TOKYO -- Japanese trust banks are looking to protect cryptocurrency investors in the aftermath of the $530 billion Coincheck heist.
The institutions are mulling services under which they would manage digital holdings as trust assets, like pensions and property. This way, the money would be safe even if a cryptocurrency exchange goes bankrupt.
Mitsubishi UFJ Trust and Banking aims to start doing this in April. Sumitomo Mitsui Trust Bank is considering a similar service.
Cryptocurrency traders sign up with exchanges and create wallets to manage their funds. Basically, the exchanges manage "keys" to the wallets and, when customers place orders, open them to fulfill the transactions.
In the service Mitsubishi UFJ Trust envisions, clients would still place buy and sell orders with the exchange, but the money itself would be managed by the bank. The exchange would become merely an intermediary.
Many of Japan's cryptocurrency exchanges are small startups with little investment capacity, yet they are watching over clients' funds on their own. Bigger players are not immune to risk, either -- Coincheck ranks as the country's second-largest exchange.
Japan's revised payment services act, which took effect last April, requires the exchanges to manage their assets independently of those of customers. But this does not guarantee that all the money can be refunded in the case of fraud, hacking or bankruptcy, as client assets may be treated as general accounts receivable.
Trust banks will be required by law to manage assets separately, and in Mitsubishi UFJ Trust's case, it will mainly keep the money in "cold" wallets that are not connected to networks. This is much safer than using online accounts. The bank will also create multiple keys to online wallets to guard against unauthorized access and large withdrawals.
Coincheck had been storing NEM cryptocurrency in a "hot" wallet, creating a security vulnerability. Working with trust banks should help exchanges make transactions safer.
One concern is that the tighter security would make transactions more time-consuming. But the massive Coincheck theft is spurring debate about how to strike a balance between safety and convenience.