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DeFi: Latest Front in Cryptocurrency’s Hacking Problem

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By Reuters | Updated: 16 August 2021

For most of the 13-year life of cryptocurrencies, exchanges were the epicentre for cyberheists. Now, a bigger hacking risk in the growing sector has exploded into view: peer-to-peer crypto platforms.

One such site, Poly Network, was at the centre of a $610 million (roughly Rs. 4,530 crores) cryptocurrency theft last week, one of the biggest ever. Within days of the heist, the decentralised finance (DeFi) platform said the “white hat” hacker or hackers had returned nearly all the loot.

The unusual ending to the Poly Network saga belies fast-emerging risks in this growing corner of crypto, where an estimated $80 billion (roughly Rs. 590 crores) or more is held, interviews with industry executives, lawyers, and analysts show.

DeFi sites allow users to lend, borrow, and save – usually in cryptocurrencies – while bypassing the traditional gatekeepers of finance such as banks and exchanges. Backers say the technology offers cheaper and more efficient access to financial services.

But the heist at Poly Network – previously a little-known site – has underscored the vulnerability of DeFi sites to crime.

Would-be robbers are often able to exploit bugs in the open-source code used by sites. And with regulation still patchy, there is usually little or no recourse for victims.

Centralised exchanges, which act as middlemen between buyers and sellers of crypto, had previously been the main targets of crypto cyberheists.

Tokyo-based exchange Mt.Gox for instance collapsed in 2014 after it lost half a billion dollars in hacks. Coincheck, also based in Tokyo, was hit by a $530 million (roughly Rs. 3,930 crores) heist in 2018.

Many major exchanges, under the regulatory spotlight and striving to attract mainstream investors, have since bolstered security and heists on such scale are now relatively rare.

Less secure

An onus on security at major platforms such as Coinbase Global has pushed less-secure venues to the sidelines, said Ross Middleton, chief financial officer at DeFi platform DeversiFi.

“What’s happened is the big exchanges have got really good (on security) and the smaller exchanges aren’t around anymore,” he said. “The frontier is definitely DeFi now.”

Losses from crime at DeFi platforms are at an all-time high, crypto intelligence firm CipherTrace said last week, with thieves, hackers and fraudsters making off with $474 million (roughly Rs. 3,510 crores) from January through July.

The spike came as funds poured into DeFi, mirroring flows into crypto as a whole. According to DeFi Pulse the total value held at such sites is now more than $80 billion (roughly Rs. 590 crores), compared with just $6 billion (roughly Rs. 44,490 crores) a year earlier.

DeFi specialists say security risks tend to lie at newer sites which may run on less secure code.

“There is a widening security and risk gap between old, battle-tested DeFi protocols, and new, untested DeFi protocols,” said Rune Christensen, former head of the body behind high-profile DeFi application Maker.

Proponents says the use of open-source code means vulnerabilities can be quickly identified and solved by users, reducing the risk of crime. DeFi can police itself, they say.

Yet for financial watchdogs and governments across the world looking at regulating the crypto sector, DeFi is increasingly in focus.

Enforcement action

US Securities and Exchange Commission (SEC) chair Gary Gensler has signalled he would take a tough stance on DeFi.

Such platforms may be captured by US securities laws, he said in a speech this month, calling on Congress to draft legislation to rein in DeFi and crypto trading.

The SEC this month brought its first enforcement action involving DeFi tech, alleging the company issued unregistered securities and misled investors. The SEC did not respond to further questions on its stance.

Officials at the US Commodity Futures Trading Commission have also signalled greater scrutiny.

Commissioner Dan Berkovitz in June called DeFi a “Hobbesian marketplace” – a reference to a 17th century philosopher who saw life without government as “nasty, brutish, and short”. Unlicensed DeFi platforms for derivatives were violating commodities trading laws, he suggested.

Elsewhere, moves are slower. DeFi is still far from the political agenda in Britain, for instance.

A spokesperson for Britain’s financial watchdog said while some DeFi activities may fall under its scope, much of the sector is unregulated.

