This week, $534 mln worth of XEM, the native cryptocurrency of NEM, was stolen from a major Japanese cryptocurrency exchange Coincheck. On January 27, merely hours after the hacking attack was announced, developers behind NEM created an automated tagging system to track down the funds stolen by hackers.
Stolen funds will be traced
As Cointelegraph reported on January 26, $534 million worth of XEM were stolen from low security hot wallet that lacked multi-signature security measures. During a press conference covered by Cointelegraph, Coincheck executives stated that all of the funds were stored in a hot wallet or an online wallet, which left user funds vulnerable to the security breach.
Shortly after the press conference, NEM representatives and its open-source development community firmly opposed the idea of conducting a hard fork to prevent user funds on a centralized cryptocurrency exchange from being recovered.
A hard fork could have been executed if $534 million in NEM were stolen due to the fault of the NEM blockchain. But, because the security breach was caused by the lack of strong security measures of Coincheck, the NEM development team rightfully refused to conduct a hard fork.
Instead, the NEM development team created an automated tagging system to ensure that all funds stolen from Coincheck are traced. By tagging stolen funds as tainted funds, cryptocurrency exchanges can now easily verify if stolen NEM funds are withdrawn or deposited to regulated trading platforms.
“Hack update: NEM is creating an automated tagging system that will be ready in 24-48 hours. This automated system will follow the money and tag any account that receives tainted money. NEM has already shown exchanges how to check if an account has been tagged. So the good news is that the money that was hacked via exchanges can't leave,” said a NEM spokesperson.
During an interview, NEM Foundation vice president Jeff McDonald confirmed the development of the tagging system and the work NEM Foundation will lead in the next few weeks to prevent stolen funds from being cashed out or converted to other cryptocurrencies through trading platforms.
As of now, the hackers behind the Coincheck NEM security breach are out of options. It is not possible for the hackers to convert the stolen NEM to other major cryptocurrencies like bitcoin and Ethereum because the automated tagging system will immediately alert exchanges about the tainted funds.
Due to the sheer size of the stolen funds, it is also not likely that the hackers will go through small-scale cryptocurrency exchanges to convert or launder the stolen funds.
At this stage, the only safe option for the hackers is to hold onto the stolen NEM. Because of the technology NEM has developed in light of the recent Coincheck hack, it has become significantly difficult for the hackers to do anything with the funds. It is not possible to cash out the stolen NEM to fiat currencies like the US dollar and it is also not possible to convert the stolen funds to other cryptocurrencies.
NEM, its open-source development community, and the NEM Foundation did not have to develop the tagging system for the benefit of Coincheck, specifically because stolen funds on the NEM blockchain network would still have circulated around the network even if they are not recovered. But, NEM developers have done Coincheck and investors that lost millions of dollars in the hacking attack a tremendous favor by voluntarily creating a solution to a serious problem.