Coincheck has recently been hacked,and it exposes gullible investors to raise. However, this can also mean that funds will easily flow into malicious hands of money launderers and terrorists. New rules for cryptocurrency exchanges will be put to the test with the latest hack on Japanese exchange Coincheck. Over $660 million of its native cryptocurrency was stolen from the cryptocurrency exchanged in the past years, we have seen over a third of all cryptocurrency exchanges being hacked. If anything that we can take away from this is that cryptocurrencies are becoming a space that is highly lucrative for hackers.
The total losses exceed $1 billion. Cryptocurrencies are highly untraceable,and it does not help people to trace back who exactly hacked the money. Therefore, the rate of recovery after a hack is very low. A number of countries which include Australia, have enacted legislative provisions which function to regulate the conduct of cryptocurrency exchanges. These regulators hope that this will reduce the risk of attack and make operators more accountable for losses which are suffered by customers.
Cryptocurrency exchanges may operate typically like a bank, but they are not regulated in the same way can mean a lot of trouble for people who choose to involve themselves with the cryptocurrency space. With exchanges, there is no depositors insurance,and most of these exchanges remain unregulated. Bitcoin is highly anonymous,and so is the other cryptocurrencies. Hence, it will be very difficult to track any missing funds.
Therefore, when a hack occurs, the attacker will gain access to the virtual wallet, which is operated by the exchange and then transfers the cryptocurrency to their own virtual wallet.
The Coincheck Hack
This Japanese exchange hack exceeds the Mt Gox hack , which saw over $480 million worth of Bitcoin being taken away. The operator of the exchange was arrested and shield for his role in the collapse not at the time, it was the world’s biggest Bitcoin exchange. He was charged for falsifying records and embezzlement. However, there were no laws in time in place to regulate the exchange and its trade in Bitcoin.
Therefore, to bring virtual currency exchanges in line with and I money-laundering and counter-terrorism financing measures can be a challenge. However, Japanese lawmakers have enacted and at where all exchanges operating in Japan must register and comply with the rules. Therefore, these rules include the mandatorily need to know their customers, employ sufficient staff, keep balance sheets and keep all of the customer’s deposits in court storage.
Under these new laws, it means that when exchanges hacked or collapse, the operators will be made liable for the way that they managed their customer’s funds. Japanese authorities are threatening to prosecute the operators ofCoincheck for failing to comply with the new laws. In their online apology, the operator of the hacked exchange admitted that they deposits replace any hot wallet, which is a matter of storage that is connected to the Internet instead of being off-line. This was mainly due to staff shortages.
Both of these failures to comply will give Japanese authorities a good reason to prosecute the company. Close scrutiny of the accounts will be more likely to reveal other irregularities. However, this does not put any of the investors in the hacked exchange at ease. In fact, the exchange has promised to return 90% of the loss cryptocurrencies to its customers, but they are yet to mention how it will happen.
How would Australia’s regulatory act?
Japan is not alone in their struggle to regulate cryptocurrency exchanges. Recently, the Australian government announced that they would have new powers to monitor Bitcoin and other cryptocurrencies. Under the new legislation, it also forces cryptocurrency exchanges to disclose details about investors and transactions. These new laws are part of the government’s efforts to comment money laundering and terrorism financing. Hence, exchanges will be required to identify their customers and report any suspicious transactions.
All transactions of A$10,000 or more must report to AUSTRAC. The report will include the name of the customers, the recipients of the transaction and how this transaction was effected. If the operator fails to comply, this will result in heavy fines and possibly imprisonment. However, even with these new laws in place, it is impossible to detect any breaches. Therefore, the enforcement of these laws depends on the honesty of the exchanges.
So far, one of the ways to detect illegal transactions to monitor the size of the deposits made into the exchanges bank account. However, people still do create fake trading accounts,and money-laundering syndicates tend to breakupdeposits into smaller amounts to avoid raising red flags.
Complying with the new regulations will be an expensive change for these exchanges. With all the new data laws coming into please, securing sensitive information about customers and their deposits will be more difficult than ever.
The cost of compliance is one of the deterrents for the registration. As registration requires compliance, exchanges need to outlay significant capital before they can start to trade. Traditionally, when a foreign exchange collapses and is unable to return any of the deposits, the regulator will prosecute directors for operating without a license, failure to comply with the regulations or four insolvent trading.
When a cryptocurrency exchange is hacked, the operators and their customers are also victims. However, the operators will be made liable for the losses. Under Australia’s current laws, a major hack of a cryptocurrency exchange will be met with similar challenges as those facing the Japanese authorities in the Japan exchange hack.
For example, ASIC has the power to prosecute for insolvent trading, operating a Ponzi Scheme and breaches of financial services legislation. The ATO could investigate whether GST was being paid on trades. For customers and investors, operators decision to reimburse them for their financial losses highly depends on whether the operators remain in the jurisdiction. This could also rely on whether the exchange has money of their own.