Cryptsy CEO: Bitcoin Theft Kept Hidden to Avoid 'Panic'

Crypsty CEO Paul Vernon told CoinDesk that the exchange did not tell customers about a hack – or tell them to stop depositing funds – to avoid panic.

AccessTimeIconJan 22, 2016 at 10:53 p.m. UTC
Updated Sep 14, 2021 at 2:00 p.m. UTC
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The future of digital currency exchange Cryptsy remains in question following news last week that withdrawals and trading would be put on hold indefinitely and claims from the company it was hacked in 2014.

Cryptsy first announced it was insolvent on 15th January after months of withdrawal problems, a situation it, until recently, blamed on technical issues. The insolvency disclosure followed on the heels of a class action lawsuit filed in federal court by Florida law firms on behalf of customers.

Since then, the exchange has opened up some of its wallets, allowing customer withdrawals in alternative cryptocurrencies. Market trading and deposits remain offline at press time, according to an announcement on the site’s main page.

Yet, last week’s disclosure raises questions as to why exchange customers weren't told about the true nature of the problems at the exchange.

A Freedom of Information Act (FOIA) request submitted to the Federal Trade Commission by CoinDesk points to reported withdrawal problems dating back to early 2014. Some critics have suggested that exchange itself may be behind the thefts.

In new comments, CEO Paul Vernon reiterated the exchange’s earlier statement that it kept the information hidden to prevent "a panic".

Vernon told CoinDesk:

"Since the funds were not moving, we thought it may be possible to get them back. We did not want to cause a panic with the users, especially if we were still able to fulfill withdrawal requests."

Vernon said that customers were allowed to continue making deposits despite the insolvency problems because "we were continuing to try and find solutions" to the issues, steps that he said included a reduction in operational costs.

Similarly, he said that customers were told the withdrawal problems were technical in nature in an effort to stem any added controversy or concern.

"Any other reason would have caused a panic," he said.

Law enforcement interaction

In its initial blog post detailing the hack, Cryptsy indicated that it had reached out to federal agencies regarding the hack and the stolen funds, but did not receive a response at the time.

When asked if the exchange had contacted the Financial Crimes Enforcement Network (FinCEN), under which Cryptsy is registered as a money services business, Vernon said that the agency indicated that it did not want reports involving digital currencies. A representative for FinCEN did not return a request for comment.

"FinCEN told us they didn't want any reports of cryptocurrency transactions, they only cared about fiat," he said.

Vernon also stated that recent exchange downtime is the result of a distributed denial-of-service attack.

Path forward

Since its initial blog post disclosing that the exchange had outstanding liabilities of roughly 10,000 BTC, Cryptsy has posted additional details, including indications that it may consider running the website with losses spread amongst its users or withholding withdrawals for certain coins until trading fees generate additional funds.

The exchange indicated that it "may take some time" before customers are fully refunded.

Cryptsy also published new transaction data pointing to additional thefts of both BTC as well as several altcoins. Vernon told CoinDesk that while the exchange maintains control of some coin balances, others remain outside of its control.

"The majority of the altcoins in the system are still under our control. The remaining few such as bitcoin, litecoin and a couple others are under control of the unknown suspect," he said.

Vernon also said he is not currently in the US, telling CoinDesk that he is “travelling[sic] in China right now”.

UpdateThis report has been amended to reflect that the FOIA request was submitted to the Federal Trade Commission.

Images via Shutterstock

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