Canadian case provides valuable lessons for crypto users
By Mia Clarke, AdvocateDaily.com Associate Editor
While cryptocurrency exchanges may not be the Wild West they once were, consumers are still advised to venture carefully into online currency territory, says London, Ont. cybersecurity lawyer Peter Dillon.
“In the growing cryptocurrency sphere, some exchanges have gained legitimacy and trustworthiness far beyond some of their competitors,” says Dillon, partner with Siskinds LLP. “Through research, it is possible to find trustworthy exchanges if you’re interested in investing in this technology.”
But a recent Canadian example illustrates that finding the right exchange isn’t the end of the story, he tells AdvocateDaily.com.
In that case, the company was legitimate, and its protocols against cyber-hacking were robust — so secure, in fact, that the secret to accessing millions of dollars’ worth of digital currency appears to have died with its 30-year-old founder in December, reports the CBC.
“The system was so secure because he was the only one who had access to it,” says Dillon. “Even the world’s top securities experts and tech guys can’t get to these coins.”
Approximately 115,000 former clients claim they are owed about $250 million, says the CBC report.
“According to court documents filed in Halifax, the CEO took sole responsibility for the handling of funds and coins on the website in order to avoid being hacked,” says Dillon.
“According to an affidavit filed by his widow, the CEO was the only person with access to the wallet as he had moved a majority of the digital coins into cold storage in order to avoid being hacked. His concerns were not without merit as a similar exchange was hacked in 2014 and lost upwards of US$500 million.”
Dillon says the recent Canadian case provides valuable lessons for consumers.
“While storing cryptocurrency online is convenient, it’s by far the least safe way,” he says.
“Instead, use either a desktop wallet, which is only accessible from the single computer through which the wallet is downloaded, or a hardware wallet, which is installed onto a USB and is only accessible with access to the USB. These wallets often require access keys or passwords to access them.”
Dillon says if the users of the Canadian company, which is in the middle of bankruptcy proceedings and has filed for creditor protection, had moved their cryptocurrency from the online wallet to a desktop or hardware wallet, the assets would have been safe — and more importantly, still accessible.
“If clients had chosen to store their own, they wouldn’t now be wondering if they’ll ever see their investment again,” he says.
Cryptocurrency began amid the fallout of the economic downturn in 2008, explains Dillon. It started as a digital coin that could be bought, sold and exchanged on the internet using a series of numbers and letters to represent the buyers and sellers. That information is kept in a digital wallet, and the ledger that keeps track of cryptocurrency transactions is called blockchain.
He says the initial lure for users was that it was anonymous and couldn’t be traced, which is why it was popular with money launderers and others with nefarious intentions.
While it’s now considered more “legitimate and mainstream,” it remains unregulated, says Dillon.
“They’re working on legislation to protect consumers — and also to control money laundering,” he says.
Dillon says the best way to safeguard the industry is to regulate the exchanges because that’s the only place that you can see fiat money — government-issued currency that isn’t backed by a commodity like gold — being used to buy cryptocurrency.
“It’s the only place we can actually see where the money is moving," he says.
“As the technology gains more widespread acceptance and is used more commonly in everyday markets, it’s important that Canadian regulators ensure that people do not lose access to their accounts due to the death of one member of an exchange.”