Online brokerage Monex Group Inc., owner of the hacked Japanese crypto exchange Coincheck, plans to join the Facebook Libra cryptocurrency project.
Online brokerage Monex Group Inc., owner of the hacked Japanese crypto exchange Coincheck, plans to join the Facebook Libra cryptocurrency project.
A report from Cointelegraph Japan today, July 26, reveals that Monex Group’s CEO Oki Matsumoto announced the company had filed an application to join the Libra Association during a press conference on Monex’s Q2 2019 financial results earlier this week.
The Libra Association is the newly-established, independent governance consortium for Facebook’s planned stablecoin, dubbed Libra, and is currently negotiating with a host of other potential members — including Visa, Uber, Mastercard and eBay.
As Cointelegraph previously reported, prospective Libra Association members must pay $10 million for the privilege. Matsumoto reportedly stated that he is deliberating hard, but that:
“I think Libra has great potential, so I want to think positively.”
The Monex Group president said that the application would be reviewed initially at the end of August, and that the company would finally decide as to whether to join the Association by the end of September. He nonetheless conceded this schedule could change in light of intense regulatory scrutiny of the project, particularly by the United States government.
As Cointelegraph Japan notes, should Monex Group join the Association, it would be the first Japanese company to do so.
Better not push virtual currencies ‘underground’
Matsumoto reportedly addressed the positive potential of Libra to broaden financial inclusion in areas such as cross-border remittances and donations to emerging economies. Noting that “points and pseudo-currencies are raging” in Japan, he suggested that it is better to cooperate with major, reputable players to foster cryptocurrencies’ credibility and adoption:
“The more you try to stop the virtual currency, the more you go underground. I think that this tendency will cede to the idea that reliable operators are better.”
He reportedly added — in reference to VISA and MasterCard— “Are there any more reliable operators” out there?
As reported, a fresh survey from CivicScience has revealed that just 2% of Americans trust Facebook’s Libra more than Bitcoin.
Earlier this month, the Banking Committee of the U.S. Senate grilled Facebook on Libra, homing in on concerns such as privacy, trust and regulatory compliance.
At a separate House meeting this month, U.S. lawmakers asked Facebook how they could be expected to trust a firm whose collection, storage and misuse of customer data had landed it a $5 billion penalty.
Following G20 meetings, where Japan led several discussions regarding crypto assets, the country’s top financial regulator told news.Bitcoin.com that 110 crypto exchanges are now interested in launching in Japan. The country recently passed a new cryptocurrency bill, and some approved crypto trading platforms have undergone changes.
Under Japanese law, companies are required to register with the country’s top financial regulator, the Financial Services Agency (FSA), to operate crypto exchanges. There are currently 19 registrants operating in the country, 16 of which were approved in 2017 while three were approved this year. However, many more crypto exchange operators have expressed interest in entering the Japanese crypto space.
The FSA revealed to news.Bitcoin.com Monday that these businesses are in various stages of registration such as “preliminary consultation” and “inquiries regarding registration,” adding:
The number of crypto asset exchange service providers which have expressed their interest is about 110 as of June.
Among applicants waiting to be approved is Line Corporation, which owns Japan’s most popular mobile messaging app, Line. The company currently operates an exchange called Bitbox worldwide except in the U.S. and Japan due to regulation. On June 20, Bloomberg reported that the company is near obtaining approval from the FSA to offer its exchange service in Japan. However, there has been no announcement from the regulator regarding the company’s registration status.
19 Registered Crypto Exchanges
The FSA maintains a list of all registered crypto exchange operators in Japan following the country’s legalization of cryptocurrency as a means of payment in April 2017. The first 11 exchange operators were registered on Sept. 29, 2017 — Money Partners Group, Quoine, Bitflyer, Bitbank, SBI Virtual Currency, GMO Coin, Huobi Japan (formerly Bittrade), Btcbox, Bitpoint Japan, Fisco Cryptocurrency Exchange, and Tech Bureau. SBI Virtual Currency Co. Ltd. changed its name on July 1 to SBI VC Trade Co. Ltd.
