Here are some stories you might find interesting — and the links to find out more about them.
Three stories about exchanges caught my eye this week — and all of them highlight why security and strict monitoring of suspicious behavior on exchanges is so important.
The first is about how Binance has frozen accounts emanating from the WEX exchange, amid fears of money-laundering. The second is about concerns that the Japanese exchange Coincheck may not recover from the $500 million hack earlier this year. And the third is that Hong Kong seems to be moving in the direction of regulating exchanges.
These stories probably remind us that “Buyer beware”. For traders, it is also “Seller beware.”
What is WEX and why is Binance suspicious?
Date: 1 November 2018
In July of this year, customers started experiencing difficulties with withdrawals from the Singapore-based exchange called WEX. The official response was that this was due to maintenance and database migration. However, the difficulties have continued.
By October, users had begun to talk about a possible exit scam by WEX and many have reported their concerns to the police. There is also a threat of class action, although it is not certain what this will achieve.
And now Binance have frozen WEX accounts.
From the start of WEX there have been some questions and some strange patterns of behaviour.
There has always been some question about the legitimacy of WEX. Did it just take over from the BTC-e exchange, shut down because of money-laundering? WEX has denied this, but skeptics point to the similarities in the design, functionality and trading options of the platform. They also query why it was so easy for WEX to acquire all the previous BTC-e customers.
WEX claims to be based in Singapore, but it uses a New Zealand domain.
Recently, there has been
some question about ownership. The official owner and CEO, Dmitrii Vasilev, has claimed that he has lost control over the exchange to unidentified persons. There has been speculation that these people intend to relocate the headquarters of WEX to Crimea, and to get it incorporated in the Ukraine.
There have been price disparities compared to other exchanges. For example, in July the WEX prices for both the USDT (Tether) and the ZCash were double the prices on other exchanges. This may have been engineered, as these were the only two coins that could be moved out of the exchange. So, customers were converting everything they had on the exchange into these coins (at a premium price), knowing that they were going to have a 50% loss wherever they moved them to.
Similarly, the BTC (Bitcoin) price was significantly above the price index. At one point in July, while Bitcoin’s price on other markets was at around $6,000, it was almost $9,000 on WEX. ETH was trading at $309 compared to $204 elsewhere. On 2 November these disparities continue: the BTC at $8,618 and ETH at $323, compared to about $6,350 and $198 elsewhere.
Binance freezes WEX accounts
Binance has frozen accounts reportedly moving millions of dollars of cryptocurrencies from WEX to Binance. This is as Binance fears that it would itself be caught up in money laundering accusations.
According to a tweet from the CEO of Binance,
“The identified accounts are frozen, please report to law enforcement and have a case number. We will work with LE. This is part of centralization we hate too, dealing with other exchange’s mess (we don’t even know the details). But we will do what we can.”
The WEX exchange has been silent since about August, with no tweets nor any responses to customers.
Users are hoping that Binance will somehow pay back the money that they have been unable to withdraw from their accounts since July. However, anything they get back will probably happen only after police action and intense legal interventions.
There is certainly something very strange going on at WEX!
Can Coincheck recover?
Date: 1 November 2018
The Coincheck story shows just how catastrophic a hack can be. Between April 2017 and January 2018, the exchange earned 53,2 billion yen ($490 million). This can be compared to the 66.1 billion yen earned for all of 2017 by the Japan Exchange Group, owners of both the Japanese Stock Exchange and the Osaka Exchange.
In January 2018, Coincheck suffered the biggest hack in history, losing $538 million of XEM, the native currency of the NEM blockchain.
As a result, it lost its license to operate as an exchange, and is required to re-apply to the Japanese Financial Services Agency (FSA).
To meet this requirement Coincheck has taken several big steps. It has negotiated a take-over by Monex, a Tokyo-based financial services company, in an attempt to gain the capital to repay its customers. It has changed the management team. It has upgraded its security systems and staffing. It has barred new users from its platform, and has been limited to trading by current customers, leading to a 66% decline in turnover. Some limited registration of new users and limited trading in coins other than Bitcoin seem to have started in the past week.
Monex appears hopeful and has plans to turn Coincheck into a “crypto asset bank”, replacing traditional payment cards.
Despite all of this, there still seems to be some doubt as to when they will re-open or whether they will regain their license.
Is Hong Kong moving to regulate crypto exchanges?
Date: 1 November 2018
Hong Kong has to date been very tolerant of cryptocurrencies and exchanges. As recently as October 2018, Carlson Tong Ka-shing, the Chairman of the Securities and Futures Commission (SFC), reiterated that banning of cryptocurrencies and cryptocurrency trading was not the correct approach. Hong Kong is therefore not taking the same approach as China has done.
However, the SFC has issued a statement, dated 1 November 2018, setting out some rules for funds that choose to deal in cryptocurrencies. In the same statement, there is a hint of future formal regulation of exchanges.
The Chief Executive of the SFC, Ashley Alder, addressing a fintech forum this week, spoke of market manipulation and abuse, scandals and fraud.
The proposed regulations for crypto exchanges, according to the SFC statement, “Should be comparable to those applicable to existing licensed providers of automated trading services”. The goal is to encourage the responsible use of new technologies while providing more protection for investors.
The Hong Kong statement follows similar tightening of approach in Taiwan. Taiwan seems to have moved away from its previous stance of not regulating the sector, towards an announcement that it would be releasing rules for ICOs in June of 2019.
The good news about these moves is that it seems to reflect a growing acceptance that Bitcoin and altcoins are not a flash in the pan. They are going to be around for some time!