Cryptsy was once one of the highest volume exchanges in the virtual currency world. Now, it's completely defunct.
Back in late 2015, after a couple years of being one of the higher volume virtual currency exchanges, it was announced that Cryptsy was insolvent and would have to suspend it's business until it's clients could be repaid.
At the time it was shocking, but it didn't really come as that much of as surprise to savvy Cryptsy customers because they could see the writing on the wall for months. The company had been having increasingly escalating service issues before the final announcement came months later.
Following a similar path of decline to that of Mt. Gox, which was one of the premier bitcoin trading exchanges before it also rapidly went under.
What Happened?
This is where things get a little murky. At the time when Cryptsy announced they would be suspending operations, the CEO Paul Vernon claimed that the company had been hacked to the tune of 13,000 Bitcoins and 300,00 Litecoins.
The company had found out about this months prior and had been operating on fractional reserves ever since. Which is why it had been having so many service issues. Needless to say when that kind of inventory was removed it was only a matter of time before the exchange collapsed.
At the time, the report was that one of the altcoins that Cryptsy had been supporting had malicious code in it's source which backdoored the exchange. It was able to run the code on the exchange platform and steal large amounts of virtual currency.
Who did the hacking?
At the time it was alleged it was an anonymous individual or individuals and the company was going to work at restoring customer funds.
However, shortly into an investigation it was revealed that the CEO of Cryptsy was likely the one doing the "hacking". Stealing customer funds and depositing them into his own personal accounts.
CEO Paul Vernon denies these allegations, but the proof according to Crypto's clients is pretty damming.
Vernon destroyed critical pieces of data just before the investigation began which would have helped locate some of the missing funds. The clients allege this was done in attempt to cover his own tracks. Vernon hasn't responded to those criticisms.
What's the latest twist?
In a complaint filed several months back Cryptsy's former customers alleged that the source of the money laundering should also be held accountable as well for the wrong doing's of Cryptsy's former CEO. That source is none other than Coinbase.
Coinbase is a regulated money services business in more than 30 US states and according to the complaint, they should have known that the approximately $8.3 million dollars in funds that Vernon was funneling through Coinbase was coming from questionable sources.
Vernon was claiming that it was coming from profits from the business, even though it was revealed quite easily that the business had no profits for months as they were barely able to stay afloat once the inventory was crippled by the "hack".
Now Coinbase finds itself in the middle of the controversy.
Coinbase originally sought to negotiate the dispute through arbitration, citing the agreements Vernon signed when Cryptsy began exchanging funds through Coinbase.
However, on June 1st, Judge Kenneth A Marra shot down the motions to compel arbitration and to stay discovery, arguing that Cryptsy customers weren't bound by the agreements that were signed by Vernon.
This means that there is likely no chance of the issue being resolved outside of court. This decision sets the stage for the suit against Coinbase to advance.
David Silver, one of the lawyers representing the former customers, had this to say following the judges decision:
"We believe that Cryptsy users that did not sign the contract with Coinbase are entitled to their day in court and to be judged by a jury of their peers. We are quite happy the court agreed with our thoughts, and the case is going to move forward in the public light."
What do you guys think, should Coinbase have known or done some kind of due diligence to find where those funds were coming from? Furthermore, in your opinion, does the agreement that Vernon signed cover Coinbase from any of the wrong doings the former customers are alleging?
Things could get very interesting here over the next several months.
The biggest take away from all of this?
I think the biggest take away from all of this and from this case in general are the signs to look out for when deciding if there is a possibility of a currency exchange collapsing.
There have been some tell tale signs letting us know that exchanges are not well. Increasing or escalating service issues seem to be one of the main signs that several of these now defunct exchanges had in common.
Without naming any names here, there is one very popular exchange that has been having a large number of problems lately. Hopefully it has just been related to the massive influx of new customers but it certainly should be raising a flag in the eyes of it's customers...
Be careful where you store your coins.
Stay informed my friends!
Sources:
https://news.bitcoin.com/cryptsy-bitcoin-exchange-announces-massive-theft-shuts-indefinitely/
http://www.coindesk.com/coinbase-to-face-trial-over-possible-role-in-cryptsy-exchange-collapse/
Image Sources:
https://news.bitcoin.com/cryptsy-bitcoin-exchange-announces-massive-theft-shuts-indefinitely/
https://www.coinbase.com/legal/user_agreement
http://themerkle.com/cryptopolis-altcoin-exchange-cryptsy-clone/
Follow me: @jrcornel
gox, mintpal, cryptsy, so many scams. we are survivors!