On Dec. 1, 2017, DMM Bitcoin, Taotao (formerly Bitarg), Bitgate, and Xtheta were registered. Bitocean followed suit on Dec. 26. No operator was registered last year, largely due to the January hack of Coincheck, one of the country’s largest crypto exchanges. Since then, the FSA has tightened its oversight of the industry including conducting on-site inspections of exchanges.
This year, three exchanges have been approved so far. Coincheck successfully registered with the FSA on Jan. 11 after it was acquired by Monex Group. On March 25, Rakuten Wallet (formerly Everybody’s Bitcoin) and Decurret were also registered.
Bitflyer Resumes Account Openings
Bitflyer, one of Japan’s largest crypto exchanges by trading volume, resumed the opening of new accounts on July 3 after freezing the service for a year due to a business improvement order it received from the FSA.
The company wrote that it “voluntarily suspended new account creation in order to reconfirm the identity of our existing customers and strengthen our internal management structure,” adding that “We would like to announce that new account creation has resumed.”
Fisco Hit With Administrative Order
It had been almost a year since the FSA last issued a business improvement order to a crypto exchange. On June 21, the FSA announced an administrative order against Fisco Cryptocurrency Exchange, which acquired another registered cryptocurrency exchange, Zaif, after it was hacked in September last year. The last order prior to this latest one was issued on Sept. 25 last year to Tech Bureau, the former operator of Zaif.
The agency explained that it conducted an on-site inspection of the exchange on Feb. 13 and found that “management did not recognize the importance of legal compliance … this has led to a number of legal violations.” The FSA continued to detail: “there have been problems with the company’s business management system … [and] also problems in the risk management system for money laundering and terrorist financing, and the external management system such as outsourcing management system.”
The agency ordered the company to establish a number of additional systems including for legal compliance, risk management, outsourcing, handling new cryptocurrencies, protecting user information, and auditing. The company must submit its improvement plan by July 22 and follow up with monthly implementation progress reports.
Coincheck Now Supports 10 Cryptocurrencies
Coincheck applied for registration in 2017 but had been operating as a “deemed dealer” until its registration was finally approved in January. Deemed dealers are exchanges that had been operating in Japan since before the regulation took effect; the FSA has allowed them to continue service while their registration applications are being reviewed.
On Jan. 26, Coincheck was hacked and lost approximately 58 billion yen (~$550 million) worth of XEM held by approximately 260,000 customers. The exchange was subsequently acquired by Monex Group and underwent extensive system improvement. Coincheck halted some services following the hack and has gradually reopened them. The platform now supports the trading of BTC, ETH, ETC, LSK, FCT, XRP, XEM, LTC, BCH, and MONA. It started collaborating with Monex Securities in April to allow the exchange of Monex points for BTC, ETH, and XRP. Monex points are accumulated by purchasing and holding investments in Monex Investment Trusts.
FSA Warns of Unauthorized Exchanges
The FSA issued a warning on June 25 to Cielo EX Ltd., a crypto exchange that has been providing service to Japanese residents without authorization. This is the fourth warning the agency has issued since it started regulating the crypto industry. The platform has been providing exchange service for cryptocurrencies such as BTC and Asobi Coin (ABX).
The other three warnings went out to Gibraltar-based SB101 on Feb. 15, Binance in March last year, and Blockchain Laboratory Ltd. in February last year.
Commitment to Applying FATF Standards
Japan recently hosted the latest G20 summit and other G20 ministerial meetings such as the G20 Finance Ministers and Central Bank Governors Meetings. At the end of the G20 summit on June 29, Japan and other G20 countries jointly declared their commitments to applying the crypto standards set by the Financial Action Task Force (FATF). The country’s finance minister also joined other G20 finance ministers and central bank governors to declare the same commitment to applying FATF’s standards.
“Technological innovations, including those underlying crypto-assets, can deliver significant benefits to the financial system and the broader economy. While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering (AML) and countering the financing of terrorism (CFT),” the G20 leaders, finance ministers and central bank governors declared. “We reaffirm our commitment to applying the recently amended FATF Standards to virtual assets and related providers for AML and CFT.”
Japan’s New Crypto Bill Passed
A new cryptocurrency bill, published on June 7, officially passed Japan’s House of Representatives, the lower house of the National Diet, on May 21. It then passed the House of Councillors, the upper house of the Diet, on May 31.
