Lee is presently CEO of BTCC, a separate Cayman Islands-registered cryptocurrency exchange company, according to a spokesman for the exchanges.
Dan Wasyluk discovered the hard way that trading cryptocurrencies such spil bitcoin happens te an online Wild Westelijk where sheriffs are largely absent.
Wasyluk and his colleagues raised bitcoins for a fresh tech venture and lodged them te escrow at a company running a cryptocurrency exchange called Moolah. Just months zometeen the exchange collapsed, the man behind it is now awaiting trial ter Britain on fraud and money-laundering charges. He has pleaded not guilty.
Wasyluk’s project lost 750 bitcoins, presently worth about $Three million, and he believes he stands little chance of recovering any money.
“It truly wasgoed zuigeling of a kneecapping of the project,” said Wasyluk of the collapse three years ago. “If you are commencing an exchange and you lose clients’ money, you or your company should be 100 procent accountable for that loss. And right now there is nothing like that te place.”
Cryptocurrencies were supposed to offerande a secure, digital way to conduct financial transactions, but they have bot dogged by doubts. Concerns have largely focused on their astronomical gains ter value and the likelihood of painful price crashes. Identically perilous, however, are the exchanges where posible currencies are bought, sold and stored. Thesis exchanges, which match buyers and sellers and sometimes hold traders’ funds, have become magnets for fraud and mires of technological dysfunction, a Reuters examination shows, posing an underappreciated risk to anyone who trades digital coins.
Yam-sized sums are at stake. Spil the prices of bitcoin and other potencial currencies have soared this year bitcoin has quadrupled – legions of investors and speculators have turned to online exchanges. Billions of dollars’ worth of bitcoins and other cryptocurrencies – which aren’t backed by any governments or central banks – are now traded on exchanges every day.
“These are fresh assets. No one indeed knows what to make of them,” said David L. Yermack, chairman of the finance department at Fresh York University’s Stern Schoolgebouw of Business. “If you’re a consumer, there’s nothing to protect you.”
Regulators and governments are still debating how to treat cryptocurrencies, and Yermack says the U.S. Congress will ultimately have to take activity.
Some of the freewheeling exchanges are plagued with poor security and lack investor protections common te more regulated financial markets, Reuters found. Some Chinese exchanges have falsely inflated their trading volume to lure fresh customers, according to former employees.
There have bot at least three dozen heists of cryptocurrency exchanges since 2011, many of the hacked exchanges zometeen shut down. More than 980,000 bitcoins have bot stolen, which today would be worth about $Four billion. Few have bot recovered. Burned investors have bot left at the grace of exchanges spil to whether they will receive any compensation.
Almost 25,000 customers of Mt. Gox, merienda the world’s largest bitcoin exchange, are still waiting for compensation more than three years after its collapse into bankruptcy ter Japan. The exchange said it lost about 650,000 bitcoins. Claims approved by the bankruptcy trustee total more than $400 million.
Te July, a federal judge ter Florida ordered Paul Vernon, the technicus of a collapsed U.S. exchange called Cryptsy, to pay $8.Two million to customers after he failed to react to a class-action lawsuit. The judge ruled that 11,325 bitcoins had bot stolen but did not identify the thief. “This is no different than bankgebouw robbers ter the Old Westelijk,” said David C. Silver, one of the plaintiffs’ attorneys. “Cryptocurrency is just a fresh vooraanzicht.” Vernon could not be reached for comment.
Another challenge for traders: government intervention. This month, Chinese authorities ordered some mainland Chinese cryptocurrency exchanges to zekering trading. The order, however, did not apply to exchanges based te Hong Kong or outside China, including those affiliated with mainland Chinese exchanges.
So-called “flash crashes” when cryptocurrencies abruptly plummet ter value are also a threat. Unlike regulated U.S. stock exchanges, cryptocurrency exchanges aren’t required to have circuit breakers te place to halt trading during wild price swings. Digital coin exchanges are also frequently under attack by hackers, resulting ter down times that can sideline traders at critical moments.
