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Another Crypto Exchange Hacked, Could it Hurt Reputation of the Market?

Last Updated September 23, 2020 12:21 PM
Joseph Young
Last Updated September 23, 2020 12:21 PM

On January 14, large crypto exchange Cryptopia was hacked, resulting in significant losses of investor funds.

In an official statement released on Tuesday, the company said that the New Zealand police and the government’s High Tech Crimes Unit had initiated an investigation into the case.

Possible Impact on the Reputation of Crypto

This time last year, in January 2018, Japanese cryptocurrency exchange Coincheck was hacked and lost more than $500 million in user funds.

At the time, Coincheck executives said in a press conference that the security breach was caused by a lack of personnel and experts working to improve the security measures of the exchange.

As Yuji Nakamura, a Tokyo-based technology journalist, reported  on Jan 26, 2018:

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.

The Coincheck security breach prompted the Financial Services Agency (FSA) of Japan to tighten regulatory frameworks surrounding cryptocurrencies and implement changes into existing policies.

coincheck crypto exchange office
Japan-based crypto exchange Coincheck was hacked for more than $500 million worth of cryptocurrency in 2018. | Source: Shutterstock

Within less than a year since the Coincheck hack, another major cryptocurrency trading platform has been hacked.

Due to many security breaches that have occurred since early 2016, the cryptocurrency exchange market has struggled to obtain a reputation for having strong security measures and internal management systems.

If exchanges continue to be breached with basic hacking tools and methods, the trust and confidence from investors in the public market will inevitably decline.

One of the contributing factors to the security breaches that cryptocurrency exchanges experience quite frequently is the focus on profitability over investor protection.

As such, some markets in the likes of Japan and South Korea require exchanges to allocate a certain threshold of their revenues to security and internal management system development.

Throughout 2018, in an attempt to increase the trading volume and activity on the exchange, the Cryptopia team integrated many cryptocurrencies and tokens, prioritizing the expansion of the businesses.

Ultimately, the decision of the exchange to allocate a larger portion of its resources toward business development over security and maintenance may have led to the materialization of a high profile security breach.

The official statement of Cryptopia read :

Yesterday 14th January 2019, the Cryptopia Exchange suffered a security breach which resulted in significant losses. Once identified by staff, the exchange was put into maintenance while we assessed damages.

How Hacks Can be Stopped

Strict regulation could work in several regions, and it certainly has worked in South Korea and Japan in preventing hacking attacks.

However, generally, a way to stop cryptocurrency exchange hacks is for users to rely on trading platforms that prioritize security and investor protection through the implementation of comprehensive security measures and insurance.

In most cases, fiat-to-crypto exchanges are compliant with local policies, but many crypto-to-crypto trading platforms operate outside of major markets, often to refrain from dealing with regulatory frameworks.

Images from Shutterstock