The bill entitled “A draft bill to amend some of the fund settlement laws, etc., in response to the diversification of financial transactions accompanying the advancement of information and communication technology” was prepared by the FSA. It seeks to amend two key laws that apply to crypto assets: the Act on Fund Settlement and the Financial Instruments and Exchange Act.
The revised bill was accompanied by a resolution of 15 requests which “require the government to clarify regulatory targets, deploy appropriate personnel, implement appropriate regulations in line with the international standards, consider appropriate taxation methods, etc.,” Impress publication detailed. The FSA told news.Bitcoin.com Monday, “We are currently undergoing an extensive personnel reshuffling.”
The agency previously explained that the 15 requests are “items which we should take into consideration before introducing the bill, and we should take appropriate responses to it at the time when the bill comes into effect.”
Further, the FSA announced last month a partial revision of its operating guidelines including a business management system required for crypto exchange operators. The document also updates supervision for initial coin offerings, including when the issuers sell their own tokens and when tokens are sold on behalf of the issuers.
Do you think Japan needs more crypto exchanges? Let us know in the comments section below.
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The personal computers of Coincheck employees have allegedly been found to have been infected by a virus associated with Russian hackers.
The personal computers of employees at hacked Japanesecrypto exchangeCoincheck have allegedly been found to have been infected by a virus associated with a hacker group of Russian origin. The allegation was reported by Cointelegraph Japan on June 16.
As Cointelegraph has reported, in January 2018, Coincheck suffered an industry record-breaking hack when $534 million worth of NEM was stolen from its wallets.
Cointelegraph Japan cites a report from Japanese media agency Asahi Shimbun, which claims that fresh research has cast doubt on prior assumptions that the high-profile hack had been perpetrated by attackers with a North Korean connection.
Experts are now considering the possibility that the crime was committed by “an unknown group of hackers,” Cointelegraph Japan notes.
According to Asahi Shimbun, “Mokes” and “Netwire” viruses have been identified in recent investigations into employees’ personal computers, which may have been disseminated via an email that installed the viruses to gain unauthorized access to the exchange’s private keys.
Given that both viruses are known to have been previously deployed by Russian hackers, a United States expert told the media agency:
“From the analysis of the virus, Eastern Europe and Russia may be related to the server criminal group of the base.”
As Asahi Shimbun reports, both viruses enable hackers to take over the infected PC and operate it remotely. While Morks was first promoted on a Russian forum in June 2011, Netwire is reported to have been known to cybersecurity investigators for 12 years.
As reported this May, as yet unidentified hackers used phishing and viruses to withdraw 7,000 bitcoin (BTC) from compromised Binance hot wallets in a premeditated attack that went undetected by the exchange’s security systems.
This spring, a South Korean cybersecurity firm claimed that North Korean hackers were behind a phishing scam targeting users of South Korean cryptocurrency exchange UpBit.
While Japan’s new laws are welcoming for most crypto exchanges, as they expect more institutional investors, custodians and wallet makers are getting worried.
On May 31, the Japanese House of Representatives amended two cryptocurrency-related laws, the Payment Services Act and the Financial Instruments and Exchange Act, which will come into effect in April 2020.
Most Japanese crypto exchanges have welcomed the changes, since they expect more institutional investors to join the crypto industry. However, others voiced their concerns that the changes may bring some uncertainty to custodians and wallet service providers.
The two documents outline several specific changes, which can be discussed separately.
The Payment Services Act (PSA)
Virtual currency to crypto assets
The new law revises the term “Virtual Currency” and says that “Crypto Asset” would be a better term to use to describe cryptocurrencies. The change was made since “crypto assets” is used more frequently at international meetings, such as the G-20. Meanwhile, the use of “virtual currency” may mislead the public into thinking that cryptocurrencies function or hold the same status that is associated with fiat currencies. This change, however, is not compulsory for implementation by exchanges and the media.
Tighter restrictions on custodian services
According to the documents, custodian service providers will now have to share the same level of accountablility for the risks as exchanges, such as the leakage of users’ crypto assets and money laundering/terrorism financing. So, custodians will need to be registered with the Financial Services Agency (FSA) even if they don’t provide crypto exchange or trading services.
