- Cryptopia’s January hack has led the company to pursue bankruptcy proceedings.
- Issues in the security of the exchange may point to a greater problem in the cryptocurrency industry.
Cryptopia has had a really rough year. In January, the exchange was hacked, losing millions of dollars before the exchange cut off customers from their withdrawals. The company worked hard to try and bring their platform back to consumers in March, but ultimately had to shut down when the relaunch was unsuccessful.
The proceedings for their bankruptcy case began a few weeks ago, and the liquidators are already running into trouble.
The former New Zealand exchange had made creditors hopeful that they would see their funds again as the bankruptcy commences. However, that optimism has not lasted, as the Grant Thornton auditing and liquidation firm has revealed that the entire process will end up taking “some months at least.”
Executive David Ruscoe of Grant Thornton added that the firm plans to “conduct a thorough investigation,” adding that they will be collaborating with multiple stakeholders, members of management, and shareholders for a satisfactory solution. Even in the last week alone, there has been new information discovered, which is why it is so necessary to continue with the wait for the firm to continue their research.
Even though the company has already stated which crypto wallets were responsible for holding most of the funds that were stolen, the actual hackers are difficult to figure out. Furthermore, actually figuring out which customers are owed the funds that the firm finds is becoming even more difficult. Looking at the filing on May 24th, which was processed through the Bankruptcy Court in the Southern District of New York (SDNY), shows that the liquidators have no idea which customers should be given the funds they find.
With the filing for the emergency provisional relief, the court first needs to issue an order that would preserve an SQL database, which is presently being held in Arizona.
While the information in this database has a lot of necessary details for reconciliation, the company that hosts it publicly ended their relationship with Cryptopia during their difficulties, which is why an order from the court is crucial. In fact, Grant Thornton has already said that the reconciliation of the funds and the distribution to users simply cannot be achieved without the data.
Speaking with Cointelegraph, Pauline Shangett from ChangeNOW said that the cryptocurrency market is young, and the traditional legal system just is not set up to deal with it yet. Shangett believes that there’s two solutions that could be implemented –
“Either the space moves on to being fully decentralized and self-regulated, or it adopts the best practices of regulators. The former might lead to anarchy as cases like Cryptopia’s have a chance to happen again, which would hinder mass adoption.”
With all of the chaos that Cryptopia has come against, there’s more of a sense of urgency for legal entities to get involved in fraud causes in the industry. CEO Kamil Gorski of Blockhunters pointed out that there is plenty of tools that exchanges could implement in a way that will prevent the hacks from happening, but “there’s no obligation to use them.”
Those tools can include ways to track the funds that have been stolen, protocols that would stop payouts if something triggers it, and even ways to track bugs. Essentially, Gorski believes that that the only lesson learned here is that “this approach can end up biting them, and more importantly their users, in the a–.”
With such a lazy attitude towards security creates a problem that just leaves investors unprotected, when it would not take much to implement. Still, by lacking protection, the fault comes back on Cryptopia when the hacks occur. No amount of avoidance can help Cryptopia to escape the fact that the money will have to come from themselves.
The majority of the funds stolen in this circumstance has come from American users, which means that the SDNY could end up getting involved in the reconciliation. However, the fact that a company from New Zealand is largely profiting from predominantly Americans is a reason to be a little concerned about how the crypto industry works.
A crypto commentator named Stephen Palley even said that the purpose of a Chapter 15 bankruptcy would be to rope in the US bankruptcy court in an effort to:
“give effect to a foreign bk/liquidation proceeding.”
It also lets the courts issue an order with the database provider in Arizona to hold on to the information that they need, which was the purpose of hiring Grant Thornton in the case.
As the drama continues to unfold, it is clear that the problems that Cryptopia faces are indicative of much bigger problems in the cryptocurrency space. The regulation in the space has been the biggest focus of the market for so long, but perhaps the necessity for clearer security requirements needs to be pushed to the forefront.