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David Drake

February 10, 2018Article

Japanese Regulators Step Up Security on Crypto Exchanges

After its system was hacked and $534 million worth of digital currency stolen this past weekend, Coincheck has been ordered to thoroughly investigate the incident. On Monday, Japan’s financial regulator ordered the cryptocurrency exchange to investigate and submit a report by February 13, 2018. In the report, Coincheck is expected to highlight measures to be put in place to prevent such incidents in the future.

In a move aimed at preventing another hacking incident, the Japanese regulator said it would scrutinize all cryptocurrency exchanges in the country; a move that some players in the cryptocurrency industry welcome and exchanges should take positively.

“Increased security checks by the government are a move in the right direction. In general it’s clear that exchanges require a more authoritative oversight. Exchanges should see this as a benefit of auditability and increased emphasis on securing the best interests of their customers. Ideally, regulators exist primarily to protect the rights of the public, whilst enabling free-flowing honest commerce. Breaches of this size cannot be expected to go unchecked nor without deep ramifications and repercussions for centralized exchanges and the industry in general," Eran Eyal, CEO of Shopin, says.

However, for some players in the cryptocurrency space, regulators are still trying to figure out how to effectively oversee the cryptocurrency market.

"The regulators are going to do as they see fit when they see fit. In my opinion they are trying to figure out a way to make it work for them. I do see the regulators continuously prodding this space for an opening until they figure out a way to monetize it," notes Todd Nichols, Digital Asset Manager at
Asset Token.

Despite this, exchanges should be ready to meet more stringent requirements introduced by regulators in the near future.

"I wouldn’t be surprised to see securities-like behavior such as the semi-permanent or temporary installation of on-site regulators at the exchanges, specializing on security full-time, similar to placing an agent at a trading firm. To know the mind of the regulator, look to its algorithms," Eyal adds.

According to Coincheck, the hackers got away with customer deposits of the less known cryptocurrency NEM tokens. While Coincheck has committed to reimburse users for the loss, it has been noted that hackers took advantage of a security oversight by Coincheck.

"Coincheck did not use adequate basic security measures such as storing the majority of users coin in cold storage, which is a very serious error in today's online environment. It's noble that they are planning to reimburse 90% to user accounts, but this incident will likely impact their customer base significantly," notes Roman Guelfi-Gibbs, Lead Trading Strategist and Project Leader at
Pinnacle Brilliance.

Following the hack, the value of NEM dropped by about 20%, from which it has since recovered.

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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