By now, holders of Bitcoin and other cryptocurrencies are accustomed to their massive price swings. In December, a two-week 81 percent surge in the price of a single Bitcoin was immediately followed by a five-day decline of 36 percent. Bitcoin’s meteoric rise in price, from a few cents a unit at its inception in 2009 to more than $19,000 in December 2017, has made its share of millionaires and billionaires.
But the realm of cryptocurrencies, digital forms of currency that exist only in electronic form, continues to face a significant threat – theft by hackers.
Of the 1,324 cryptocurrencies in existence, none are owned or regulated by any single government. Each is truly a global currency. The industry is largely unregulated, as governments, law makers, financial institutions and legal systems struggle to keep pace. Often, the structure and integrity of the marketplace is dependent on the individual exchanges where the cryptocurrencies are traded.
With more than 150 cryptocurrency exchanges across 48 countries, exchanges serve a number of key roles. First, they broker the transactions between buyer and seller, ensuring payment and receipt is made to each client account. Second, they often serve as custodian for client cash and cryptocurrency assets, maintaining holdings on their own infrastructure and servers. Finally, they seek to provide security and integrity to the marketplace and the encrypted identification used to safeguard client assets.
But the security of these exchanges has been called into serious question. Constantly besieged by hackers, thieves and fraud, the industry’s lack of common regulations or standards for cybersecurity has its repercussions. It is estimated that more than 980,000 Bitcoins, with a current value of more than $13 billion, have been stolen from cryptocurrency exchanges, primarily from hackers. Little of this has been recovered.
On Dec. 19, South Korea-based exchange Youbit was forced into bankruptcy after hackers stole nearly one-fifth of all client cryptocurrency holdings. This followed an April 22 attack, where hackers stole 3,831 Bitcoins, then valued at $5.3 million, representing 37 percent of all client assets.
In August, Hong Kong-based Bitfinex, then the world’s largest cryptocurrency exchange, had 119,756 Bitcoins stolen by hackers. This loss, representing 36 percent of all client cryptocurrency holdings, was valued at more than $72 million and was the second largest hack of all time. Bitfinex is still in operation.
The hacks of Youbit and Bitfinex serve to highlight the challenges customers face. In the world of cryptocurrencies, you’re on your own. Courts and rule of law over cryptocurrencies can be murky at best. For both Youbit and Bitfinex, the exchanges spread out the losses among all customers, regardless of whether their account was hacked or not. To cover customer losses, the exchanges provided IOUs, to be paid off from the exchange’s future revenues.
But the largest hack is the now infamous Mt. Gox incident. Based in Japan, Mt. Gox was the world’s largest Bitcoin exchange, handling more than 70 percent of all global Bitcoin transactions. In February 2014, Mt. Gox was forced into bankruptcy after roughly 850,000 Bitcoins went missing, presumably stolen by hackers, over a two-plus year period. At the time, the loss was valued at $450 million. At today’s prices, the stolen Bitcoins are worth more than $11.4 billion. The theft impacted more than 24,000 customers around the world.
To date, 650,000 of the Mt. Gox Bitcoins remain missing and unaccounted for. So far, customers have not recovered a single penny as the failed exchange remains mired in endless litigation from customers, creditors, business partners and its own bankruptcy proceedings.
Government regulation and oversight are typically reactionary, rather than proactive. Implementation of new laws tends to move at a glacial pace. In the U.S., the Securities and Exchange Commission, the Internal Revenue Service, the Department of Treasury, the Commodity Futures and Trading Commission and state and federal lawmakers are playing catch-up to the regulatory and legal challenges of cryptocurrencies.
Overseas, in light of the recent collapse of Seoul-based Youbit, South Korea is considering a ban on all cryptocurrency exchanges within its country. In September, China announced its ban on exchanges and made it illegal for citizens to engage in cryptocurrency transactions within its borders. In October, Russia banned all exchanges in its country and access to websites that offer them.
The world is still in the learning curve phase of cryptocurrency law. There are legitimate concerns: money laundering, terrorist financing, tax evasion, fraud and security, among others. Some users of cryptocurrencies may decry attempts to regulate this last bastion of unregulated currency, commerce and trade. But a lack of regulation has a cost, in theft, fraud and price manipulation. Despite efforts by some countries to ban them, cryptocurrencies are here to stay. And so too, is increased government oversight. The challenge, of course, is finding the right balance.