Bitcoin trading platform Cryptsy faces bankruptcy after hacker attack caused millions of dollars in losses

Embattled bitcoin exchange Cryptsy has announced it is unable to repay its debts.

The exchange said in a new announcement that a hack in June 2014 cost it nearly 13,000 bitcoins (equivalent to $7.5 million) and nearly 300,000 litecoins (equivalent to $2.08 million).

The announcement also stated that unless the funds were recovered or investors' losses were compensated, the website would be shut down and declared bankrupt.

The announcement, acknowledging insolvency and the hack, came months after customer withdrawal requests were repeatedly delayed and the company was sued, threatening to follow in the footsteps of collapsed Japanese bitcoin exchange Mt Gox.

Cryptsy is said to still have an outstanding debt of around 10,000 Bitcoin ($4.15 million). The site had previously announced that it would suspend trading and withdrawals indefinitely, and had been forced to shut down at press time.

The company said it did not disclose losses after the hack but continued to operate and that it used trading revenue to repay customer funds.

Here is part of the announcement:

"The hacker attack was a critical event for our company, but the website was still profitable at the time and we still had some electronic coins on hand. Therefore, the company decided to use the profits to make up for the losses and try to avoid the consequences of shutting down the website."

The statement further pointed out that the developers of an altcoin called Lucky7Coin may be behind the attack.

Thick fog

Prior to today’s announcement, Cryptsy had blamed the slow withdrawals on technical glitches on the platform, but new revelations show that the company has been unable to repay its debts for some time. The company now admits that its ability to pay out customer funds from trading profits has been greatly reduced due to declining trading volumes.

Cryptsy suspended trading last week and again this week, the latter allegedly due to a phishing attack targeting customer email addresses and cellphone numbers. Yesterday, two Florida law firms filed a lawsuit in federal court on behalf of affected customers.

The trading platform explained that it did not disclose the hack when it was attacked because it "did not want to cause panic" and said that recent attempts to communicate with government agencies, including the FBI, had made no progress.

The announcement also said the company had previously worked with former Secret Service agent Shaun Bridges on an unrelated matter. Bridges was sentenced in December to five years and 11 months in federal prison on obstruction of justice and money laundering charges.

Cryptsy also criticized an article published on October 4 that reported that the company was under investigation by a US government agency. CEO Paul Vernon called the article defamatory and denied that it was under investigation at the time.

“Things started to get out of control after Coin Fire published an article full of false accusations. This article essentially caused our withdrawal crisis. Due to our limited reserves, customer withdrawal issues began,” the new announcement reads.

Mike Johnson, a former editor at Coin Fire, said he has received multiple death threats since the company’s announcement.