On May 7, traders on a U.S. exchange called Openbreken lost more than $Five million when it came under attack and couldn’t be accessed, according to a class-action lawsuit filed te Florida. During the incident, the suit alleges, the exchange’s price of a cryptocurrency called ether fell more than 70% and the traders’ leveraged positions were liquidated. They received no compensation. The exchange declined to comment on the lawsuit. Te a court filing, it asked for the case to be dismissed and said the claims should be determined by arbitration.
Another two flash crashes occurred this year on the U.S. exchange GDAX. The exchange said it compensated traders who lost money.
Not remarkably, many banks are leery of cryptocurrency exchanges and some have refused to overeenkomst with them. At a bankgebouw investor conference this month te Fresh York, Jamie Dimon, chief executive of JPMorgan Pursue, called bitcoin “a fraud” and predicted it will “blow up.”
Boycotts by banks can make it unlikely at times for exchanges to process wire transfers that permit customers to buy or sell cryptocurrencies with traditional currencies, such spil dollars or euros. Te March, Wells Fargo stopped processing wire transfers for an exchange called Bitfinex, leaving customers incapable to transfer U.S. dollars out of their accounts, except through special indeling with the exchange’s lawyer. Wells Fargo declined to comment.
Dealing with the banks “is a onveranderlijk and ongoing challenge,” said Bitfinex Chief Executive Jean Louis van der Velde. “Citizens and businesses being treated like criminals when they are not, including myself.” He declined to say which banks Bitfinex is now using.
Ter part, banks say they are worried about the due diligence cryptocurrency exchanges do on their customers to guard against money laundering, criminal activity and sanctions violations. While regulators require banks to verify who their customers are, some cryptocurrency trading platforms have performed minimal checks, Reuters found.
Internal customer records reviewed by Reuters from the BTCChina exchange, which has an office ter Shanghai but is stopping trading at the end of this month, display that te the fall of 2018, 63 customers said they were from Iran and another nine said they were from North Korea – countries under U.S. sanctions.
Americans are generally prohibited from conducting financial transactions with individuals ter Iran and North Korea. Statements on BTCChina’s webstek from 2013 and 2014 identify Bobby Lee, who holds American citizenship, spil its chief executive and co-founder. Lee is presently CEO of BTCC, a separate Cayman Islands-registered cryptocurrency exchange company, according to a spokesman for the exchanges.
The spokesman did not react to repeated questions from Reuters spil to Lee’s current role at BTCChina, and Lee did not comment on the punt. The spokesman said that BTCChina serves with Chinese law and “is run by a Chinese citizen, and its lícito representative is also a Chinese citizen.”
The spokesman originally said the exchange had “significantly strengthened” its compliance processes overheen the last two years, including “banning registrations from sanctioned countries such spil Iran and North Korea. Our system still has some inactivated accounts from some sanctioned countries for audit and logging purposes.” He said “most” of those accounts had never bot used to trade.
He straks said that BTCChina has never had any North Korean customers and “has had only one Iranian customer.” The Iranian used a canap account te China, not Iran, “therefore all of that customer’s transactions on our trading toneel did not violate” U.S. sanctions, the spokesman said. He said “BTCC has never had and does not have any North Korean or Iranian customers.”
The U.S. Treasury Department’s Office of Foreign Assets Control ter Washington, which enforces economic and trade sanctions, declined to comment.
Te mid-2018, the Chinese exchange hired a compliance analyst to help profesor any suspicious activity on the trading toneelpodium. It selected Constance Yuan, then 23 years old, who told Reuters she had no prior formal training ter compliance. On hier LinkedIn pagina, she listed hier title spil “Senior compliance manager.”
“I wasgoed a bit astonished,” Yuan said of hier hiring. “I felt I had no practice, and it wasgoed a pretty big responsibility.” She said lawyers trained hier on the job, which she recently left.
The spokesman for BTCChina told Reuters it has had a vice voorzitter ter charge of compliance on its staff since 2013 and that person helped to develop a “robust” system to verify customers’ identities.