For some analysts, greater regulation in inevitable, with little sign that DeFi sites can do the job themselves.

“The unfortunate situation is that (Poly Network) was seen as just an average Tuesday in the DeFi world,” said Tim Swanson of blockchain firm Clearmatics.

“The industry likes to congratulate itself by claiming it resides on transparent systems, but it has repeatedly shown it is incapable of policing itself.”

© Thomson Reuters 2021

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Crypto Exchange Binance Has Ireland in Plans for ‘Decentralised’ Regional Headquarters

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By Reuters | Updated: 8 October 2021

Major cryptocurrency exchange Binance sees Ireland as part of its plans to establish a number of headquarters across the world, its CEO told Reuters on Thursday.

Regulators across the world have in recent months scrutinised Binance, the world’s largest exchange by trading volumes. Some have banned the platform from certain activities, while others have warned consumers that it was unlicensed to operate.

In response, CEO Changpeng Zhao said in July he wanted to improve relations with regulators, and would break with its “decentralised” structure and establish regional headquarters.

Last month, Binance registered three firms in Ireland, corporate registry documents show.

“Historically, we claim that we don’t have headquarters. We are actually just in the process of establishing a few headquarters in different parts of the world,” Changpeng Zhao said in an interview.

Asked if Ireland featured in Binance’s plans to establish headquarters in a particular country, Zhao replied: “Yes it does.” He declined to give further details of the plans for the country.

“When we first started we wanted to embrace the decentralised principles, no headquarters, work all around the world, no borders,” he said. “It’s very clear now to run a centralised exchange, you need a centralised, legal entity structure behind it.”

Trading volumes at Binance soared between July and September, suggesting a recent crackdown by regulators across the globe has had little impact on the platform’s business.

Binance’s corporate structure is opaque. Its holdings company is registered in the Cayman Islands, according to British court documents and Malaysia’s securities watchdog.

© Thomson Reuters 2021

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NFT Sales Surge to $10.7 Billion in Q3 2021 as Crypto Asset Frenzy Hits New Highs

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By Reuters | Updated: 5 October 2021

NFT sales volume surged to $10.7 billion (roughly Rs. 79,820 crores) in the third quarter of 2021, up more than eightfold from the previous quarter, according to data from market tracker DappRadar, as the frenzy for crypto assets reached new highs.

NFTs use blockchain to record the ownership of digital items such as images, videos, collectibles, and even land in virtual worlds.

Surging sales and hefty prices on NFTs – items which do not physically exist – have baffled many but the explosive growth shows no sign of abating.

The third-quarter figure was up from $1.3 billion (roughly Rs. 9.680 crores) in Q2 and $1.2 billion (roughly Rs. 8,935 crores) in Q1, DappRadar said.

On the biggest NFT marketplace, OpenSea, sales volumes hit $3.4 billion (roughly Rs. 25,320 crores) in August. Activity remained strong even in September when global stock markets faltered.

Cryptocurrency price gains during the COVID-19 pandemic are often cited as a driver behind the NFT market’s growth – because people use cryptocurrencies to buy NFTs – but enthusiasts say that the crypto assets have value independently of market conditions.

To be sure, estimates for the size of the NFT market vary depending on what is included. Transactions which take place “off-chain”, such as NFT art sales at auction houses, are often not captured by the data.

DappRadar’s numbers, which include multiple blockchains and “off-chain” transactions, put total 2021 sales volume at $13.2 billion ((roughly Rs. 98,285 crores). Another market tracker, CryptoSlam, which excludes “off-chain” sales, says the figure is $9.6 billion (roughly Rs. 71,480 crores).

Meanwhile, NonFungible.com, which tracks NFTs on the Ethereum blockchain only, puts the 2021 total volume at $7 billion (roughly Rs. 52,110 crores). Ether price in India stood at Rs. 2.6 lakhs as of 1:30pm IST on October 5.

