Crypto Exchange Coincheck Receives Business Improvement Order From Japan’s Financial Regulator

News, Regulation | January 30, 2018 By:

Japan’s Financial Services Agency (FSA) has issued a business improvement order to crypto exchange Coincheck after hackers stole over $400 million worth of cryptocurrency from the exchange. The Coincheck hack is believed to have been the largest crypto exchange theft in history, eclipsing even the infamous Mt. Gox theft in 2014.

Coincheck suspended trading of all cryptocurrencies except bitcoin on Friday, and said it had lost 523 million units of XEM, the native token of the NEM Foundation. The stolen XEM tokens were kept in what’s known as a hot wallet, which is connected to external networks, rather than in offline cold wallets, which are more secure. The exchange said on Sunday it would use company funds to reimburse the approximately 260,000 affected customers to the tune of 88.549 yen (82 US cents) per token stolen, approximately its market value.

On Monday, The FSA ordered Coincheck to launch an investigation into its security vulnerabilities that led to the hack, and to submit a report for management improvement to the authority by February 13. The regulator said the exchange is also required to report details regarding the facts and causes of the issue.

The FSA stated that it does not have any rules banning the use of hot wallets by exchanges, nor does it set requirements on how much should be kept in cold wallets. The regulator also said that it was not yet aware of when and how Coincheck plans to repay its customers, or whether it has sufficient resources to do so.

In a statement, Coincheck said that it will follow the FSA’s guidance and would promptly strengthen its customer protection and governance and develop its risk management systems.

Coincheck is not a registered operator in Japan, but has applied to the agency for a license as a crypto exchange. The exchange has been operating under FSA rules while waiting for a decision. The regulator said there were currently 16 registered crypto exchanges and 16 waiting for approval while operating.

The FSA said it will be expanding its investigations, including on-site inspections at other cryptocurrency exchanges in the country, to prevent a recurrence of the issue.