As of now, there are no specific guidelines for cases that are not clear cut. However, the governing bodies are likely to release further information to clarify the situation.
Exchanges must change how they store crypto
From April 2020 onward, crypto exchanges operating in Japan will have to manage users’ money separately from their own cash flows. This means finding a third-party operator to keep hold of the users’ money (this can be a trust company or any other similar entity).
When managing users’ money, “reliable methods” will have to be used, such as a cold wallet. If the exchanges manage users’ stored cryptocurrencies in other ways, such as a hot wallet system, they have to hold “the same kind and the same quantities of crypto assets” as the users’ crypto assets. This would enable the exchange to reimburse users if the funds get stolen from the platform.
The revised laws still do not directly regulate anonymous cryptocurrencies or privacy coins such as monero and zcash. On March 15, the FSA said it would deal with problematic crypto assets that are easily used for money laundering because their transaction records are not traceable. Back then, the agency dubbed the anonymous coins as “problematic crypto assets.” However inclusion of anonymous coins in the bill eased the speculations regarding whether the FSA is indeed planning to regulate this area of the crypto sphere. Also, a recent report highlighted that money laundering in Japan is on the rise.
As Cointelegraph reported earlier, in May 2019, Japan has been working on some time to combat money laundering through anonymous coins and imposed inspections upon exchanges that offered these coins for trade to their user base.
The Financial Instruments and Exchange Act (FIEA)
Revised FIEA documentation introduced the concept of electronically recorded transferable rights (ERTRs) to define that initial coin offerings (ICOs) and security token offerings (STOs) are regulated under the FIEA. ERTRs refer to tokens issued in the expectations of profits (i.e., security tokens).
More specifically, tokens issued under STOs can constitute ERTRs if the three requirements below are met, according to Japanese law firm Anderson Mori & Tomotsune:
“(i) Investors (i.e., right holders) invest or contribute cash or other assets to a business,
(ii) the cash or other assets contributed by investors are invested in the business, and
(iii) investors have the right to receive dividends of profits or assets generated from investments in the business.“
Notably, while ERTRs will be regulated under the FIEA, they are excluded from using the official term “crypto assets,” as per PSA guidelines.
From April 2020 onward, crypto asset derivatives transactions will be regulated under the FIEA. The law doesn’t specify margin rates, although the Japan Virtual Currency Exchange Association (JVCEA), a major self-regulatory organization in Japan, has a guideline that proposes to restrict margin rates by four times or even lower.
The Anderson Mori & Tomotsune report says that the JVCEA’s guidance “may be taken into account when specific provisions are promulgated by the relevant Cabinet Office Order.” It then goes on to suggest that the exact level may be decided upon in the future:
“Cabinet office orders determine how laws will be enforced in reality and something the Japanese crypto industry pays careful attention to after the amendment of the two laws on May 31st.”
Introducing a clear regulation on derivatives transactions may be urgent, since 80% of crypto trades comes from derivatives, and yet it is largely unregulated. Data from the Japan Virtual Currency Exchange Association (JVCEA) shows that the volume of leveraged, margin and futures trading for crypto was far higher than that of spot trading in Japan from April 2017 to March 2018.
The FIEA prohibits anyone from engaging in activities such as dissemination of rumors, usage of fraudulent means for purposes of selling or purchasing or engagement in any transaction in respect to crypto assets or for purposes of engagement in any crypto asset derivative transactions and the likes.
Anderson Mori & Tomotsune has set out the possible areas that may constitute a breach of law by the governing body:
“(i) engage in fake sales and purchases; (ii) engage in collusive sales and purchases;
(iii) entrust or accept any entrustment of fake sales and purchases or collusive sales and purchases;
(iv) engage in market manipulation through actual sales and purchases;
Or (v) engage in market manipulation through representations and certain similar acts”
Market reaction is mixed
“Japan is leading the crypto regulation”
Most Japanese crypto exchanges that Cointelegraph Japan contacted have spoken positively about the new laws.
Katsuya Konno, head of the CEO office of fintech company Quoine, welcomes the changes and thinks that the revised laws will enhance customer protections and encourage more institutional investors to enter the crypto industry. According to a translation of his comments, he told Cointelegraph:
“I think it’s great, frankly. With the revised content, customer protection is further pursued, so I think that Japan will be able to become a world leader in virtual currency-related regulations, and the entry of institutional investors will also increase. As new initiatives such as STO are becoming possible, the boundaries between virtual currency and existing finance may be overlapping more and more.”