Yea lost a lot of coin there! I stopped mining and stopped working with crypto for about three years whoops all my Coin lost!
I wish we could do away with exchanges all together. P2P was the original purpose of Bitcoin.
Thanks for informing.... Didn't knew what happened... But now things are pretty clear..
Yep as soon as I heard of people having a lot of problems on this exchange it made me look to other sites.
I used cryptsy back in the day.... was lucky on that one but fell prey to some of the other scams.
Wow, such an eye opener ... many of these exchanges can immediacy shut down at anytime, never keep your tokens in an exchange guys 😲😲😲
The negetive thing with these crypto wallets is they do not care where funds are comming from and where funds are going. This gives hackers, criminals and terrorists opportunity to move money that is stollen or will be used to commit crime. Due dilligence should be done when huge amount of coin is being transfered or received however is all about gains and that is the limitations of blockchain technology isnt it? good post @jrcornel keep it up and following you for more
maybe i should take the money off of the exchanges.. but i just have so many different coins :(
Don't leave any significant amount on any exchange..... I recommend: Fire up the different coin wallets you have one at a time. Make an address and withdraw, close down that wallet when you have confirmed its there, move on to the next, and keep backups.
And be 100% sure the coin wallets you download are from the right place :-)
Poloneix?
Good article. I used to have a cryptsy account back in 2013/2014. I was wondering what had happened to cryptsy the other day.
I found this a few days ago... Troubling
https://steemit.com/bitcoin/@sensatus/if-you-have-a-coinbase-account-beware-spread-the-word-fellow-steemians-and-cryptotraders
"...the CEO Paul Vernon claimed that the company had been hacked to the tune of 13,000 Bitcoins and 300,00 Litecoins."
Add a zero @jrcornel :D
Exchanges are terrible. Bad customer service, bad functionality, poor security. This is why companies like #Bitshares are surging.
#Coinbase still seems to be the most reputable, and maybe this lawsuit will put a fire under their butts to refocus their efforts on the customer!
The
Time's up to build a decentralized exchange to surpass the fraud that has taken place far too long. Every single failure will only strenghten crypto-haters to make newbies believe that the common FIAT money system is safe and here to stay!
Maybe this model of a decentralized Xchange will serve the cryptocrazies needs!
About Coinbase: if someone get smacked down you can make it undo by turning the back on him! Life is also a matter of responsibility!
Greetings and THNX for the great post!
1/3rd exchange
1/3rd wallet
1/3rd cold storage/paper wallet
I'm upvoting right now! I've upvoted. Nice post from @jrcornel Thanks for sharing!
I agree with @enki74 and @automaton for the point made!
Problem with some of the coins in the exchanges is that the wallets are not easy to acquire or manage. It's just plain convenient to keep coins in the exchanges. Now I'm thinking of just pulling out all my coins.. :(
In my opinion Coinbase shouldn't be held accountable. $8.3 million isn't that much in the grand scheme of things and they probably figured that with the volume Cryptsy was doing that it was possible for him to make that much.
Secondly anything that Big Vern signed with Coinbase in the way of arbitration agreements shouldn't be extended to customers who have filed the class action. They never made those agreements with Coinbase.
I had a friend get Goxed, A friend who got MintPal'ed, and a friend who got Cryptsy'd . It is terrible.
I guess the smart thing to do to protect yourself would be to transfer small amounts every time, if every things go ok then transfer some more. Don't keep your money in the exchange's wallets. Once you did the conversion you need, withdraw back to a desktop wallet.
To which exchange are you subtly referring? Polo?
Good posts!!
Upvote & Resteem
Good job @jrcornel
I really miss Cryptsy when it was the best place to trade Alts... I was hoping some thing similar would take its place.
someone lost an 8k worth of btc there
I read that's a lot of $$$!
Crypto people deserve some better infrastructure. When the writing was on the wall with Cryptsy, Big Vern was still being invited to big conferences as some kind of hero. Today, we're a couple of steps further along with the infrastructure (exchanges, gateways, merchants, etc.), but it remains far too centralized and needs to be much more reliable/accountable.
So are you insinuating that coin base might go under? I just found out today that i'm am number 1388 in the cue to get approved for TETHER..... its been 3 weeks!