Japan’s cryptocurrency whiz kid faces $530m reckoning


  • Cryptocurrency Premium
  • Tuesday, 30 Jan 2018

A man walks past a building where Mt Gox, a digital marketplace operator, is housed in Tokyo

TOKYO: In Japan’s stodgy financial world, young entrepreneur Koichiro Wada wanted to make a splash.

Giant billboard ads promoting his cryptocurrency exchange Coincheck Inc. festooned Roppongi Hills in central Tokyo, home to many tech companies. In December, it started running advertisements on national television featuring a slapstick act by a comedian who said he didn’t know why Coincheck was superior to rivals.

The ad didn’t bother to explain either, but Mr. Wada was proud of it, saying on Facebook that the comedian was ignorant about bitcoin and it gave the ad a “nice flavor.”

The good taste didn’t last. On Friday, Coincheck said it lost some $530 million worth of customers’ assets in a cryptocurrency called NEM after getting hacked, in what could turn out to be the biggest heist in cryptocurrency history.

On Monday, Japanese regulators ordered the exchange to step up security and find out what happened. They said they couldn’t pinpoint yet who the hackers were. Coincheck said over the weekend that it planned to spend some $426 million to repay NEM customers in Japanese yen.

People who have worked for Mr. Wada, now 27 years old, said the hacking reflected Coincheck’s rush to expand its business without always adopting the latest security. Mr. Wada and a Coincheck spokeswoman didn’t respond to repeated messages seeking comment.

Among other things, Coincheck kept the customers’ NEM in “hot wallets,” meaning the accounts were connected to the internet and more easily accessed by hackers.

Coincheck was one of the many ambitious startups that rose to prominence after the demise of Tokyo-based Mt. Gox, which was once the world’s biggest bitcoin exchange before going bankrupt in 2014. Mt. Gox said it suffered a hacking attack that led to around $450 million in losses based on bitcoin’s price at the time.

Mr. Wada, who attended the elite Tokyo Institute of Technology, had already experienced startup success when he helped found a web platform for people to post short autobiographies. One of the stories went viral and turned into a hit book and movie.

A mentor to Mr. Wada said in an interview that the entrepreneur’s elders told him to stay away from cryptocurrencies, believing the Mt. Gox affair would prove the death knell of the idea.

Mr. Wada didn’t listen. He said he had no doubt that cryptocurrencies would soon become a widely used financial tool and opened the Coincheck site for business in 2014.

It was a prescient call. The value of bitcoin spiraled thanks to an investment fever, and some businesses in Japan started accepting bitcoin as a payment method.

One person who knows Mr. Wada called him a “brilliant programmer who can quickly turn an idea into actual software.” People involved in Coincheck’s operations say he developed much of the site’s software, which won plaudits for being easy to use.

In a 2016 interview with Wired’s Japan website, which named him a winner of its “Innovation Award 2016,” Mr. Wada said the bitcoin community reminded him of the internet’s freewheeling early days. “I feel like we’ve gone back to the internet as it should be,” he said.

By last year, Coincheck was describing itself as the largest cryptocurrency exchange in Japan by trading volume, as new investors clamored to get in on the gains in bitcoin and other currencies. One of Coincheck’s advantages was its offering of 13 kinds of cryptocurrency, a bigger range than its local competitors.

Mr. Wada and his partner in the business, 37-year-old Yusuke Otsuka, were confident they had learned the lessons of Mt. Gox.

Mr. Otsuka said in 2014 that the collapsed exchange had insufficient security and predicted a similar case wouldn’t happen again. Mr. Otsuka even delivered a lecture at the Tokyo Metropolitan Police Department last September about cryptocurrency security challenges, according to a company blog.

But engineers who worked for the duo said their company came to focus more on expanding the business than on security. Some of the new currencies it handled didn’t have strong security built into them, making them unsuited to the amateur investors who crowded onto Coincheck’s site, say specialists in financial technology.

In May last year, Coincheck started quoting wildly inflated prices for some currencies. It had to shut down the exchange for hours and cancel some transactions.

In an interview with the Nikkei newspaper, Mr. Otsuka said half-jokingly about the incident, “If we did that again, I’d be arrested. That’s how big our company has gotten.”

The interview was on Thursday. A day later, Messrs. Wada and Otsuka were wearing black suits and black ties and bowing before the television cameras to disclose that they had lost nearly all of their customers’ NEM cryptocurrency.

Mr. Otsuka said customer asset safety was the exchange’s top priority and he didn’t believe the platform’s security level was inadequately low. 

Mr. Wada said little, apart from repeated apologies. He hasn’t appeared in public since. - WSJ

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