ledger of the new currency, which can see all transactions.

Investigators suspect the hackers may have generated a false authentication ID, which allowed them to break into the system at 2:57 a.m. on January 26 and make a large number of withdrawals over an eight-hour period.

Japan’s largest newspaper, Yomiuri Shimbun, reported on Jan. 30 that police have determined that the stolen NEM coins were initially sent to a specific address during the hack. Based on information found at that address, investigators found that the NEM coins were subsequently sent to eight different addresses. The news report added that police are continuing to track down the virtual currencies.

Tokyo police declined to comment on the incident.

compensate

Coinchek announced that they will compensate all the losses of NEM users, and they estimate that this will cost about $430 million. They have not yet announced the time of compensation or where they will raise the funds. According to Coinchek, 260,000 users were affected by the hack.

A popular Japanese media outlet reported on the incident, and it is possible that quite a few celebrities lost a lot of money. The latest all-girl cryptocurrency-themed band, Crypto Girls, even held a live press conference, saying that they were surprised by the theft on Coinchek, but they also expressed their firm belief in cryptocurrency. One of the members even called on the hackers to return the stolen XEM.

However, it is unlikely that the hackers will respond to such requests, and the question is whether Coincheck will be able to compensate its customers.

Mt. Gox CEO Mark Karpeles is not optimistic based on his personal experience. In an email, he said:

Coincheck's challenge from now on is to survive - their words about compensating everyone who lost money at the valuation of the NEM coins sounded good at first, but it is likely that many people would not agree. The current valuation of the NEM coins used to calculate compensation is much lower than the price of the NEM coins at the time of the theft... There is no timetable for compensation, and in the meantime, unhappy customers may sue the exchange, and may have to fight legal battles with it until it runs out of funds.