Mickey Mouse identities
Bitcoin, the very first digital currency to build up widespread acceptance, sprang up during the financial laagconjunctuur about nine years ago. Its attraction, early proponents maintained, wasgoed that it suggested a way to bypass banks and governments, and to conduct financial transactions more cheaply. Every transaction is validated and recorded on a public ledger called a blockchain that is maintained by a network of computers. While anonymous, the individual transactions are available for all to see on the internet. They are secured by cryptography, the computerized encoding and decoding of gegevens.
Mike Hearn, an early bitcoin developer, said bitcoin wasgoed primarily viewed more spil a hobby than a serious alternative to traditional money. “People didn’t truly think it could take off and get big,” he said. “It wasgoed a thought proefneming that happened to have some code.”
However bitcoin turned out to generate fat attention and media coverage, it is still not widely used by ordinary consumers. Few retailers accept it, and processing transactions on the blockchain remains much slower than payment card networks, despite some latest technical switches.
The rekentuig maker Dell, which announced ter 2014 that it would accept bitcoin payments, has stopped “due to low usage,” a spokeswoman said. At the U.S. online retailer Overstock.com, only a fraction of one procent of sales are transacted te bitcoins, according to the company.
“Most of the cryptocurrencies right now are more commodities than currency,” said Dan Schulman, chief executive of payments company PayPal. “You trade them based on what you think will toebijten to their value. They’re not indeed accepted by many merchants spil a currency.”
Instead, cryptocurrencies have proved attractive to those seeking anonymity.
Poloniex, a U.S. exchange, has permitted some customers to trade cryptocurrencies and withdraw up to $Two,000 worth of digital coins a day by providing only a name, an email address and a country, Reuters found. Te a statement, Poloniex said it “has spent considerable resources developing a culture of compliance and has systems te place to prevent users from manhandling the podium.”
The exchange isn’t permitted to accept Fresh York residents spil customers because it lacks a state license to operate a cryptocurrency exchange. But Reuters interviewed two Fresh York residents who had claimed that they lived elsewhere and were able to trade on Poloniex. A Poloniex spokesman said, “Any NY resident who submits false profile information te order to trade on our toneel is te breach of our terms of service.”
Informed by Reuters of the trading on Poloniex by Fresh York residents, the state’s Department of Financial Services said it would “take suitable act.” Ter a statement, the department said: “As Fresh York’s regulator of cryptocurrency, DFS will not tolerate any activity by unlicensed operators who attempt to conduct business te the state.”
Ter June, a former U.S. federal prosecutor testified before Congress that criminals – including distributors of malicious code called ransomware, “large drug kingpins and serial fraudsters” – were increasingly using unregulated foreign exchanges that don’t verify their customers.
“Criminals can open anonymous accounts, or accounts with phony names to fly under the radar of law enforcement,” Kathryn Haun, a former assistant U.S. attorney, said at a congressional hearing. “Thus, wij have received ‘Mickey Mouse’ who resides at ‘123 Main Street’ ter subpoena comes back.”
Haun left the Justice Department ter May and joined the houtvezelplaat of Coinbase, which runs the GDAX exchange. She told Reuters she wasgoed affected with Coinbase’s team and vision. A class-action lawsuit wasgoed filed last year against Coinbase on behalf of customers of the collapsed Cryptsy exchange. It claims that Coinbase converted bitcoins allegedly stolen from Cryptsy into about $8.Two million that wasgoed then withdrawn. Haun and Coinbase declined to comment on the case, te a court filing, Coinbase denied any wrongdoing.
Te July, U.S. authorities shut down the webstek of the BTC-e exchange, one of the world’s largest, and ordered it to pay a $110 million fine. The Treasury Department said it had “facilitated transactions involving ransomware, rekentuig hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.”
BTC-e required only a username, password and email address to open an account, authorities said.
Reuters wasgoed incapable to voeling BTC-e, whose saco of operations wasgoed unclear, tho’ it proceeds to have a webstek using a Fresh Zealand domain name. It now forwards to a fresh exchange called WEX, which didn’t react to a request for comment.
One of the criteria traders say they use to select an exchange is trading volume. The more trades an exchange treats, the swifter buyers and sellers can be matched.