As reported, Quoine’s trading platform, Liquid, hit unicorn status with over a $1 billion valuation in April 2019.
BitPoint, another crypto exchange in Japan, has also praised the new laws. The exchange’s spokesperson told Cointelegraph, in translation:
“We are very positive. Clear rules are expected to help institutional investors enter, leading to market expansion.”
BitPoint also expects more institutional investors to join the crypto movement and the market to expand further as crypto rules become clearer. However, the exchange has admitted that a review of the wallet management system will need to be undertaken in order to strike the right balance between security that entails the use of cold wallets and more user friendly, but less secure, hot wallets. BitPoint will therefore look to entrust fiat currencies to a trust company and receive a financial instruments business operator’s license.
Meanwhile, Coincheck, which just obtained an exchange license from the FSA in January, wrote in a translated email that the new laws are something it expected, also adding:
“By clarifying the target and standards of regulation through the current legal reform, we believe that it will lead to the healthy development of the cryptocurrency industry. On the other hand, there is also concern that the term change to crypto assets may be a setback for cryptocurrency as a means of payment. I would like to make an effort as an industry to make that not happen.”
The exchange has also said it would be closely monitoring the cabinet office orders that determine how the laws will be enforced in reality.
Ambiguity for wallet makers
AndGo, a Japanese-made hardware and mobile wallet development company, outlined some “ambiguity” in the new laws when speaking to Cointelegraph Japan.
AndGo points out that there are two kinds of wallet makers. One is able to move clients’ assets. It will be viewed as a custodian wallet and required to be registered with the FSA, as in the case of exchanges. The other type doesn’t possess clients’ private keys, hence can’t move clients’ assets. The new law doesn’t apply for the latter type.
As AndGo explained the issue, its wallet is of the second type, so it should not be subject to the new laws. However, the laws are unclear about the cases in which it holds one of the private keys (as with multi-sig) and a private key that clients encrypts by setting up their own passwords. In those cases, wallet makers cannot move clients’ assets solely by their own volition. According to a translation of a correspondence with AndGo:
“The details and interpretation of this regulation are often vague, and I think that wallet operators will have to ask the FSA individually about gray areas in the future.”
However, AndGo understands that regulators don’t often catch up with the rapid pace of technological innovation, writing:
“While entrepreneurs develop their service products by looking years ahead, regulators focus on technologies and services that were released years ago.”
After attempting to get ahead with crypto regulation, Japan witnessed two major hacks in 2018. Protecting crypto customers and investors has become a priority, and those who have enough funds to comply with the regulation may be at an advantage. In contrast, it may become harder for crypto entrepreneurs to enter the industry. The FSA, in the comment to Cointelegraph Japan (translated into English), addressed some of the concerns, however:
“We think the balance between customer protection and innovation is important. We continue to prioritize customer protection and other regulations where appropriate, while making sure that they will not be too much for the industry to grow further.“
Ahead of the enforcement day, the FSA is going to release government orders including a Cabinet Office Ordinance, which determines how the law will be enforced. At the same time, it will seek public comments on its website regarding the orders, one month before the implementation. It is not yet clear what the FSA will include in the government orders, but one of them is expected to be about the rate of margin trading.
Moreover, according to the FSA, many elements of Japan’s new laws are included in the recently published IOSCO’s document, which will be used in the upcoming G-20 meeting in a discussion surrounding crypto regulation. The FSA hopes to “share Japanese experiences with G20 members and deepen the mutual understanding.”
Bitcoin’s history is rife with hacks and heists, sometimes resulting in six-figure bitcoin losses and businesses going bankrupt, unable to pay their customers back. A new video by Bitcoin.com explores the largest bitcoin heists in history and explains how each one was pulled off.
With cryptocurrencies’ steep rise in value, heists have become increasingly lucrative for hackers. The biggest targets have so far been crypto exchanges with weak security measures. Since a large number of crypto users are still not holding their own private keys, opting to leave their coins on these exchanges, large and frequent heists are inevitable. Blockchain data forensics firm Chainalysis detailed in its January report:
The hacking of exchanges is far and away the most costly type of crypto crime, generating around $1 billion in hacking revenues in 2018 alone.
