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Latest cryptocurrency heist erodes trust in Japan's exchanges

Reforms after Coincheck fail to prevent another major robbery

Hackers stole about $60 million in digital coins, including bitcoin, from virtual currency exchange Zaif.   © Reuters

TOKYO -- Trust in Japan's cryptocurrency industry continues to fade as exchange operator Tech Bureau said Thursday that about 6.7 billion yen ($60 million) in digital coins was stolen last week, just months after Coincheck was hacked for roughly 58 billion yen in January.

Suspicions were raised Monday night when Zaif, a virtual currency exchange service operated by Tech Bureau, tweeted on its official account that deposits and withdrawals of bitcoin and Monacoin "are suspended due to server failure." The company later said deposits and withdrawals of Bitcoin Cash were also suspended. It then tweeted Tuesday around noon that it had "confirmed the safety of customer assets."

But Zaif had actually detected an irregularity Monday and notified the Financial Services Agency and law enforcement of damages after Tuesday, according to its Thursday announcement. The breach occurred between 5 p.m. to 7 p.m. on Friday, by which time an improper remittance had already been made. The Osaka Prefectural Police are investigating the case.

The digital coins were lifted from "hot wallets" that are connected to the internet for easy deposit and withdrawal but lack security in return. The danger of this method had already been confirmed by Coincheck, which was breached through these wallets as well.

Founded in June 2014, Osaka-based Tech Bureau is one of Japan's oldest cryptocurrency exchanges. It raised about 10 billion yen through an initial coin offering in the fall of 2017 and gained attention for such novel endeavors as providing ICO services to companies.

The FSA had already ordered Tech Bureau twice to improve its operations, including its response to system failures. The company has yet to announce its progress on those security measures or how the hackers got in.

Tech Bureau said it will receive about 5 billion yen in financial support from a group company of Fisco, which provides financial information services. The exchange operator plans to compensate customers for their lost holdings, which amount to about 4.5 billion yen. It has yet to determine what point of time it will use to value the cryptocurrencies.

There are no established rules in the industry for compensating customers. The self-regulating Japan Virtual Currency Exchange Association is considering compensation guidelines for digital currencies stolen in cyberattacks. The frequency of such incidents is soaring, with 158 cases reported nationwide from January to June 2018, more than tripling from the same period last year.

Traditional financial institutions already have already taken countermeasures against hacking. Banks compensate customers for money withdrawn through stolen bank cards under depositor protection laws. At securities companies, customers' cash is typically kept in trust banks while securities are separately managed by institutions like Japan Securities Depository Center. The threat of hacking is therefore low.

Incidents like the Coincheck heist have depressed cryptocurrency trading volume. Bitcoin was trading at nearly $20,000 at the end of last year, but has sunk to about $6,000 now. Thursday's revelation is stoking concern that investors will further distance themselves from virtual currencies.

The FSA plans to scrutinize exchanges more closely, checking their asset management systems for clients and the state of their security measures. Tech Bureau may also be hit with additional punishments.

The agency also plans to restart screenings for newly registered exchanges, a process it almost stopped after the Coincheck incident. More than 160 exchanges are currently awaiting registration, but their examinations will now take into account such factors as the effectiveness of business plans, based on the results of previous onsite inspections.

The Tech Bureau hacking "will likely have an impact on future screenings," said an FSA official.

In the financial technology industry, including cryptocurrencies, the FSA plans to encourage innovation while protecting users. In April 2017, Japan revised its payment services law to guard users and prevent money laundering.

But strengthening regulations also poses a dilemma. Even if Japan clamps down on the exchanges, offenders will be able to skirt harsher rules by funneling transactions through foreign channels. It will therefore be necessary to create a framework for international cooperation.

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