From about early 2014 until late January this year, Chinese exchanges accounted for about 90% of entero bitcoin trading volume, according to the webstek bitcoinity.org, which collates trading gegevens reported by exchanges.
Some of that high volume occurred because traders were attracted by the fact that thesis exchanges at that time charged no transaction fees. But some of the volume wasgoed fake, six former employees at two Chinese exchanges told Reuters. Artificially pumped-up volumes te China could have affected the often volatile price of bitcoin, because investors elsewhere pedagogo and react to the activity.
One exchange, OKCoin, inflated volumes through so-called wash trades, repeatedly trading nominativo amounts of bitcoin back and forward inbetween accounts, two former executives said. The transactions were logged on the exchanges but not recorded on the blockchain, according to a former employee.
Zane Tackett, who held several positions at OKCoin from 2014 to 2018 including international operations manager, said he resigned partly out of concern about its fake volumes. “The motivation is to seem larger than their competition,” he said.
Changpeng Zhao, a former chief technical officer at OKCoin, stated on the webstek reddit.com te May 2018 that OKCoin used bots that “are designed to pump up volumes.” Ter a response to the postbode, OKCoin said: “OKCoin does not need to have any fake volume.”
Te a statement to Reuters, OKCoin said it “never artificially inflated trading volume.”
Four former employees at BTCChina, including one of its co-founders, said the exchange had also engaged te faking its trading volumes. A spokesman for the exchange said it “has never faked its trading volumes.”
The Chinese exchanges’ sky-high volumes emerge to have caught the attention of the People’s Bankgebouw of China. After a series of inspections by the central canap, Chinese exchanges te January began charging trading fees spil exchanges elsewhere typically do and volumes ter China plummeted.
“A deceptive market is not a healthy market,” said Xiaoyu Huang, a co-founder of BTCChina, who said that the exchange had faked some of its volume. “And, te fact, it wasgoed the fake volumes that made the government mistakenly believe that the Chinese market accounted for so much of the universal trading volume, and caused the government to supervise bitcoin te China so forcefully.” Huang said he had left the company ter part overheen a disagreement overheen its direction.
The spokesman for BTCChina said “the Chinese government’s scrutiny into bitcoin exchanges earlier this year wasgoed because of a dramatic increase ter bitcoin’s price.” China’s central canap declined to reaction questions.
Exchanges are frequently targeted by hackers, causing extra problems for investors.
Walle Weiland, a Chinese trader based te Guangxi ter southern China, said he wasgoed trading futures te bitcoin and a cryptocurrency called litecoin on OKCoin.com on July Ten, 2018. Betting that the litecoin price, then about $Four, would rise, he bought contracts for long positions using borrowed money. This meant that he only had to waterput down 10% to trade. Trading with that much leverage meant that a petite stir te the price could either wipe out his positions or greatly magnify his gains.
Instead of rising spil Weiland had hoped, litecoin’s price began falling and OKCoin’s webstek slowed down, Weiland said. He wasgoed incapable to buy or sell. When he regained access to his account, his contracts had bot liquidated. He said he lost Trio,136 litecoins, then worth about $12,500.
OKCoin announced on its blog that it had bot a victim of “large scale” attacks by hackers who flooded its websites with traffic, preventing some users from accessing their accounts.
On July 13, Weide suffered a 2nd, similar event with bitcoin. He said the exchange’s webstek became inaccessible, his contracts were liquidated and he lost 57.9 bitcoins, then worth about $16,900.
Weiland said he complained and OKCoin covered 15% of his bitcoin losses, waived one month’s worth of trading fees and talent him a mobile phone charger. He said he also filed complaints with police and five government agencies, including the central canap and the China Securities Regulatory Commission (CSRC). Most disregarded his complaints, he said, and those that replied told him his problem didn’t fall under their jurisdiction.
“They said to find the relevant department. But I don’t know what other relevant government departments there are,” he said.
A person close to the CSRC said cryptocurrency exchanges fall under the purview of the central handelsbank, which declined to response questions.
