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BusinessMay 28, 2019

How New Zealand company Cryptopia lost over $20 million from a hack


It’s been a rollercoaster ride for the once flourishing company that now owes investors tens of millions of dollars. Don’t follow? Here’s a brief recap of Cryptopia’s historic downfall over the last five months.

First thing’s first, what is Cryptopia?

Cryptopia is (well, was) a Christchurch-based cryptocurrency exchange founded by Rob Dawson and Adam Clark in 2014. The pair initially started Cryptopia as a hobby, largely due to their own “negative experiences with other exchanges”.

After about two years, Dawson and Clark both quit their jobs in order to run the company full time, coinciding with the skyrocketing value of Bitcoin in 2017. It led to a massive surge in business for Cryptopia and by 2018, it had grown to over 80 staff and more than 1.4 million users worldwide. 

Hold up, remind me what cryptocurrency is again? And what is a cryptocurrency exchange?

Simply put, cryptocurrency is a digital or virtual currency that includes the likes of Bitcoin, Ethereum, Ripple and thousands of others. As the name suggests, cryptocurrency uses cryptography to keep transactions secure and anonymous. Many cryptocurrencies also operate on a decentralised basis by using blockchain technology. That means there’s no central governing power and peer-to-peer transactions take place without the need for an intermediary such as a bank.

Meanwhile, cryptocurrency exchanges (like Cryptopia) are the online platforms where you can trade one type of digital asset (like Bitcoin) for another (like Ethereum). This is done through a ‘trading pair’ which is essentially the market between the two assets allowing users to trade one for the other. These exchanges take custody of a user’s funds to trade, which is why the Cryptopia hack is such a big deal.

Tell me more about this hack. What happened and when?

On January 15, Cryptopia announced on Twitter that it had experienced a major security breach resulting in “significant losses”. Trading services were suspended and a police investigation was launched that night, leading to a lockdown of company’s Colombo Street headquarters the next day.

It later emerged that the hacking went on from January 14 (when Cryptopia had shut down for “unscheduled maintenance”) to January 17 (days after police became involved). Another hack occurred several days later.

Cryptopia’s statement on Twitter

How much money was lost from the hack?

Initially, almost NZ$4 million was reported to have been stolen. But the most widely reported figure since then has been NZ$23 million (or US$16 million) after Cryptopia calculated that up to 9.4% of its total holdings had been stolen.

What’s happened since then?

In February, Cryptopia staff were allowed back into their Colombo Street offices in order to start securing coins. Founders Dawson and Clark also returned to Cryptopia after leaving the company the year prior.

In March, the site partially reopened for the first time in two months, allowing investors to log into their accounts again on a ‘read-only’ basis (but only with pre-hack balances displayed). It also stated in an email to investors that Cryptopia would give a “rebate” to those that lost funds, although details remained scarce as to how that would happen. Later that month, Cryptopia announced it had finished securing a handful of coins and some trading resumed.

So why is Cryptopia back in the news this month?

Cryptopia is back in the news because on May 15 (basically four months since the first hack) Cryptopia announced that it was going into liquidation. All trading was subsequently suspended and assets are no longer able to be deposited or withdrawn.

“We are now undertaking an extensive process to confirm amounts owing and available to return to customers. This is a complex process and will likely require direction from the New Zealand Courts. Until the investigation has concluded we cannot return any crypto-assets to customers.”

Cryptopia’s statement on its website

Since then, Cryptopia has filed for bankruptcy and “urgent interim relief” in the US. Liquidators Grant Thornton says the move is an effort to preserve Cryptopia’s information which is currently stored and hosted on servers run by an Arizona-based business. That business is reportedly terminating its agreement with Cryptopia and is demanding to be paid $2 million USD, fuelling concerns that the company could decide to delete Cryptopia’s data if it doesn’t get paid. And if that happens, it’s basically game over.

What now for investors?

Investors are currently in a state of limbo as their assets are likely to remain frozen for “months rather than weeks”. Obviously, that sucks and people are understandably very mad, a situation made worse by the fact that one of Cryptopia’s co-founders has set up a new cryptocurrency venture as the firestorm rages on (Clark, however, notes that his venture pre-dates Cryptopia’s hack by several months).

So will investors get their coins back? At this stage, we just don’t know. It’s an ongoing investigation so we can only wait and see. In any case, Cryptopia’s downfall once again raises questions over the unstable, unregulated, notoriously hack-prone nature of currency exchanges, questions that need addressing sooner rather than later.

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