The Shame of Cryptsy

Tuesday 19 January 2016

Cryptsy is insolvent, brought down by a hack they covered up 18 months ago and have lied about ever since. Finally, they have admitted the truth. Maybe.

Ever since Cryptsy started delaying withdrawals some months ago, rumours have swirled. This is crypto, after all, and MtGox is the obvious template for the story of what happens when exchanges get into trouble. Had they been hacked or otherwise lost customer funds, and the delays were symptomatic of the complications of running a fractional reserve?

Disgrace

The scale of Vern's deception is staggering:13,000 BTC, 300,000 LTC and 18 months of lies

In the last few weeks that situation became acute, with withdrawals of all but a few altcoins halted. Paul Vernon, aka ‘Big Vern’, Cryptsy’s CEO, put out a series of anodyne tweets that promised they were working hard and conducting hardware upgrades. Prices of alts that could be withdrawn spiked.

Then it happened. Reports appeared on the internet that Cryptsy had moved out of its building and were nowhere to be found. Some amateur detectives found that Big Vern was in the middle of a divorce, and his house up for sale. The exchange shut down trading entirely. And this blog appeared on the site

Cryptsy has had problems for some time now and it’s time to let everybody know exactly why. These problems were NOT because of any recent phishing attacks, or even a ddos attack, nor does it have anything to do with me personally.

About a year and a half ago, we were alerted in the early AM of a reduction in our safe/cold wallet balances of Bitcoin and Litecoin, as well as a couple other smaller cryptocurrencies. After a period of time of investigation it was found that the developer of Lucky7Coin had placed an IRC backdoor into the code of wallet, which allowed it to act as a sort of a Trojan, or command and control unit. This Trojan had likely been there for months before it was able to collect enough information to perform the attack.

The long and the short of it were that around 13,000 BTC and 300,000 LTC were stolen. Vern’s solution? Lie and hope it got better.

The decision was made to pull from our profits to fill these wallets back up over time, thus attempting to avert complete closure of the website at that time… Some may ask why we didn’t report this to the authorities when this occurred, and the answer is that we just didn’t know what happened, didn’t want to cause panic, and were unsure who exactly we should be contacting.

Vern did what a lot of other exchange owners have done and might have done: something unconscionable, that has no place in the current crypto climate. Two or three years ago, it might have been the norm. Now, though, things have changed and he can expect to pay some heavy consequences.

The decision he made smacks of cowardice and fear. The result is that hundreds of people have continued to deposit funds to Cryptsy and to trade, when he knew full well that they would not be able to withdraw the money they sent in. Cryptsy has been trading fantasy coins for weeks or months, allowing customers to buy and sell nothing more than numbers in their database that could never be turned into real coins on the blockchain. (It’s worth stating that many in the community don’t believe the hack story at all, and believe it’s a convenient cover for an inside job.)

A bunch of aggrieved customers are bringing a class action lawsuit against Vernon, who is currently AWOL. Where that will end is unclear. For now, Cryptsy has few options. They may adopt a BTER-like approach of seeking investment and/or slowly paying off the losses from trading fees, or simply socialising losses entirely.

The scale of the deception, though, is staggering: 13,000 BTC, 300,000 LTC and 18 months of lies. Trust will be impossible to rebuild, and rightly so. If this was the real world, the inevitable outcome would be that Big Vern ends up in the big house. Given the legal and regulatory changes of 2015, that must be an uncomfortable possibility for him.

 


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