When considering “exchange thefts, fraud and exit scams,” blockchain security company Ciphertrace estimates that they “may tally more than $1.2 billion in the first quarter  alone.”
As exchanges’ security measures tighten over time, the number of coins hackers are able to steal has been decreasing. As Chainalysis noted, “Crypto crime increased in 2018, but it made up a smaller slice of a much larger market. Indeed, according to our analysis, illicit transactions comprised less than 1% of all economic bitcoin activity in 2018, down from 7% in 2012.”
Biggest Heists and How They Were Pulled Off
The latest installment from Bitcoin.com’s new video series entitled “The 5 Biggest Bitcoin Heists in History – Ranked” examines the top bitcoin heists and a Ponzi scheme, and details how each one was executed. The heyday of cryptocurrency heists started in 2011, quickly peaked over the next two years, and has continued to this day. As described in the video, hackers were able to steal sums as large as 650,000 BTC, 120,000 BTC, and 100,000 BTC — to name a few.
Inevitably featured in the video is the Mt. Gox heist which saw 650,000 bitcoins stolen throughout 2013 by a still-unknown hacker. For years, victims of the hack blamed CEO Mark Karpeles for the theft, but Japanese courts eventually exonerated him of ill intention. Another major hack in Japan hit one of the largest crypto exchanges in the country; Coincheck was hacked last year for about 50,000 BTC worth of cryptocurrencies. The video tells the story of how it re-emerged and became one of the 19 fully registered crypto exchanges in Japan.
The largest Ponzi scheme to date is also featured in the video. Bitcoin Savings and Trust, operated by Trendon Shavers, stole approximately 265,675 BTC from its customers. Another high-profile heist was the 2016 Bitfinex hack, which lost about 120,000 BTC. The video explains what happened there as well.
The Curious Case of Bitcoinica
An interesting series of heists revolved around Bitcoinica, an early bitcoin exchange by a 17-year-old entrepreneur and coder named Zhou Tong. Hackers first exploited a vulnerability in shared online web host Linode and stole over 46,653 BTC from eight different Bitcoin services there in March 2012, including more than 43,000 coins from Bitcoinica.
Before Tong could pay back his customers, the exchange suffered a second attack. In May 2012, hackers managed to empty the exchange’s hot wallet and user funds at its new server host, Rackspace. The thieves got away with a total of 18,547 bitcoins this time, causing the fledgling exchange to shut down. Trouble continued for Bitcoinica, however, as a third heist hit two months later and 40,000 more coins belonging to the exchange and its users stored on Mt. Gox vanished. “A total of around 100,000 bitcoins were stolen before Bitcoinica closed its doors the same year,” the Bitcoin.com video notes.
For more information about the largest hacks in bitcoin history and how they were pulled off, see the video below.
What do you think of these heists? Let us know in the comments section below.
Images courtesy of Shutterstock.
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Data obtained from three major trading platforms — Bitpoint, DMM Bitcoin and Coincheck — pointed to a significant increase in interest from entry-level investors since the end of March.
The change in habits among those who assumedly did not use cryptocurrency before highlights the impact of rising prices on consumer interest, which rose in step with the return of a bull market across the industry.
Daily account openings for Bitpoint were three times as high in May as for March, and twice more than in April.
DMM saw May openings double those in March and 1.5 times more than in April, while Coincheck likewise saw openings treble in May compared to March.
Coincheck’s PR department told Cointelegraph Japan that the local peak occurred on May 14, which saw seven times more accounts coming online than on the average day in March.
The data corresponds to Bitcoin prices between $3,750 and $4,150 in March, while May 14 saw BTC/USD trade around $8,250.
As Cointelegraph reported, it was not just Japan’s exchange sector that capitalized on the resurgence. This week, Kraken unleashed an equity sale which has gained over €8 million ($9.3 million) in two days.
A major crypto exchange in South Korea has shut down, showing the intensity of the brutal 16-month bear market that caused a wide range of issues for crypto businesses.
