Here We Go Again: Chinese Bitcoin Exchange Freezes Accounts After Hack

The Chinese-based e-currency exchange Vircurex has announced in a statement that it has frozen all of its customer accounts after hackers apparently drained it of funds.

Though Vircurex appears to be a small player, this freeze continues to show the vulnerability, at this stage, of e-currencies to hacks.

I would rank government regulation as the greatest present threat to Bitcoin, followed by the unknown magnitude of vulnerability of bitcoins to hacks.

Here's the full statement from Vircurex:

Frozen Funds

In preparation of the following, we have with immediate effect stopped the possibilities to withdraw BTC, LTC, FTC and TRC. All incoming deposits will also not be credited to the users accounts for the time being. 

On 24th March 2014 we will be freezing the current BTC, LTC, TRC and FTC accounts, then perform the below distribution of the available coins and reenable deposits and withdrawals. This action will also require us to delete all open sell orders for BTC, LTC, FTC and TRC. 

As you may very well be aware, we had two incidents last year that lead to a loss of a significant number of BTC, LTC, FTC, TRC. We had communicated at that time that we will be covering those losses from our income, which we have done so far. We had enough coin balances in our cold wallet to upkeep our platform and the positive cashflow enabled us to gradually refill the wallets.

Unfortunately we had large fund withdrawals in the last weeks which have lead to a complete depletion of our cold wallet balance and we are now facing the option of either closing the site with significant unrecoverable losses for all or to work out a solution that allows the exchange to continue to operate and gradually pay back the losses.

We have obviously chosen the later and hence are going to do the following:

• 1. We will introduce an additional balance type called "Frozen Funds". Funds in this balance type cannot be used to trade or withdraw. Those are the balances that the exchange will gradually pay back and hence transfer back to the available balance over time.
• 2. We will move all current balances for BTC, LTC, TRC and FTC to the "Frozen Balance", i.e. your balance will be set to 0.
• 3. We'll take the current available cold storage balance and distribute it based on the below described distribution logic.
• 4. Monthly we will take the net profit of the exhchange and credit back that amount distributed to the users based on the described distribution logic.

The freezing of the balances is a one-time action, it does not affect future deposits in any ways. 

Distribution logic

50% of the amount will be distributed top down and the other 50% will be distributed bottom up.

Top down means: credit the amount from the largest account balance down to the smaller accounts Bottom up: credit the amount from the smallest account balance to the larger accounts.

Example

User 1: 5 BTC
User 2: 4 BTC
User 3: 3 BTC
User 4: 3 BTC
User 5: 3 BTC
User 6: 3 BTC
User 7: 1 BTC

Amount to distribute: 12 BTC: 
Step 1: Top down distribute 6 BTC:

• User 1: Credit 5 BTC
• User 2: Credit 1 BTC, remaining frozen balance = 3 BTC

Step 2: Bottom up distribute 6 BTC:

• User 7: Credit 1 BTC
• User 6: Credit 3 BTC
• User 5: Credit 2 BTC, remaining frozen balance = 1 BTC

This approach has the advantages that

• all users will eventually receive their funds, though the timeframe depends on the monthly volume available
• new deposits and users are not penalized, thus supporting the ongoing operations of the platform
• fund withdrawals from the available funds are guaranteed, no surprises or unecessary delays

We believe that this is the best way forward and hope for your support and understanding