Trend in Japan: Large Crypto Exchanges Get Hacked, Conglomerates Take Over
In Japan, the largest crypto exchange market in the world, a new trend has emerged; large conglomerates have started to acquire hacked digital asset trading platforms as a way to enter the cryptocurrency sector.
Since the $500 million security breach of Coincheck, formerly the most widely utilized cryptocurrency trading platform in Japan, the country’s main financial watchdog Financial Services Agency (FSA) has tightened regulatory frameworks around digital asset exchanges.
Particularly, the FSA has vowed to impose stricter policies pertaining to investor protection and platform security to ensure that cryptocurrency exchanges, at least those approved and licensed by the FSA, are robust enough to handle billions of dollars on a daily basis.
$60 Million Zaif Hack and an Emerging Trend
The efforts of the FSA to expand its crypto department to handle massively increasing demand towards cryptocurrencies by local conglomerates were praised by companies within Japan and the rest of the global market.
But, with 160 companies planning to apply for licenses to operate as cryptocurrency exchanges in Japan in the upcoming months, it remains unsure whether the FSA will continue to license more exchanges in the short-term, especially after the recent high profile cryptocurrency hack of Zaif.
In January, Coincheck experienced the largest hacking attack in history, losing more than $500 million worth of XEM, the native cryptocurrency of NEM. Fortunately, the company was able to cover the funds of investors that were lost in the hack and initiated the process of compensating traders.
Subsequent to the security breach, Coincheck was acquired by Oki Matsumoto, former Goldman Sachs executive and the CEO of Monex, at a mere $34 million. Compared to the acquisition of Poloniex by Circle at a valuation of $400 million, Coincheck was sold for less than 10 percent of the valuation of the US-based exchange, even though at its peak, it was processing a daily volume that was nearly 100-fold larger than that of Poloniex.
For Monex Group, the acquisition of Coincheck at a valuation of $34 million made sense for many reasons. Perhaps most importantly, as Matsumoto emphasized, while it is possible to create an infrastructure that is stronger than that of Coincheck, it is difficult to recreate the brand value and user base of the exchange.
“Coincheck is a pioneer of the crypto-exchange business, not only in Japan but in the world… It has a global brand value, user base, technologies. It’s possible to manage risks but it’s no easy job for Monex to create a user base and brand like Coincheck’s by itself,” said Oki in a press conference in Tokyo.
Recently, major Japanese cryptocurrency exchange Zaif was hacked for $60 million, within a year since the high profile security breach of Coincheck. Unable to cover the lost funds of investors, Zaif secured a deal with Tokyo-based financial markets research firm Fisco, which gave Zaif $44 million in return for majority stake in the exchange.
Yet again, a major cryptocurrency exchange in Japan was hacked and a conglomerate has taken over as the first step towards establishing a reputable brand in the rapidly growing cryptocurrency market.
Isn’t it Positive?
In a sense, analysts could argue that the acquisition of hacked exchanges by large conglomerates is positive, and over the past week, security experts in both Japan and South Korea stated that exchanges are better off with companies that have significant resources and capital.
The issue with Coincheck, Zaif, Coinrail, and many of the exchanges that were hacked in the past year has been their inability to establish a strong security team to oversee vulnerabilities.
Under the governance of the FSA, for the long-term growth of the market, the Japanese sector could benefit from the emergence of major corporations with long track records in the local cryptocurrency exchange market, and it is positive that at least for now, all of the investors in both hacking attacks were compensated.