DMM Bitcoin, the cryptocurrency exchange of Japan’s DMM Group, suffered a shocking breach of 42 billion won worth of Bitcoin. This is the second largest after the ¥58 billion breach at Coincheck in 2018.
Analyze the background and cause of the incident
At 1:26 PM on March 31, DMM Bitcoin discovered that some bitcoins had been fraudulently exchanged. These bitcoins had been held in a “cold wallet” that was not connected to the internet, but it appears that they were either hacked or the password was compromised during the process of moving them to the internet. DMM Bitcoin offers more than 40 cryptocurrencies and has more than 370,000 customer accounts.
Japan’s cryptocurrency management strategy
In Japan, the principle is to manage cryptocurrencies in a secure way, such as a “cold wallet”. If you manage using a ‘hot wallet’, you must hold the same size reimbursements. However, this incident raises the possibility that DMM bitcoins may have been insecure.
Global Cryptocurrency Hacking Cases
Cryptocurrency hacking is happening all over the world, not just in Japan. The Mount Gox hack in Japan in 2014 was followed by the Coincheck, Bitpoint Japan, and TechBureau breaches in 2018. In 2022, $600 million was stolen from the Ronin Network project, and $570 million worth of tokens were stolen from Binance in the same year.
Countermeasures by the Financial Services Agency of Japan
The Financial Services Agency of Japan has recognized that the possibility of hacking into cryptocurrencies cannot be completely eliminated and has strengthened its safety net. Under the revised Funds Settlement Law of 2019, cryptocurrency exchanges in Japan are obligated to hold funds in trust banks. Even when FTX Trading went bankrupt in 2022, FTX Japan’s investors were protected. In relation to this incident, the Financial Services Agency has also taken measures against DMM Bitcoin to prevent recurrence and protect customer assets.
The rise of Bitcoin ETFs
The incident highlights the difficulty of managing bitcoin, and is fueling interest in bitcoin exchange traded funds (ETFs). Bitcoin ETFs can be traded like stocks through a brokerage account, and investor assets are protected even if the brokerage firm goes bankrupt. The U.S. Securities and Exchange Commission (SEC) approved a Bitcoin ETF earlier this year.
The potential for a Bitcoin ETF in Japan
Bitcoin ETFs are not currently available for development in Japan. This is because, according to Article 3 of the Enforcement Decree of the Investment Trust Act, cryptocurrencies are not among the “specified assets” that can be included in an investment trust. Japanese securities firms must file with the Financial Services Agency to handle foreign ETFs. There are even calls for a ban on Bitcoin ETFs in Japan.
Conclusion
The massive DMM Bitcoin breach has once again reminded us of the importance and difficulty of managing cryptocurrencies. These events are expected to bring more attention to the safe custody of cryptocurrencies and alternatives such as Bitcoin ETFs.
