Japan's regulators have ordered improvements to Tokyo-based Coincheck's operations. Hundreds of millions of NEM coins were lost in a massive cryptocurrency heist.
Japan's Financial Services Agency has imposed a "business improvement order" on Coincheck, one of the country's biggest virtual currency exchanges, government spokesman Yoshihide Suga said on Monday.
"While examining the cause of the incident and taking necessary measures, we want the ministries and agencies concerned to urgently study what further measures we'd need," he told reporters.
At a briefing on Monday, the FSA said it would look into all crypto exchanges to detect security weaknesses. Japan's finance minister, Taro Aso, told parliament on Monday that the government would take "necessary administrative measures, including an on-site inspection."
Police were also going to look into the incident, the Kyodo news agency reported.
Last Friday, $530 million (€427 million) worth of the cryptocurrency New Economy Money (NEM) – the 10th biggest worldwide - were lost when hackers managed to get hold of the virtual coins. It was more than the $480 million in bitcoin stolen from Japan's MtGox exchange in 2014.
Hot vs cold wallets
The hacker took advantage of Coincheck's lax security protocols. Customers' assets were kept in what's known as a hot wallet, which is connected to external networks.
'Bitcoin has paved the way for others'
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A so-called cold wallet, however, is preferable, as they are not connected to the outside world and are thus less vulnerable to fraud.
Coincheck said it would use its own funds to reimburse around 90 percent of the coins lost.
Japan is a leading market for cryptocurrencies, with nearly one-third of all December transactions of the popular virtual currency bitcoin denominated in yen, according to specialist website jpbitcoin.com.
Roughly 10,000 businesses in Japan apparently already accept bitcoin as a payment method.
Virtual currencies have come under fire from traditional banks, politicians and authorities, who are all calling for more regulation and have warned investors to be careful of investing in cryptocurrencies.
In the wake of the MtGox scandal, Japan passed a law on cryptocurrencies that requires exchanges to be regulated by the FSA. It went into effect last year. Coincheck has not yet received a license, but was allowed to continue to operate.
Bitcoin: Where it came from and where it's headed
The booming cryptocurrency has a cryptic backstory and a perplexing modus operandi. Following a year of particularly tumultuous growth, DW asks where Bitcoin will go next. Can it sustain its incredible ascent?
Image: picture-alliance/dpa/J. Kalaene
Good time to start a currency
Introduced in 2009, Bitcoin was the world's first decentralized digital currency. It quickly gained traction amid lingering uncertainty in the wake of financial crisis. Designed to be as rare as gold, Bitcoin was created to have a maximum of 21 million "coins." Initially worth just a fraction of a cent, by February 2011 the currency had gained parity with the US dollar, then it really took off.
Image: picture-alliance/dpa/J. Kalaene
An anonymous founder
The name Satoshi Nakamoto is synonymous with Bitcoin. It is said to be the alias for an unknown IT whizz who invented the cryptocurrency. But despite claiming to be a 30-something Japanese national, it is generally thought that several computer science experts created the technology behind the digital coin. One rumor even suggested that Tesla chief Elon Musk is the real Satoshi, which he denied.
Image: Reuters/AAP/B. Macmahon
So no coins then?
Instead of being printed like dollars and euros, each Bitcoin is created on a global network of computers and verified by the system rather than a bank. There are no transaction fees. The smallest amount you can buy is a "Satoshi" or one-hundred-millionth of a Bitcoin. Purchases can be made anonymously and even at digital currency ATMs. When you buy Bitcoin, it is often stored in a digital wallet.
Image: DW/M. Sevcenko
Complex puzzles
To ensure that not too much Bitcoin comes into circulation, a process called mining was created where blocks of transactions could only be processed once a difficult math problem was solved by geeks. The puzzles are becoming so complex that bigger and bigger computers are being utilized to decipher them. That's led to concerns about the amount of electricity used to handle Bitcoin transactions.
Image: Getty Images/AFP/M. Zmeyev
Are Bitcoin fortunes legit?
Due to its anonymous nature, Bitcoin's success is likely being fueled by organized crime, including money laundering and the purchase of illegal goods. The currency is also being targeted by cybercriminals. A recent hack blamed on North Korea forced a South Korean digital currency exchange into bankruptcy. Reports suggest the "Islamic State" armed group used Bitcoin to receive funds to buy arms.
Image: picture-alliance/Zuma Press/M. Dairieh
Bitcoin leads, others follow
Bitcoin is the largest of all the cryptocurrencies and its incredible rise has spawned many imitators. Other large digital cash creators include Ethereum, Zcash, Bitcoin Cash, Ripple and Litecoin. As of November 2017, their number had swelled to 1,324. Hundreds of others have attempted and failed to launch their own digital coins. The market is now coming under increasing scrutiny by regulators.
Image: picture-alliance/NurPhoto/J. Arriens
Watch it skyrocket
2017 was a stratospheric year for Bitcoin. Worth close to $1,000 in January, some twelve months later it had scaled to an all-time high of $19,784. Despite much skepticism, the currency started to see serious interest from institutional investors. Two exchanges began Bitcoin futures trading, allowing speculators to punt on the incredible volatility in the value of the cryptocurrency.
Image: Reuters/D. Ruvic
Warnings abound
From central banks to respected investors, almost the entire financial establishment warned of a massive Bitcoin bubble, which they said can only end in disaster for holders of the digital currency. Among them was Nobel prize-winning economist Joseph Stiglitz who said Bitcoin "ought to be outlawed." Jamie Dimon, the CEO of JPMorgan Chase labeled those who buy the currency "stupid."
Image: World Economic Forum/Benedikt von Loebell
The shape of things to come?
Just before Christmas 2017, Bitcoin saw a dramatic rally, topping out at nearly $20,000 before losing a third of its value in just five days. More intense volatility followed early in the New Year, only to be reversed when it plummeted by almost half. Are we in for an even bigger rollercoaster ride if Wall Street adopts Bitcoin?