The most expensive known NFT sale was a digital collage sold at Christie’s for $69.3 million (roughly Rs. 515 crores) in March. Since then, no known NFT has come close to this price, but auction houses still hold NFT sales, often fetching millions.

However, despite growing sales and celebrities and other investors jumping on the trend, the number of NFT buyers remains relatively small: there were just 265,927 active wallets trading NFTs on the ethereum blockchain in Q3, NonFungible.com said.

More than half of NFTs sold in Q3 were $101 (roughly Rs. 7,510) -$1,000 (roughly Rs. 74,440 crores), while those in the $1,001 (roughly Rs. 74,510) -$10,000 (roughly Rs. 7.4 lakhs) bracket accounted for 20 percent of sales, and 17 percent fetched less than $100 (roughly Rs. 7,440), NonFungible.com said.

One NFT brand to see particularly high growth in Q3 was Art Blocks, a US-based project which sells NFTs of algorithmically-generated digital artworks.

On Saturday, an Art Blocks NFT sold for 2,100 Ether (roughly Rs. 51 crores at the time). Average Art Blocks prices have risen to roughly $15,100 per NFT in September, up from $3,300 in July, according to CryptoSlam.

Gaming-related NFTs also surged, with the blockchain-based game Axie Infinity leading the “play-to-earn” sector with $776 million (roughly Rs. 5,780 crores) in Q3 revenues, DappRadar said.

© Thomson Reuters 2021

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Cryptocurrency Adoption in Emerging Markets Can Threaten Financial Stability, Says IMF

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By Reuters | Updated: 2 October 2021

The advent of digital currencies in emerging markets could spark “cryptoization” of local economies, potentially undermining exchange and capital controls and upsetting financial stability, the International Monetary Fund said on Friday.

Bitcoin and its kin have in the last year soared in price and popularity, with emerging and developing market economies such as Vietnam, India and Pakistan seeing rapid growth in some measures of adoption, according to US blockchain researcher Chainalysis.

Cryptocurrencies offer, in theory, a cheaper and quicker way of sending money across borders. Backers say digital tokens such as stablecoins could also help protect savings from high inflation or fluctuations in local currencies.

In September, El Salvador became the first country in the world to adopt bitcoin as legal tender, with backers tipping the experiment to lower costs for billions of dollars of remittances sent to the Central American nation.

The IMF said that unsound macroeconomic policies and inefficient payment systems are among the drivers of cryptocurrency adoption in emerging economies, along with the lure of quick gains that has also excited investors across the world.

But the IMF said the exact level of adoption of crypto in emerging economies was hard to gauge accurately.

Factors such as low credibility of central banks and weak domestic banking systems that can fuel “dollarization” can also contribute to growing crypto use, the Fund added.

Dollarization is where a foreign currency – typically the U.S. currency – is used in addition to, or instead of, a domestic currency. High inflation or the instability of a domestic currency are among the drivers of the process.

Wide adoption of stablecoins – digital tokens designed to hold a steady value and seen as useful for savings and commerce – could also pose significant challenges by reinforcing existing dollarization forces, the IMF said.

“Dollarization can impede central banks’ effective implementation of monetary policy and lead to financial stability risks through currency mismatches on the balance sheets of banks, firms, and households,” it said.

“Cryptoization” could also become a threat to fiscal policy, with digital assets possibly facilitating tax evasion, the IMF added.

The fund urged developing nations to strengthen macroeconomic policies and consider the possible benefits from issuing central bank digital currencies as a response to the rise of crypto.

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Coinbase Says Cryptocurrency From At Least 6,000 Customers Stolen by Hackers

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By Reuters | Updated: 2 October 2021

Hackers stole from the accounts of at least 6,000 customers of Coinbase Global Inc, according to a breach notification letter sent by the cryptocurrency exchange to affected customers.

The hack took place between March and May 20 of this year, according to a copy of the letter posted on the website of California’s Attorney General.

Unauthorized third parties exploited a flaw in the company’s SMS account recovery process to gain access to the accounts, and transfer funds to crypto wallets not associated with Coinbase, the company said.

