Put Your Digital Money Where Your Mouth Is

Coinsquare's has quickly risen to become a premier Canadian crypto exchange, but a pair of big scandals points to an uncertain future.

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The world of cryptocurrencies is, unsurprisingly, cryptic.

Navigating the long list of digital currencies and assessing the legitimacy and security behind various exchanges is a difficult process. This becomes all the more complicated when seemingly reputable companies are caught out for fraudulent activity and security failures.

Coinsquare is a Toronto-based start-up that has risen to become one of the primary Canadian crypto exchanges. They paved the way for cryptocurrency in Canada by making it straightforward to trade using Canadian dollars, something that’s more complicated on other leading cryptocurrency exchanges. This was achieved by establishing relationships with numerous Canadian banks, making it simple to deposit Canadian dollars into your Coinsquare account through e-transfers or wire transfers.

Recently, however, Coinsquare has twice landed itself in hot water: their streak without a security hiccup was broken with a data breach in June 2020, and separately, they were subject to a regulatory probe under an accusation of wash trading. As part of the process of cleaning up shop at Coinsquare, several key players including CEO Cole Diamond resigned, and the company agreed to a series of recommendations mandated by the Ontario Securities Commission (OSC) to ensure compliance going forward.

Coinsquare’s proprietary platform follows crypto markets and industry developments and features multiple layers of security to make sure the client’s money is safe. Also featured on-site is an educational section that teaches newcomers about cryptocurrencies.

The company has grown considerably since its genesis in 2014. A total of $47.3 million has been raised in the last few years, and the group has over 90 employees with plans to expand that to 200 by the end of the year. Other rival Canadian crypto groups have appeared, but Coinsquare remains the top dog with over 100,000 user accounts on the exchange.

How do crypto exchanges work?

Crypto exchanges, for a commission fee, allow users to exchange one digital currency for another and exchange fiat money (i.e. real-world money) into cryptocurrency and vice versa. They require identity verification, which facilitates secure dealings between buyers and sellers.

The exchanges set the currency’s rate, which is typically dependent on the behaviour of buyers and sellers, but other factors can come into play.

Crypto exchanges operate similarly to the stock market, where traders negotiate assets on a stock exchange to profit from changing rates. What’s different with crypto traders is that they profit from the high volatility of currency rates.

Traders buy cryptocurrency on an exchange where the price is low and sell it on in a different exchange where the price is higher (a process known as arbitrage). There are other ways to profit from crypto, including long-term investments.

The most popular cryptocurrencies are traded on Coinsquare’s platform, including Bitcoin, Litecoin, and Ethereum.

Coinsquare’s customizable user interface makes things comfortable for users as they go about trading and reviewing financial data along with charts and graphs. There’s also a mobile app that allows users to monitor financial markets on the go and quickly jump on trading opportunities as needed.

Security protocols

Coinsquare’s security protocols are among their biggest selling points as an exchange. For example, their system features 95% cold storage of coins in their control. In the crypto context, storage, hot or cold, refers to whether your private key is kept online or offline respectively.

A private key is a form of cryptography that allows users to securely access their digital money while deterring theft. Only the person who holds the key can access it, and if you lose yours without a backup, your stockpile could be lost forever, so securing them is essential.

Private keys are made by an algorithm and are usually composed of a long series of alphanumeric characters which make them hard to crack. They can be stored on hardware devices like a USB.

This is an example of cold storage since it is offline and not easy to hack. Hot storage, which may include leaving your private key within a desktop wallet for the sake of convenience, leaves your money open to attack from hackers.

Coinsquare also uses anti-phishing measures like two-factor authentication to keep scammers out of your account. Moreover, they implemented encrypted communications to prevent interception by fraudsters.

Finally, the group claims to have successfully stress-tested their servers to prevent a DDoS attack, which has the potential to bring down an exchange site and lock users out of their accounts.

Data breach and wash trading scandal

In spite of the rigorous security measures, there was June’s data breach in June, conducted by a former employee. The information, which included cell numbers, emails, and ID docs, wound up on the dark web. All in all, roughly 5,000 users’ contact details were compromised in the attack.

The breach was disclosed to all Coinsquare users along with the relevant authorities and data regulators, but little relief could be found for the traders who were affected.

In a company-wide email shared by Betakit, Coinsquare stated that “…the person(s) responsible for the data theft indicated their intent of publishing the data is to ‘embarrass the company’. Coinsquare takes these types of security threats seriously.”

That same month, numerous reports emerged suggesting that Diamond had encouraged employees to engage in wash trading on the exchange. Wash trading is a form of market manipulation that involves simultaneously buying and selling the same asset to create the illusion of greater activity on an exchange.

Coinsquare reportedly inflated 90% of their trading volume with fake trades over an 18-month period. The company told the CBC that they acted on incorrect legal advice and reaffirmed their commitment to investors, employees, and the company.

Following the investigation by the OSC, Coinsquare agreed to establish an independent board of directors, appoint a new CEO, and create an independent internal whistleblower.

The company’s future

Coinsquare has a lot to offer Canadian crypto investors and continues to attract interest due to their large standing as an exchange and commitment to innovation.

They have been dogged by sizeable controversies, and it remains to be seen how this will play out with their customer base. Despite this, their cooperation with OSC and the exit of those involved in the wash trading scam may help their image, but addressing the data breach will likely be key in regaining the trust of prospective traders.

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Barry is a journalist, editor, and marketer for several media outlets including HeadStuff, The Media Editor, and Buttonmasher Magazine. He earned his Master of the Arts in Journalism from Dublin City University in 2017 and moved to Toronto to pursue a career in the media. Barry is passionate about communicating and debating culture, science, and politics and their collective global impact.