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Will BitGrail’s Demise Boost Calls for Crypto Regulation?

March 28, 2018 4:48 pm Published by

In January of this year, Nano (XRB) looked like the rising star of crypto. Its fee-free transactions and instant confirmations offered an exciting alternative to the strained bitcoin network. And Nano requires no mining grunt at all, unlike most of its rivals.

In a feverish trading atmosphere, the price of Nano — then named RaiBlocks — was beginning to soar. The rebrand from RaiBlocks to Nano was also a smart move. It reinforced its key USPs, as well as making the currency sound more dynamic.

But there was a problem. Nano — then RaiBlocks — was heavily dependent on a couple of obscure exchanges. Unfortunately, the end result was a massive loss of funds, and catastrophe for customers that depended on both.

A Brief History of BitGrail

BitGrail is an Italian exchange dedicated to the trading of a small number of cryptocurrencies. Around 80% of its trading volume took place in XRB. But as Nano took off, users began to notice cracks appearing in the BitGrail infrastructure.

In early January, Reddit users noted inconsistencies when trading on the Bitgrail exchange. Occasionally, balances would slip into negative figures. Others reported that deposits were processed twice. (This thread is one of several on this topic.)

Around the same time, BitGrail abruptly disabled Nano withdrawals. Four days later, it implemented mandatory Know Your Customer (KYC) checks for non-EU customers, essentially preventing them from withdrawing crypto without going through a lengthy verification process. Users pleaded for updates on Twitter, which largely fell on deaf ears.

Hacks, Losses, or Code Flaws?

On February 9th, BitGrail announced that there were “inconsistencies” in its Nano wallet, resulting in the lost of around 17 million Nano tokens; $170 million, or thereabouts. It claimed a “loss” had occurred, but users were left to speculate on the cause: was it a massive hack, a serious problem with the code, or — as alleged by some — an inside job?

The end result was a damaged and devalued currency, an exchange that is essentially insolvent, and thousands of Nano investors out of pocket.

In the days that followed, the Nano team released chat logs that appear to show Bitgrail’s owner, Francesco Firano, suggesting that the Nano ledger should be altered to recover the stolen funds.

In a rapid souring of relations, Firano then accused Nano’s development team of libelling him, while Nano rejected claims that they had recommended BitGrail as a reputable exchange.

Nano’s team maintain that there was no double spending on its ledger. It identified one or two suspicious accounts that made large withdrawals in October 2017, and other exchanges have attempted to freeze funds from corresponding transactions.

Options for BitGrail Investors

There’s a good chance that people who lost money in the BitGrail fiasco will never be compensated. Despite this, Reddit customers are planning a lawsuit.

But BitGrail has fought back with a compensation plan that would severely hinder a class action case.

On its website, BitGrail said that it will pay back 20% of the lost Nano tokens to verified customers, with the fate of the remaining 80% being recouped from future exchange profits. BitGrail has launched a new coin, BitGrail Shares (BGS), as a substitute. But this coin only exists on BitGrail.

But in order to recover their money, users must accept a new set of terms and conditions that essentially waive their right to take legal action. They must sign the conditions, scan the paper copy, and email the resulting file to BitGrail.

If you lost XRB at BitGrail, and you don’t sign, you lose your account and any chance of recovering your funds through the exchange. If you do sign, you lose your right of reply, and your BGS tokens cannot be withdrawn.

In the background, BitGrail’s lawyers are still recommending that the exchange files for bankruptcy, and Firano has allegedly admitted he can’t even get a bank account to pay the company that verifies customers for him.

As the saga continues to play out, investors appear to be stuck between a rock and a hard place.

Is it Time We Regulated Crypto?

The BitGrail fiasco proves, yet again, that a deregulated market is a market that must be navigated with caution. Resistance to regulation is a noble cause, but it seems highly unlikely that crypto will enter the mainstream without some form of control on exchanges.

Arguably, the inconvenience of having funds tied up impacted trading long before the exchange itself collapsed. For days — even weeks — eager investors waited to withdraw their money, but the company was no obliged to help them.

Could regulation prevent hacks, or rogue actors? Aside from curbing activity like money laundering, it may force exchanges to identify suspicious transactions before small issues snowball into massive losses for users.

History Repeating Itself

For now, the moral of the story mirrors the advice given after the high-profile hack of MtGox. Trade only with reputable and trusted exchanges. Keep your crypto in trusted wallets. And only store funds on exchanges long-term if you are willing to lose them.

The sorry tale of BitGrail — and its predecessors, like MtGox — brings the risks of crypto trading into sharp relief. While most traders follow the news and are wise to these problems, a small but significant number of hobbyists are impacted most when things go wrong.

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