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BusinessMay 28, 2019

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

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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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don01

BusinessMay 27, 2019

New Zealand’s first weed IPO launches today. Should you buy in?

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Ten million dollars worth of stock in a medicinal cannabis company goes on sale today as Cannasouth aims to be the first company of its kind to list on the NZX. But should you buy in? Don Rowe talks to Simplicity managing director Sam Stubbs. 

The country’s first medicinal cannabis initial public offering (IPO) launches today, giving Kiwi investors a chance to purchase stock in R&D firm Cannasouth ahead of the 2020 referendum.

Cannasouth, a Waikato-based biopharmaceutical company specialising in cannabis therapeutics, plans to raise a minimum of $5m from invited investors and a further $5m through an initial public offering, the NZX’s first IPO in two years. Last year the company, which boasts six-year Federated Farmers CEO Conor English on its board, secured CMP Growth Capital Fund funding, the firm taking a 20% stake in the burgeoning company. Cannasouth plans to sell as many as 20 million shares.

The legal marijuana industry drew in more than $15b in investment worldwide last year, and the combined North American market is expected to exceed $24b in 2019.

But before you run in guns blazing, know this: some fund managers are skittish. At least four fund managers declined to go on the record about the Cannasouth offering, one telling The Spinoff it could put them offside with their older, more risk-averse clientele. According to Simplicity CEO Sam Stubbs, it’s no surprise the big players are wary, given that listing a cannabis company in New Zealand is unprecedented, and the industry potentially volatile.

“I think that if you look at it as an investment opportunity with your KiwiSaver hat on, [fund managers] have got fiduciary responsibilities, so I’d be surprised if wholesale institutional managers would invest yet. That’s no commentary on the business, it’s just a very uncertain environment, so you need more certainty. But clearly it will appeal to people with high risk [appetite] or who love the product.”

Cannasouth has licences to cultivate cannabis and manufacture extracts and products for research, and also to import dried leaf and viable seeds from places like the Netherlands. Those are two key selling points in what is a highly speculative offering.

“By importing a wide variety of cultivars, along with the dried flower from the Netherlands, we can further investigate the potential of both high CBD and THC varieties,” chief executive Mark Lucas told Newstalk ZB in February.

Stubbs said while large fund managers may be playing it conservative when it comes to cannabis, offshore IPOs in the therapeutics industry have lead to huge earnings for early investors.

“Some investors will do it for genuine interest to see how to develops, and overseas there have been some small fortunes made in this area. We’ve seen a lot of money lost and a lot of money made.”


Watch: Grass Roots: the wāhine of Hikurangi Enterprises


Potential regulation in 2020 could also create a wealth of data on the impacts the legalisation of marijuana has on any number of social issues, Stubbs said. This would colour the regulatory environment and the ways in which companies could operate, and that susceptibility to political whims makes it a hard sell for fund managers.

“If you thought about marijuana as a product, I’d group it with alcohol in that it’s an industry, but government can have a huge influence on how you sell the product. If it’s a drug, which it is, then if it’s successful it’s likely to be heavily taxed. The big uncertainty is not only regulatory environment, but also tax.”

Recreational substances are also underperforming worldwide, says Stubbs.

“We [at Simplicity] don’t invest in tobacco or alcohol, because it’s unethical but it’s also an underperforming industry because fewer are smoking or drinking, so we’re sitting out. I would think that we would look at [Cannasouth] from that perspective: quite possibly less or unchanged demand. The evidence says legalisation has little to no impact on demand.

“There have been early-stage dramatic IPOs on paper, but bear in mind those are only paper profits. Will they produce long term? We still don’t know. As an investment we’d look at it that way. Ethically, half might say no, and will it be a good product?

Cannasouth is the third medicinal cannabis company to seek public funding, following Taranaki’s Greenfern, who raised $1.8 million in crowdfunding earlier this year, and frontrunners Hikurangi, who crashed the Givealittle servers two nights running in 2018 on their way to $2m. Stubbs says crowdfunding is a more natural fit for such volatile and experimental investment products.

“IPOs are expensive and you have to be big to justify the cost, and there are ongoing regulatory requirements, so crowdfunding seems more logical. An IPO gives you respectability or maturity, but getting there is difficult and expensive, and most companies in the future that get to public listing will in my opinion go through crowdfunding or an incubator first.

“But if you love the product and the idea? You know, it’s their choice. Good on them.”