2016 is only 18 days old and the Bitcoin world has already had a fair amount of shocks to deal with. Apart from the headline buster about deep disagreements within the Bitcoin development community, we have been chasing the whole Cryptsy saga. Our previous post addressed some of the possibilities, with our team sensing some Mt Gox-like trouble. There was an editorial decision not to go into Vern’s – Cryptsy’s founder – personal life, opting instead to publish again when Cryptsy released an official response to widespread withdrawal problems. This editorial decision paid off. The latest developments prove our team was not far off from the truth. By keeping an open mind, our team has also been able to formulate 2 possible solutions to Cryptsy’s troubles that should be considered and developed further.
The Accusations
Many users reported difficulties withdrawing funds from Cryptsy on various platforms. These accusations go back a few months to at least October 2015. These users also accused Cryptsy of censoring their comments on its chat. Furthermore, Cryptsy halted trading at least once before for a whole day, and there were even reports of the company moving out of its offices unannounced. Suddenly, users were concerned that another Mt Gox was unfolding before their eyes and that they would be cheated out of their money.
Cryptsy’s Reaction
Although it took the company quite a while to respond to the accusations, it finally did so and managed to save face, although some concerns linger. Contrary to what the rumors said, and according to the official statement, Cryptsy’s troubles had nothing to do with Vern’s personal matters. Vern’s blog post also asserts that Cryptsy’s problems had nothing to do with phishing attempts or DDoS attacks. It seems however, that Cryptsy was the victim of a Trojan with a certain degree of sophistication.
Hacked!
The attack took place about a year and a half ago. The hacker managed to plant an IRC backdoor in the code of Cryptsy’s wallet. This Trojan allegedly took a few months to collect the information necessary to carry out the attack. Since the attack took place a year and a half ago, and Cryptsy is only going public about it now, users could be concerned about the future operation of the company. This was probably a PR mistake, so calm rational analysis is warranted.
Cryptsy Going from Defense to Offense
According to the blog post, Cryptsy was earning more than it was spending so it had enough reserves. This means that Cryptsy will not go down like Mt Gox. The company thus decided to cover the wallets attacked with funds from their profits. This was a sensible maneuver, although Cryptsy still holds liabilities of 10,000BTC vis-à-vis its customers.
In light of the severity of the attack, Cryptsy has turned the guns on the perpetrator of the attack. Vern is offering a bounty – probably the first notorious cryptocurrency reward offered to help solve a cyber-crime – of 1000BTC for information that leads to the recovery of the money stolen. On the other hand, Cryptsy announced that it is halting trades and withdrawals indefinitely until the issues are resolved. Cryptsy intends to give its users their funds back.
Going Forward
Vern has identified a few possible solutions in his blog post:
- Declare bankruptcy and let customers initiate their claims according bankruptcy proceedures.
- Selling Cryptsy with its liabilities to another interested party.
- Return the lost funds and process withdrawal requests.
Others have written with the following suggestions:
- Spread the loss among customers.
- Allow withdrawals to trickle on a first come first serve basis.
- Freeze existing user balances and release as they become available.
- Get a loan or partner up with an investor.
In order to approach any of the suggestions above, there are a few key questions that must be answered. The first and probably most important question is, has Cryptsy’s credibility taken too big a hit and made the company and/or the brand too hazardous for business going forward? The only way to gauge this would be to follow various forums to try and grasp what users and potential users think about Cryptsy going forward. Cryptsy itself could probably issue a survey to its users and asses the damage themselves.
If the answer to that question is that in fact, the Cryptsy brand still has some value and the company can still operate, then Vern could explore the following possibilities:
- Getting a loan.
- Getting an investor to partner up with.
- Selling the company.
If the answer to that question is that Cryptsy’s credibility has been damaged beyond repair and customers would not feel comfortable holding their funds and trading with Cryptsy, then bankruptcy is the only option left. Only existing customers could decide among them if they would agree to become stakeholders in Cryptsy’s solution, and go forward with one of the following:
- Fund freeze until funds become available.
- Spreading the loss and allowing Cryptsy to keep on operating.
- Allowing withdrawals to trickle on a first come first serve basis.
Our Staff Weighs In
We think that Bitcoin as a collaborative decentralized project has taught us a fair share about cooperation and doing business in good spirits. Solutions have to be win-win, therefore a bankruptcy process will be the worst possible solution from the ones fielded so far. Instead we suggest 2 possible solutions that depend on the resilience of the Cryptsy brand.
If Cryptsy is still a strong brand, and Vern is considering giving up some equity, then customers should be allowed to become stakeholders. Don’t merely spread the loss among them, reward them with shares. This way they will be able to profit from Cryptsy’s future endeavors. This solution will also allow Cryptsy to score big on the PR arena.
If Cryptsy is not a strong brand anymore, then maybe a relaunch is the best possible solution. Since it still has a customer base, and apart from the unfortunate attack and some key PR mistakes, Cryptsy has been largely a trust worthy company, there is no reason why it wouldn’t be able to re-brand and take either a loan or partner up with investors. Rebranded Cryptsy could still offer its customers a first shot at becoming shareholders in exchange for the money owed to them.
Whichever route Vern choses, we hope that the solution will be the best for all the parties involved. We are not holding our breath for the return of the stolen coins.
Click here to read Cryptsy’s blog post
