Security lapses, bank freeze lands Indi-Bitcoin wallets, investors in a soup

Business Technology
In the post 2017 Bitcoin boom world, the Indian cryptocurrency economy continues to remain a risky territory as local wallet providers face RBfI raids, bank account freezes, and security lapses.

Bangalore, January 23, 2018: “Want to buy a bitcoin? It might be easier than buying a pizza,” a city-based Bitcoin wallet provider said at a recent Bitcoin conference held in Bangalore. The major wallet providers have suffered a string of security lapses and loss of investor’s money since the launch of India’s first bitcoin exchange in 2011.

Bitcoin wallets are software programs which store bitcoins. However, they do not technically store bitcoins but they store private keys which are identifiers for a bitcoin owner. A private key lets someone claim ownership to his bitcoins whereas a public key lets the global bitcoin network link bitcoins to its owner.

Yadunandan Batchu,a blockchain developer from Unocoin said that there are two types of wallets – non-custodial and custodial wallet. Wallet companies provide hot wallets or custodial wallets to its users which enable faster transactions but provide lesser security.

Mahin Gupta owned BuySellBitco, India’s first Bitcoin exchange launched back in 2011changed its headquarters to Singapore and name to Zebpay after the Enforcement Directorate raided its Ahmedabad office in 2013. This came after RBI released an advisory on cryptocurrencies.

Similiarly, Unocoin’s parent company CoinMonk Ventures faced a RBI raid in January 2014 and had closed down operations for 24 hours affecting all transactions.

There were two separate incidents in 2017 involving Unocoin which saw bitcoins being hacked from user’s wallets. In August 2017, a number of users reported unauthorized transfer worth 0.25 BTC each from their Unocoin wallets. The second incident involved Rs 1.2 lakh being removed from a Bangalore-based user’s wallet.

The company like the other major Bitcoin exchanges in India had implemented Know-Your-Customer (KYC) to verify details of all its customers back in 2014, said Yadunandan. However, he refused to comment on the security lapses that his company faced recently.

The security vulnerability during the second hack was due to the One Time Password (OTP) delivery via email or phone which a third party like a telecom company can access or monitor. An OTP is generated for every transaction and is sent to the user via email or SMS for verification.

An India-based wallet provider, Koinex announced via Twitter on January 15 about their payment delay due to banks reversing their transactions.

On Jan 20, news outlets reported that Indian banks like State Bank of India, Axis Bank, HDFC Bank, ICICI Bank and Yes Bank have frozen the bank accounts of many Bitcoin wallet providers citing malicious transactions. It included major wallet providers like Zebpay, Unocoin, CoinSecure and BtcxIndia.

Zebpay refused to comment on this development. While, Coinsecure denied that they are facing any such bank freeze and clarified that they are not facing any liquidity problems.

A Bangalore-based Bitcoin merchant like Tejas Surywanshi who runs a restaurant called Suryawanshi said that his business has not seen much bitcoin transactions in the last few months. He added that he himself is a small time investor in the cryptocurrency market and uses wallets only for liquidating his bitcoins.

“It is a worrisome fact that the banks have frozen the accounts and it definitely makes bitcoin investment and transaction a bit risky in the country. However, since I use my own wallet so it keeps me away from that risk…however, if RBI decides to ban bitcoins I will liquidate my money,” said Tejas.

Gautham, a city-based senior software engineer and bitcoin investor said that investors like him are definitely worried because of the sudden bank freeze and it will affect the investor trust in the cryptocurrency market in the future. He said that even Australia had done a similar bank account freeze in the past which halted the operations of its top four exchanges.

He added that the most India-based Bitcoin wallet companies lack transparency in their transactions.

“Except Coinsecure,I have not seen an Indian company letting the users look at the number of buy orders and number of sell orders,” he added.

When someone wants to buy bitcoins, an exchange issues a buy order. A sell order is issued when someone wants to sell some bitcoins. The number of buy and sell orders make up the demand and supply and finally,the bitcoin prices in that particular exchange.

Yadunandan assured that there is no reason for concern about liquidity as Unocoin holds all its customer’s money as it is, without investing it elsewhere.

“We are adding 10,000 customers every day. There is nothing much to be concerned about,” he added when he was asked about the server downtimes and user’s complaints on their forums about slow verification and payout timings.