Cryptopia cyber-attack: still a mess, the liquidators filed a High Court application and the hearing scheduled for Feb 3

It is almost a year from the Cryptopia cyber-attack that happened, but the situation is still a mess, with the most basic question unresolved and customers not seeing any funds returned.

Cryptopia founders Rob Dawson and Adam Clark.

Fortunately, it’s heading for a precedent court trial likely in February that might determine customers’ rights to their funds when a crypto-exchange occurs – whether due to hacking or commercial misfortune.

Hacker attacked Christchurch-based crypto exchange

On January 14, the crypto exchange based Christchurch reported to the police that it was suffered a hack. Despite no exact sum was given, some experts later estimated it was between $ 23 million and $35 million.

Right after being attacked, Cryptopia went offline and only re-opened a short time, on a limited basis (customers were given “read-only” access to their account) before falling over. Then, on May 15, David Ruscoe and Russell Moore from Grant Thornton New Zealand were appointed as liquidators of Cryptopia. Moreover, the business operates in the US also went bankrupt, and Ruscoe and Moore can retrieve data from servers in Arizona that hosted Cryptopia’s services.

Cryptopia cyber-attack: still a mess, the liquidators filed a High Court application and the hearing scheduled for Feb 3

Cryptopia – Cryptocurrency exchange

Besides, on the police, they did not have a major breakthrough to report when approached and even can not provide a broad time frame for when the case could be resolved. As Greg Murton, Detective Inspector who is heading the inquiry shared that “We are committed to identifying the actor, or actor, responsible. However, this is still a complex and challenging investigation”.

In addition, The high-tech crime team of the police is working to analyze a large amount of digital evidence along with information obtained from various cryptocurrency exchanges worldwide where the stolen currency has transacted through. Murton said, “Valuable support and assistance are still being furnished by our international regulation enforcement partners including the FBI”.

On the other hand, at one level, the liquidators have had more immediate success. In the six-month report issued on December 11, Ruscoe and Moore stated that they had recovered a negligible $ 10.9 million after recovering the $ 5 million sitting in a third-party trust fund at the liquidation time, $1m in funds on-hand, plus $4.4m from cryptocurrencies outside the customer’s digital wallets that were converted into fiat (regular) currency) following order of the Supreme Court in May plus the sale of miscellaneous assets.

According to that, after subtracting the costs as $689,000 in legal fees, $823,000 in liquidators’ fees and more than $1m in costs associated with rent, salary and server fees because some of Cryptopia’s employees were kept to help troubleshoot corporate issues, Ruscoe and Moore had a net $7.2m on hand. Therefore, it is more than enough to pay preferential creditors (employees owed $200,000; IRD is completing an audit to determine if any concessional taxes are owned) and 26 unsecured creditors collectively $3 million.

Particularly, having about the 900,000 active Cryptopia customers at the time of the Christchurch-based, global exchange’s collapse.

In general, there are two main complications here: Firstly, establish how many customers are owed. And secondly, establish in legal terms if their cryptocurrencies should be identified as assets under the Companies Act (1993). That, in turn, will inform whether Cryptopia customers are trustees, effectively guaranteed creditors should be paid off – or if their digital currency will be owned.

The liquidators still in an “early phase” of identifying

The first point, how much was taken in the attack is still a very open question. The liquidators have yet to collate the funds in their customers’ accounts or existing digital wallets with the amount prior to the January 15 hack (then offline exchanges).

You maybe think this would be a straightforward process, because of advocates of the blockchain like to promote its pinpoint accuracy and transparency. However, things were messier in Cryptopia’s case.

“When Cryptopia held details of customer holdings and announced these on the exchange, the crypto-assets themselves were pooled (co-mingled) in coin wallets,” said in their six-month report. They continued, as a centralized platform “customers’ trades would occur in the exchange’s internal ledger without confirmation on the blockchain” and it will take “some time” to eventually get a reconciliation.

Currently, the liquidators are also still in an “early phase” of identifying all the wallet holders.

Finding the legal direction

On Oct 1, Ruscoe and Moore filed a High Court application about determining whether cryptocurrency should be defined as property, and the hearing scheduled for Feb 3 next year.

The key question is given that Cryptopia, like nearly all cryptocurrency exchanges, has not offered any guarantees around funds, further, was not subject to any government guarantees. It also said that the liquidators are neutral, they simply want legal direction.

Besides, they noted that if the court decides cryptocurrency is not property, then “there could well be a lot of litigation” and the already messy and complicated situation would get messier. Moreover, Ruscoe says he and Moore will give an interim update after the Feb 3 hearing.

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