South Korea’s leading crypto exchange Bithumb lost 35bn won ($31.5m) worth of virtual coins in a recent hack.
The incident has been the second time that Bithumb’s security has been breached in less than a year.
A cryptocurrency is a digital asset intended to work as a medium of exchange that uses cryptography to secure its transactions, to manage the creation of additional units, and to authenticate the transfer of assets. Cryptocurrencies are a form of digital currencies, alternative currencies, or virtual currencies. As it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. As of May 2018, there were over 17 million bitcoins in circulation with a total market value of over $140 billion.
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes with minimal processing fees. Thus, it is more attractive for individuals and companies alike to use these decentralised cryptographic systems instead of central banks for basic transactions or for raising capital for projects.
The exchange, the sixth busiest in the world according to Coinmarketcap.com, said it had stored all clients’ assets in “safe cold wallets” – which operate on platforms not directly connected to the internet. “Since coins in the cold wallets are not at all wired to the internet, it would have been impossible for hackers to steal those in cold wallets unless they physically broke in,” said In Ho, a professor at Korea University’s Blockchain Research Institute, a blockchain expert at the research centre.
Bithumb stated they will fully compensate customers. They alerted Korea Internet and Security Agency (KISA) prior to releasing information to the public. Although the breach may not be as severe as the $530 million hack of the Coincheck exchange earlier this year, the fact that Bithumb now ranks as the sixth biggest trading venue in the world still marks it as a notable, and worrying, incident. Crypto assets across the market, including Ethereum, fell in valuation following the breach.
South Korea has adopted a strict cybersecurity framework to tackle cybercrimes and protect users from personal data breaches. While it is not recognised as legal tender, crypto exchanges are allowed only through recognised banking institutions. Apart from requiring domestic exchanges to enforce a real-name verification process, financial watchdogs in South Korea have not yet made any concrete move in regards to regulating exchanges in a legal framework. The government has said that while it will not ban bitcoin exchanges, initial coin offerings and futures will remain under scrutiny.
At the previous G20 summit in Buenos Aires, the watchdog for financial regulation the FSB (Financial Stability Board) asserted that crypto doesn’t pose an immediate threat. The International Monetary Fund (IMF) called for more cooperation. Leading the way in its bid to become a “crypto nation”, Switzerland, with the Swiss Finma financial authority, are actively looking to support the ICO market by clarifying when businesses need to apply anti-money laundering and securities law.
Disruptive technologies such as blockchain and cryptocurrencies are able to rewrite our day-to-day life. Influence in real and financial markets requires regulation which caters to start-ups, established entities and governments. Recently, US Securities and Exchange Commission (SEC) regulator said crypto transactions aren’t subject to federal securities rules as they aren’t recognised securities. This led to a surge in valuation of crypto currencies like Bitcoin and Ethereum indicating that these assets function in a manner similar to those listed on Wall Street.
Mun Chong-hyun, the chief analyst at ESTsecurity, said digital coins would continue to be targets for hackers around the world. “No security measures or regulations can 100% guarantee safety of virtual coins. It is held anonymously and in lightly secured systems, which makes them an irresistible target,” Mun said.
Our assessment is that Bithumb may soon face a financial crunch if safety mechanisms are not effectively implemented. As stated previously, the cryptocurrency market is volatile and there remains some doubt over the real value that should be attributed to cryptocurrencies like Bitcoins. Private security processes require strong government protection for all participants against unethical hacking. We believe that while states can attempt to ban their use, it is more viable to use regulatory processes.