The shutdown of Coinnest on April 18, one of the major crypto exchanges in South Korea, showcased the intense brutality of the 16-month bear market, which came crashing down as soon as bitcoin achieved an all-time high at a price of $20,000.
While not many major crypto exchanges have closed their operations in the past year, most exchanges — with the exception of some platforms considered to have real daily volumes by Bitwise Asset Management — have struggled to maintain a stable inflow of revenue.
The bear market was particularly difficult for small exchanges that are known to strategically inflate their volumes to appeal to users on leading market data platforms like CoinMarketCap.
Profit margins sharply dropped due to an overall drop in daily volumes for smaller exchanges such as Korbit in South Korea, creating a difficult environment to survive in.
Cryptocurrency exchanges generate the overwhelming majority of their revenues through fees that occur when trades are executed. When daily volumes of crypto assets drop, exchanges suffer a dip in revenue.
Why crypto exchanges suffered during the bear market, especially in South Korea
According to a report from The Block, Binance generated a quarterly profit of around $71 million from January to March 2019, nearing the annual operating profit of Upbit, South Korea’s largest crypto exchange.
Upbit is the only exchange among the top five cryptocurrency exchanges in South Korea’s local crypto exchange market to record a profit in 2018.
Bithumb recorded a net loss of $175 million, and other leading platforms like Coinone and Korbit also recorded relatively large losses in 2018 to the tune of tens of millions of dollars.
Although a Bithumb representative told MK, a mainstream media outlet in South Korea, that the business of the exchange remains solid, a $175 million loss could have been critical for the exchange if it had not reportedly secured around $190 million in new funding:
“Even during a phase in which the cryptocurrency market is struggling, Bithumb is sustaining a solid business with unique services and global market dominance. Bithumb will put in all efforts in protecting user funds.”
Other challenges: no new registrations
2018 was particularly hard for exchanges in South Korea because exchanges were prohibited from accepting new registrations for awhile. As such, exchanges experienced a substantial decline in revenues.
Last year was challenging even for Upbit, the country’s dominant leader in the cryptocurrency exchange market.
A representative of Dunamu, the parent company of Upbit, said that the exchange was able to operate healthily throughout 2018 due to the company’s strategy of reducing marketing efforts and resources by employing a cautious approach in management.
“In comparison to other exchanges, Upbit operated with caution by reducing marketing efforts and overall manpower because new registrations were blocked. Most of the revenues recorded by Upbit in 2018 were generated in the first quarter of 2018 when the cryptocurrency market was hot. Upbit actually recorded an increase in revenues and operating profit since 2017.”
For smaller platforms like Coinnest, it was virtually impossible to expect any substantial operating income because of the sentiment around the market and the state of the cryptocurrency exchange market in South Korea.
Coinnest specifically suffered more than others due to the exchange’s reported $5 million mishap in January, during which the exchange mistakenly sent more than $5 million to clients.
Moreover, on Oct. 18, the former CEO of Coinnest was sentenced to three years in prison and a $2.6 million fine for fraud and for extracting user funds for personal financial gain. According to court documents, the former CEO and two other executives stole more than $30 million from users and reportedly faked around $400 million in volume.
Ultimately, citing regulatory uncertainty and a drop in crypto trading volume, a Coinnest representative said that the exchange was forced to close, a fall from grace for an exchange that was once the third biggest in the local market. The exchange’s representative said:
“It is a natural result of a decrease in trading volume. Both regulatory issues and business decisions have served as a background for this decision.”
Even big firms like Coinbase struggled
Small exchanges across major markets like Japan and South Korea often get acquired by larger companies or declare bankruptcy because of their focus on short-term profitability.
For exchanges, a strong network effect is crucial for sustainability. Hence, apart from the top five exchanges in every major region, most exchanges consistently struggle to generate profits.
In a bear market, the situation gets worse for both small and large exchanges, as seen in the performance of Coinbase in 2018.
On April 18, Reuters reported that Coinbase recorded an annual revenue of $520 million in 2018, which would normally be considered a healthy figure coming off of a brutal 85% correction of crypto assets.
But, Coinbase is one of the biggest exchanges in the global market, and it failed to reach its projection by 60%:
Net revenues of 520 million dollars with a ~40%+ profit margin for the year of 2018 is beyond excellent! Congratulations @coinbase team.
