In what would seem to be a worrying trend to crypto enthusiasts seeking progress on the security front, Vircurex has just announced that they will be freezing withdrawals to cover major losses last year.

On May 10, 2013, a security breach led to significant losses in BTC, LTC and TRC under Vircurex’s care. In its quarterly report, Vircurex said, “Dividends will be used to purchase back the missing funds in the coming months. Depending on the trading volume development this is expected to take 9 to 12 months.”

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Vircurex is one of the few exchanges awarding “dividends” for customer balances. However, these have not been sufficient to recover what was missing due to recent developments:

“As you may very well be aware, we had two incidents last year that lead to a loss of a significant number of BTC, LTC, FTC, TRC. We had communicated at that time that we will be covering those losses from our income, which we have done so far. We had enough coin balances in our cold wallet to upkeep our platform and the positive cashflow enabled us to gradually refill the wallets.

Unfortunately we had large fund withdrawals in the last weeks which have lead to a complete depletion of our cold wallet balance and we are now facing the option of either closing the site with significant unrecoverable losses for all or to work out a solution that allows the exchange to continue to operate and gradually pay back the losses.

We have obviously chosen the later and hence are going to do the following:

• 1. We will introduce an additional balance type called “Frozen Funds”. Funds in this balance type cannot be used to trade or withdraw. Those are the balances that the exchange will gradually pay back and hence transfer back to the available balance over time.
• 2. We will move all current balances for BTC, LTC, TRC and FTC to the “Frozen Balance”, i.e. your balance will be set to 0.
• 3. We’ll take the current available cold storage balance and distribute it based on the below described distribution logic.
• 4. Monthly we will take the net profit of the exchange and credit back that amount distributed to the users based on the described distribution logic.”

In assessing how to “distribute” available balances for withdrawal, they are taking a mixed “top-down” and “bottom-up” approach. 50% of remaining funds are credited to account holders, starting from top to bottom (the remainder from the top account goes to the second, etc). The reverse applies for the other 50%, starting from the bottom. Under such a plan, people in the middle of the pack are potentially the biggest losers.

The more intuitive approach, adapted by Poloniex after it was hacked, is to distribute the % loss evenly among all accounts.