Financial Advisory

Cubits, an online cryptocurrency trading platform, faced significant challenges when it became insolvent following a major security breach. The company, which operated primarily in Germany and Malta while being incorporated in the UK, relied on an intermediary payment service provider, Pay Secure Online (PaySec), to facilitate transactions for its growing customer base in China. On February 5, 2018, the accounts of three Chinese customers were allegedly hacked, leading to a loss of Bitcoin (BTC) valued at approximately €29 million. This incident not only resulted in the loss of funds owed to Cubits but also left the company unable to recover the BTC purchased by these customers. In total, PaySec owed Cubits around €35 million, which included €6.9 million from transactions that occurred before the hack. The investigations into this case revealed several critical areas where Cubits could have implemented measures to prevent the fraud. Firstly, conducting thorough due diligence on PaySec and its officers would have exposed connections to known criminals, potentially averting any partnership with the company. Secondly, the absence of security policies and procedures left Cubits vulnerable; there were no mechanisms to detect unusual trading activity or to monitor transactions effectively. Lastly, despite advertising that customer funds were held in cold storage, Cubits did not practice this, which would have safeguarded the funds from being transferred to the compromised accounts. In response to the incident and the evolving regulatory landscape, new regulations under The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 were introduced, requiring cryptocurrency service providers in the UK to register with the FCA and adhere to anti-money laundering (AML) rules. While these regulations aim to enhance security and accountability within the cryptocurrency exchange industry, they do not directly address the supplier relationship issues that Cubits faced, highlighting ongoing challenges in the sector.