“We immediately fixed the flaw and have worked with these customers to regain control of their accounts and reimburse them for the funds they lost,” a Coinbase spokesperson said on Friday.

The hackers needed to know the email addresses, passwords and phone numbers linked to the affected Coinbase accounts, and have access to personal emails, the company said.

Coinbase said there was no evidence to suggest the information was obtained from the company.

News of the hack was earlier reported by technology news portal Bleeping Computer.

© Thomson Reuters 2021

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Bitcoin Price Climbs to Highest in Nearly Two Weeks

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By Reuters | Updated: 2 October 2021

Bitcoin rose on Friday to its highest level since around mid-September, bolstered in part by seasonal factors as well as supportive comments overall from US Federal Reserve Chairman Jerome Powell on Thursday.

In testimony to Congress, Powell said the Fed had no intention of banning cryptocurrencies, in response to a question from House Representative Ted Budd.

Some analysts also said October is typically a bullish month for digital assets, with September historically a bearish period for the sector.

“The digital asset market is benefiting both from the seasonality effect as well as generally positive market fundamentals,” said Ulrik K.Lykke, founder of crypto assets hedge fund ARK36.

“Q4 has often seen strong performances and the expectation the trend will continue this year can become a self-fulfilling prophecy. It is possible that we will see new all-time highs in Q4, especially that on-chain data, particularly in the case of bitcoin, seem to indicate a potential for a strong bull market continuation.”

He also cited Powell’s comments on Thursday as one factor for bitcoin’s positive price action.

The largest cryptocurrency was last up 9.3% at $47,910, after hitting a high of $48,236.08. If gains are maintained, bitcoin would be on pace to post its largest daily percentage gain since mid-June.

Smaller coins ether and XRP, which tend to move in tandem with bitcoin, were up 10.1% at $3,301 and 8.5% at $1.0326, respectively.

Joseph Edwards, head of research at Enigma Securities in London, also said spiking volumes on crypto derivatives exchanges was a possible driver for the moves. Derivatives trading often influences spot prices in bitcoin markets.

In the futures markets, bitcoin showed a net short position of -883, the smallest since mid-August, data from the Commodity Futures Trading Commission released on Friday showed.

© Thomson Reuters 2021

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Ethereum Researcher and Cryptocurrency Promoter Pleads Guilty to Advising North Korea Evade Sanctions

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By Agence France-Presse | Updated: 30 September 2021

A prominent American cryptocurrency promoter and former hacker has pleaded guilty to advising North Korea on using virtual money to avoid international controls, a New York court said Monday.

Virgil Griffith, who is based in Singapore, launched projects in 2018 to provide services to individuals in North Korea by developing and financing cryptocurrency structures, including cryptocurrency mining, according to the Southern District Court of New York.

A ruling will be announced in January 2022.

Griffith, who faces a 20-year prison sentence, worked with others to provide cryptocurrency services and help North Korea evade sanctions, the court said.

He was arrested at Los Angeles International Airport in November 2019.

Griffith, 38, had attended a conference on blockchain and virtual currencies in Pyongyang in April that year, where he spoke about how to use both technologies “to evade sanctions,” the US Justice Department said.

Doing so violated US Treasury bans on “exporting any goods, services, or technology” to North Korea, put in place in response to the country’s nuclear weapons program.

After the conference, Griffith “began formulating plans to facilitate the exchange of cryptocurrency between the DPRK and South Korea, despite knowing that assisting with such an exchange would violate sanctions,” the Justice Department said, using the North’s official name.

The department said he also announced plans to renounce his US citizenship, aiming to “purchase” citizenship in another country.

Called a “cult hacker” in a New York Times profile 11 years ago, Griffith has a doctorate in theoretical neuroscience from the California Institute of Technology.

Four years ago he joined Ethereum, a Singapore-based company developing a secure blockchain-based global platform for business and finance use, and promoting its own cryptocurrency of the same name. Ether price in India stood at Rs. 2.38 lakhs as of 11am IST on September 30.

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