Indictment of Cryptsy CEO Illustrates Regulatory Needs of Crypto Custody

Paul Vernon, CEO of the cryptocurrency exchange Cryptsy, was indicted on seventeen counts, including tax evasion, wire fraud, money laundering, computer fraud, and more. It is alleged that after stealing more than $1 million of assets from investor wallets and moving to China, he announced that the exchange had been hacked.

“This is a case that goes back years. Since 2013, we’ve come a long way to shut down what many called the Wild West of Crypto. But, the unsealed indictment should remind us that there are absolute holes in our custody apparatus, even now. We need to design a better mousetrap for the custody component of digital asset investment,” said Richard Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges.

According to the indictment, “Paul E. Vernon solicited and caused cryptocurrency investors to trust the safety of Cryptsy, an online cryptocurrency exchange company, for storing and trading their virtual currency. Vernon exercised control over cryptocurrencies deposited on the Cryptsy website.  Between May 2013 through May 2015, Vernon used his control over Cryptsy’s accounts, known as wallets, to steal over one million dollars from Cryptsy’s cryptocurrency wallets.  Once Vernon stole his customers’ funds from Cryptsy’s wallets, he deposited the funds into a personal cryptocurrency wallet and then transferred the same funds into his personal bank account.”

“What we’re seeing now is much different. The issues are less about malevolent operators and more about security protocols that aren’t up to snuff. We need the regulators to establish a framework for custody that goes beyond administrative elements,” opined Gardner.

Fireblocks, which is among the best known custody providers, found itself embroiled in a lawsuit with StakeHound, which alleges the custody company lost roughly $70MM of Ethereum, after the key vanished. As a result, StakeHound could not access over 38,000 ETH.

“People think of custody the same way they think of it in traditional finance, but the burden is much higher for digital assets. There’s much more security that goes into it, and we haven’t seen the custodians offer the kind of protection that investors deserve,” said Gardner.

Modulus is known throughout the financial technology segment as a leader in the development of ultra-high frequency trading systems and blockchain technologies. Modulus has provided its exchange solution to some of the industry’s most profitable digital asset exchanges, including a well-known multi-billion-dollar cryptocurrency exchange. Over the past twenty years, the company has built technology for the world’s most notable institutions, with a client list which includes NASA, NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.

“Once we get regulation in place and custody is more secure, I think you’re going to see crypto mainstream even further than it is, moving swiftly through Main Street. The investor class will be ready to further increase their investment, and cryptocurrency will see a major boon,” said Gardner.