By Taiga Uranaka and Thomas Wilson
Japanese authorities said on Monday they would investigate all cryptocurrency exchanges in the country for security gaps and ordered Coincheck to raise its standards after hackers stole $530 million of digital money from the Tokyo-based exchange
The theft – one of the world’s biggest cyberheists – highlights the vulnerabilities in trading an asset that policymakers are struggling to regulate, as well as the broader risks for Japan as it aims to leverage the fintech industry to stimulate economic growth.
The Financial Services Agency (FSA) on Monday ordered improvements to operations at Coincheck, which on Friday suspended trading in all cryptocurrencies except bitcoin after hackers stole 58 billion yen ($534 million) of NEM coins, among the most popular digital currencies in the world.
Coincheck said on Sunday it would repay about 90 percent, though it has yet to figure out how or when.
The NEM coins were stored in a “hot wallet” instead of the more secure “cold wallet“, which operates on platforms not directly connected to the internet, Coincheck said. It also does not use an extra layer of security known as a multi-signature system.
The hack has drawn into focus Japan’s approach to regulating cryptocurrency exchanges
Last year, it became the first country to regulate exchanges at the national level – a move that won praise for boosting innovation and protecting consumers, contrasting sharply with crackdowns in South Korea and China.
The FSA said it ordered Coincheck to submit a report on the hack and measures for preventing a recurrence by Feb. 13.
It added it would conduct hearings with other exchanges after their operators had run their own checks. If any problems or weaknesses with security were found during the course of the hearings, the FSA would also conduct onsite inspections.
The regulator also said it had yet to confirm whether Coincheck had sufficient funds for the reimbursement
But the regulator 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,” an FSA official said at a briefing.
In response to FSA’s order for improvements, Coincheck said it would promptly strengthen its customer protection and governance and develop its risk management systems.
Japan started to require cryptocurrency exchange operators to register with the government only in April 2017, allowing pre-existing operators such as Coincheck to continue offering services ahead of formal registration.
The FSA has registered 16 cryptocurrency exchanges so far, and another 16 are still awaiting clearance. Coincheck’s application was made in September.
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