Ter a written response, OKCoin said it had invested powerfully te guarding against attacks and there wasgoed no precedent for multinational corporations to compensate users for service interruptions. “All trading’s profit or loss should be solely contacto by the users,” OKCoin said. To open an account, customers voorwaarde agree to terms of service that absolve the company of liability for losses from “hacker attacks” and “computer virus intrusion or attack.”
Inaccessible websites aren’t the only way investors can lose money on exchanges. Te February, a hedge fund called GABI, based ter Suéter, bought a futures contract on OKCoin’s Hong Kong exchange, betting the price of bitcoin would rise. But the contract wasgoed liquidated soon afterwards when another investor placed a giant bet the other way that dwarfed it.
Ter regulated exchanges, such spil the Chicago Mercantile Exchange, there are thresholds to the size of futures contracts to prevent one trader from predominant the market. That’s not the case on some cryptocurrency exchanges.
Te its online February newsletter, the hedge fund’s manager called the incident “clear market manipulation.” He said he questioned OKCoin about it: “They confirmed to us that there were no position thresholds whatsoever and that people were free to do whatever they desired ter their ‘glad trading environment’ (yes, they used those presente words).”
The February bitcoin contract cost the hedge fund inbetween $400,000 and $500,000, according to a person accesible with the matter.
OKCoin said the “two customers traded fairly” and “there is no regulation restricting the trading strategy.” Hong Kong’s Securities and Futures Commission declined to comment.
“An absolute disgrace”
Te the past 15 months, Bitfinex, one of the world’s largest cryptocurrency exchanges, wasgoed fined by a U.S. regulator, lost $72 million worth of bitcoins to hackers and wasgoed cut off by Wells Fargo, one of America’s thickest banks.
Bitfinex wasgoed set up four years ago. Its hundreds of thousands of clients include banks, investment funds and other cryptocurrency exchanges, according to van der Velde, its CEO and co-founder, and its lawyer.
It has no head office, is wielded by a British Cherry Islands company and is managed by three executives who live te Hong Kong, the United States and Europe. Besides its Dutch chief executive, they include Chief Financial Officer Giancarlo Devasini, who is Italian, and Chief Strategy Officer Philip Potter, an American who merienda worked at Morgan Stanley.
Ter June 2018, the U.S. Commodities Futures Trading Commission fined Bitfinex $75,000 for suggesting “illegal” cryptocurrency transactions and failing to register spil a futures commission merchant.
“We were glad with the terms of the settlement,” said Stuart Hoegner, Bitfinex’s universal counsel.
Ter August 2018, hackers stole 119,756 bitcoins from Bitfinex.
Spil customers and others went online to vent their anger – “@bitfinex is an absolute DISGRACE to the #bitcoin community and needs to go,” one Twitter user wrote – Bitfinex executives weighed their options. Coaxed they couldn’t get a bankgebouw loan and lacking insurance, they determined to reduce their customers’ balances by 36%, regardless of whether the investor accounts had bot hacked a technology known spil the “socialization” of losses.
The exchange distributed IOUs te the form of digital tokens, which could be traded on Bitfinex. Some customers converted the tokens into equity te the company that operates the exchange. Albeit the exchange zometeen redeemed the tokens ter utter, some customers had already sold them at a loss.
Ter an vraaggesprek, van der Velde voiced regret for the hack. But he defended his rock-hard’s response. “I felt – and I still feel – terrible for those people who lost their money,” he said.
He declined to discuss how the hack happened, citing an ongoing police investigation. “We took responsibility. How many financial institutions te the past can you find that say within a very brief time, ‘Wij are good for that loss, and wij kwestie an IOU for that’? Please find mij one.”
He also said Bitfinex has acted transparently, has rigorous know-your-customer procedures and cooperates with law enforcement agencies.
Despite its numerous challenges, van der Velde said Bitfinex is now treating about $12 billion ter trades a month and is “very profitable.” Last year, the exchange said it expected to make a $20 million profit te 2018. Despite all the Wild Westelijk problems besetting cryptocurrencies, van der Velde predicted the final amount will turn out to be even higher.