What Really Caused Japan’s Biggest Cryptocurrency Exchange to Lose $500 Million?
Earlier this year, Japan’s largest cryptocurrency exchange Coincheck lost more than $500 million in the biggest hacking attack in the history of the cryptocurrency market. Approximately $530 million worth of XEM, the native cryptocurrency of NEM, were stolen from the trading platform’s hot wallets.
Regulation is Not the Issue
Local financial authorities immediately resorted to the lack of regulations in the cryptocurrency market to justify the security breach. Investors and other cryptocurrency exchanges in the market claimed that it was caused by a careless oversight by the Coincheck development team as it stored massive sums of user funds in hot wallets instead of cold wallets, which cannot be hacked as they are stored offline, disconnected from the internet.
In an interview with Bloomberg, Coincheck CEO Koichiro Wada stated that despite the company’s efforts to cooperate with headhunters and agencies to find talented and experienced individuals to run internal checks and improve the security measures of the Coincheck cryptocurrency trading platform, it simply couldn’t find individuals to fill the gaps it had.
“We were aware we didn’t have enough people working on internal checks, management and system risk. We strived to expand using headhunters and agencies, but ended up in this situation,” said Wada.
Even though the Japanese government and local financial authorities were fully aware of the situation at Coincheck after the hack given that they had conducted a full investigation into the security breach, the solution the government came up with is to impose stricter regulations and policies that simply led major cryptocurrency exchanges including Kraken and Binance out of Japan.
The actual cause of the $500 million security breach of Coincheck was the lack of talented and experienced security experts and developers, not the lack of regulations. As of current, the Japanese government is heavily focusing on the imposition of stricter policies in order to prevent a Coincheck-like situation in the future. But, because the hacking attacks were not caused by the lack of regulations in the Japanese cryptocurrency exchange market, the Japanese government’s efforts will not be able to prevent major breaches from occuring in the future.
“We need to introduce a new perspective in reviews of registrations,” an official from the FSA said, according to Nikkei Asian Review. “Without the necessary know-how, we’ve been feeling our way through the dark on how thoroughly we should check these different aspects,” another source within the Japanese government said.
What Can Prevent Hacking Attacks?
Recently, the Financial Services Agency (FSA) said that it has introduced a five-point system which all cryptocurrency exchanges within the country and the local cryptocurrency market will be required to follow. In addition to the system, the government will involve itself in the structure of cryptocurrency exchanges by separating shareholders from management and system developers from asset management.
“Lastly, the FSA will require stricter internal regulations. Operators will need to separate shareholders from management. System development roles will also be separated from asset management roles to keep employees from manipulating the system for their own gain,” Nikkei Asian Review reported.