Bloomberg said in October 2018 that Coinbase expected an annual revenue of $1.3 billion in 2018 despite the correction of the market. Given that the document was obtained by Bloomberg late last year, it is likely that the last quarter was distinctly agonizing for exchanges.
Coinbase missed its annual revenue projection by a staggering 60% even with the continuous efforts of the exchange to increase the volume of the platform through the addition of new tokens and crypto assets.
Throughout the past two years, major exchanges in strictly regulated markets, such as the United States, refrained from prematurely listing tokens due to regulatory uncertainty around the nature of tokens.
In April alone, Coinbase listed tokens from Maker (DAI), Augur (REP) and EOSIO (EOS) on Coinbase Pro, following the listing of Stellar’s lumens (XLM) and the highly anticipated support for XRP, the cryptocurrency developed by Ripple.
The Coinbase team said after listing lumens in March:
“One of the most common requests we receive from customers is to be able to trade more assets on our platform. With the recent announcement of our new listing process, we anticipate listing more assets over time that meet our standards.”
Which other exchanges have shut down?
In South Korea alone, there are hundreds of cryptocurrency exchanges, with some reports estimating the number of exchanges in the country surpasses 100. Most of these exchanges are small companies that aim to drive short-term profits with aggressive token listings.
Due to a lack of resources, when minor exchanges are hit with security breaches, hacking attempts or a drastic drop in trading volume in the cryptocurrency exchange market, they are unable to cope with changes in market conditions.
Throughout the past 16 months, exchanges like Coinnest, Coinpulse and Liqui have shut down as a result of liquidity issues, and bigger platforms including QuadrigaCX, Coincheck and Zaif have closed following high-profile security breaches.
While Coincheck and Zaif have reopened in Japan with the approval of the Financial Services Agency (FSA), the two firms needed a lifeline from bigger conglomerates to fully compensate all user funds.
Zaif reopened on April 19 after securing a deal with Fisco worth around $44.5 million to compensate users affected by the hack.
“After that, on condition of financial support of approximately 5 billion yen, transfer of Zaif business from Tech Bureau Co., Ltd. to us was decided. In addition, we have asked customers via the Internet and by telephone etc. for the procedures for consenting to business succession,” Fisco team said.
Why small exchanges are always vulnerable
Small exchanges often fall victim to hacking attacks because compliance and security cost a significant sum of money. Well-regulated platforms like Gemini have insurance, in-house security experts and regular audits in place to secure user funds. But small exchanges cannot afford similar resources as major companies.
Even Coincheck, which was once the largest cryptocurrency exchange in Japan, did not have proper in-house security experts to oversee the platform:
Main takeaways from Coincheck press conf: – only NEM impacted – plans to continue operating, restart trading – not clear on plan to repay customers – no multisig💀 – wouldn’t admit security was weak – not sure how hacked, if domestic or foreign hackers – CEO barely spoke
Former Coincheck CEO Koichiro Wada said in April 2018:
“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.”
Although an investigation is said to be ongoing in the QuadrigaCX scandal — during which Gerald Cotten, the CEO of the exchange, lost $190 million in crypto and other funds after he reportedly passed away with private keys — the Coinbase team speculated that QuadrigaCX may have also been affected by the bear market and faced liquidity issues. Brian Armstrong, the CEO of Coinbase, said:
“QCX was one of the oldest exchanges in existence (founded in 2013). If they planned an exit scam, it likely would have been timed better. They suffered a multimillion dollar bug in June 2017. This is when we start to see movement of funds to ‘cold storages.’”
Patterns of sends from cold storage suggest they tried keeping the exchange afloat, and maybe attempted to trade their way out of the hole. Liquidity dried out and the bear market of 2018 may have caught up with them. The sequence of events suggests this was a mismanagement with a later attempt to cover it up.
Exchange closures will decline as the industry matures
The crypto bear market is crucial because it allows the industry to settle down, reflect, escape the speculative mania phase and rebuild the infrastructure around the market.
During an extended correction, the prices of crypto assets plummet and the volume of the market drops, leaving many low-quality projects and exchanges with a few options.
The cycle of the crypto market of speculation-correction-build-rally improves the quality of the industry and focuses the resources, capital and labor within the sector to quality companies.