Can Traditional Finance Save A Hacked Crypto Exchange?

The aftermath of the January 26 hack of more than $500 mln worth of NEM from Japanese crypto exchange Coincheck has led to a regulatory re-examination of Japan’s crypto industry, so far culminating in the $33.5 mln sale of the hacked exchange to Japanese financial services provider Monex Group.

Japan had been one of the leading countries in crypto adoption when it legalized Bitcoin as a payment method a year ago. The move was made in part to prevent another hacking incident such as that of the now defunct Japanese crypto exchange Mt. Gox — arguably the most infamous, and previously the largest hack in crypto history, when around $473 mln in Bitcoin was stolen from investors in 2014.

However, this January’s Coincheck hack, which came four years after the almost-equally large Mt. Gox hack, prompted Japan’s Financial Services Agency (FSA) to inspect and issue business improvement notices to eight of Japan’s crypto exchanges currently awaiting registration, including Coincheck, while temporarily halting the activities of three more.

Coincheck has also been hit with several lawsuits from crypto traders both over their decision to freeze withdrawals of all cryptocurrencies right after the attack as well as generally suing for damages of up to around $800,000.

Now four months after the attack, Coincheck has already begun partially refunding users, as well as unfreezing the withdrawals and trading of several cryptocurrencies on the exchange, not, however, including NEM.

Monex acquires Coincheck

As the latest step in Coincheck’s efforts to keep the exchange moving forward in its plan to keep operations running and file for registration as an official crypto exchange in Japan, the company has decided to accept the Monex Group’s offer of 3.6 bln yen (around $33.5 mln) for the acquisition of 100 percent of the shares in Coincheck. The offer had been rumoured since the start of the month, but only officially confirmed by both parties on April 6.

The news of Monex Group’s acquisition of Coincheck sent the company’s share price way up, showing an increase of almost 20 percent by traditional market’s close on April 6.

The acquisition announcement further shows that Coincheck has taken a distinctly different post-hack route from Mt. Gox, which had filed for bankruptcy after its hack and has still not yet refunded all affected users. In contrast to Mt. Gox,  Coincheck immediately announced a tracking system for the stolen NEM coins developed by the NEM Foundation and made a promise to refund users, making it clear that the exchange wasn’t planning on letting the hack be the end of their story:

”Along with our ongoing efforts to file applications to be registered as a Cryptocurrency Exchange Service Provider with Financial Services Agency, we will continue business.”

Why such a low price tag?

The $33.5 mln price tag for 100 percent of Coincheck’s shares unquestionably seems low, especially considering the fact that Coincheck allegedly has enough cash flow to pay back all 260,000 users who lost NEM in the hack.

The initial sum, however, doesn’t tell the whole story. The Monex press release announcing the acquisition notes that the amount was calculated based on an estimate of Coincheck’s net assets by the end of the March 2018 fiscal year, and clarifies that it is not a stand alone price: both Monex and Coincheck shareholders have also agreed on what is known as a “contingent payment”:

“The additional payment may be made up to a half of aggregated sum of net income over the three upcoming fiscal years, deducting a certain level of realized business risk.”

According to the press release, Coincheck’s net income for the fiscal year ending on March 31 will not be less than that of March 2017 — 540 mln yen (around $5 mln) — even after the refunds are taken into account. However, if the exchange’s net income stays around $5 mln annually, the total additional sum to be paid remains inexplicably low.

During a press conference on April 6, Monex CEO and founder Oki Matsumoto said that the relatively low price had nothing to do with any possible risk in acquiring the hacked crypto exchange:

“It is not that there is a big risk… we confirmed that the risk is limited in the course of due diligence (asset valuation) and I judged that I could make a profit.”

The press release notes that “at this moment, the Company is not able to determine the impact of this share acquisition on the Company and our group companies’ business performances. Further disclosure will be made when it becomes necessary.”

Why Monex bought

As regards the impetus of the Coincheck bid, the press release describes how the crypto exchange’s acquisition is a “core part” of Monex’s “new beginning” vision:

“We recognize blockchain technology and cryptocurrencies as next-generation technologies and platforms which are likely to drastically change the way people approach money. Therefore, since we announced ‘MONEX’s new beginning’ last October, we have considered entering the cryptocurrency exchange business.”

Monex also notes that they formed the Monex Cryptocurrency Lab in January as part of the “Monex’s New Beginning” initiative.

Monex is also reportedly not fazed by the business improvement order that Coincheck received from the FSA, noting that they will use their online securities “expertise and human resources of business administration, system risk management, and customer asset protection system” to promote a secure setting at the crypto exchange:

“Through integrating Coincheck’s knowledge on blockchain technology and cryptocurrency with our knowledge on financial industry, we will accelerate the “MONEX’s new beginning” and contribute to the sound development of the cryptocurrency industry. The Company and Coincheck aim to develop a common vision to design the way of finance of the future and provide new values.”

Monex had not replied to Cointelegraph’s request for comment by press time.

Why Coincheck sold

Koichiro Wada, the CEO of Coincheck, said at an April 6 press conference that Coincheck had chosen to accept Monex’s offer among the other bidders for the sake of expediency. Coincheck had not responded to a request for comment by press time.

Coincheck’s new future

Monex’s acquisition of Coincheck will take place on April 16, and while Coincheck founders Koichiro Wada and Yusuke Otsuka will leave their CEO and Director positions, they will remain connected to Coincheck as operating officers. The Managing Director of Monex Group, Toshihiko Katsuya, will be appointed as the Representative Director of Coincheck, and Matsumoto will assume the role of Director on the executive board.

Monex Group will also make Coincheck a wholly owned subsidiary from the consolidated financial results for the first quarter of the the fiscal year ending March 31, 2019.

According to Matsumoto, Monex plans to continue the process of filing with the FSA to register as a cryptocurrency exchange, citing the figure of “two months” as a goal towards registration:

“And out of common sense, without registering as a crypto exchange, we would not restart the service at all.”

Matsumoto also added during the press conference that Coincheck’s future would include an initial public offering (IPO) as a way to bring more capital into Coincheck:

“The crypto exchange business will end up being similar to a banking business, so I think we will need more capital in future. In addition, IPOs and external audits will strengthen the company’s management system.

NEM’s reaction

NEM’s price had increased by almost 30 percent on Jan. 27 after Coincheck’s announcement that they would be refunding all affected customers.  The recent news of the Monex acquisition has also led to a slight rise for NEM. According to data from CoinMarketCap, it seems that the April 3 rumors of the acquisition actually contributed more to a price bump than the official announcement on April 6.

The NEM team had not responded to Cointelegraph’s request to comment by press time.

Potential for success?

Coincheck has set out to change the example that Mt. Gox set back in 2014, forging a new framework for “what to do” in the aftermath of a hack of around half of a billion dollars in cryptocurrency. The traditional markets’ positive response to the news of the acquisition of Coincheck by a otherwise traditional financial services provider may be a vital piece of the puzzle for building legitimacy for a hacked crypto exchange.

And while the future of Coincheck cannot be determined with any certainty, as the FSA sends out a string of business improvement and halt notices to crypto exchanges, perhaps Monex Group’s support of Coincheck will lend the security that the exchange needs to overcome the blows to both the company’s finances and reputation caused by the massive hack.

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