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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

Cryptocurrency

Cryptocurrency Ban: Russia’s Central Bank Calls for Crackdown on Mining, Transactions

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By Agence France-Presse | Updated: 21 January 2022

The Russian central bank proposed Thursday cracking down on cryptocurrencies, a move which if adopted could disrupt the burgeoning virtual money sector as Russia is one of the largest crypto-mining nations in the world.

Russian authorities have for years criticised cryptocurrencies over fears they can be used for illegal activities and have called for regulation.

Authorities granted cryptocurrencies legal status in 2020, but their use in payments was never authorised.

The Bank of Russia called Thursday for reinforcing the ban on cryptocurrency payments, banning cryptocurrency mining, and tightening laws on trading virtual money.

“The use of cryptocurrencies creates significant threats to the well-being of Russian citizens and the stability of the financial system,” a report published by the central bank said.

It added that the swift growth of cryptocurrencies is driven by “speculative demand” that leads to the forming of a “bubble”.

The report added that cryptos resemble financial “pyramid schemes” because their value increases with the emergence of new players on the market.

It estimated the annual transaction volume of Russian citizens at $5 billion (roughly Rs. 37,270 crore).

Bloomberg earlier cited sources as saying that Russia’s domestic security agency, the FSB, had lobbied central bank head Elvira Nabiulina for a ban.

The FSB cited concerns over Russians frequently using the hard-to-trace transactions to support “undesirable organisations”, such as opposition groups.

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Twitter Debuts Hexagon-Shaped NFT Profile Pictures

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By Reuters | Updated: 21 January 2022

Twitter on Thursday announced the launch of a tool through which users can showcase non-fungible tokens (NFTs)as their profile pictures, tapping into a digital collectibles craze that has exploded over the past year.

The feature, available on iOS to users of the company’s Twitter Blue subscription service, connects their Twitter accounts to cryptocurrency wallets where the users store NFT holdings.

Twitter displays the NFT profile pictures as hexagons, differentiating them from the standard circles available to other users. Tapping on the pictures prompts details about the art and its ownership to appear.

Like other tech companies, Twitter is rushing to cash in on crypto trends like NFTs, a type of speculative asset authenticating digital items such as images, videos, and land in virtual worlds.

The social media platform last year added functionality for users to send and receive Bitcoin.

Sales of NFTs reached some $25 billion (roughly Rs. 1,86,250 crore) in 2021, according to data from market tracker DappRadar, although there were signs of growth slowing toward the end of the year.

Proponents of Web3 technologies like NFTs say they decentralise ownership online, creating a path for users to earn money from popular creations, rather than having those benefits accrue primarily to a handful of tech platforms.

Critics dismiss the decentralisation claims, noting that many of the services powering adoption of those technologies – like the six crypto wallets supported by Twitter’s NFT product – are backed by a small group of venture capitalists.

In a widely circulated tweet after the launch, security researcher Jane Manchun Wong highlighted one of those links, showing how an outage at venture-backed NFT marketplace OpenSea temporarily blocked NFTs from loading on Twitter.

OpenSea did not immediately respond to a request from Reuters for comment.

© Thomson Reuters 2022

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Singapore Central Bank Issues Guidelines to Discourage Crypto Trading by Public

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By Reuters | Updated: 17 January 2022 

The Monetary Authority of Singapore (MAS) on Monday issued guidelines that limit cryptocurrency trading service providers from promoting their services to the general public, as part of a bid to shield retail investors from potential risks.

Singapore is a popular location for cryptocurrency companies due to a comparatively clear regulatory and operating environment and is among the forerunners globally in developing a formal licensing framework.

But the city-state’s authorities have repeatedly warned that trading in digital payment tokens (DPT), or cryptocurrency, is highly risky and not suitable for the general public, as they are subject to sharp speculative swings.

The new guidelines clarify the expectations of MAS that companies should not engage in marketing or advertising of DPT services in public areas in Singapore or through the engagement of third parties, such as social media influencers, to promote DPT services to the general public.

They can only market or advertise on their own corporate websites, mobile applications or official social media accounts.

“MAS strongly encourages the development of blockchain technology and innovative application of crypto tokens in value-adding use cases,” Loo Siew Yee, MAS Assistant Managing Director (Policy, Payments and Financial Crime), said in a statement.

“But the trading of cryptocurrencies is highly risky and not suitable for the general public. DPT service providers should therefore not portray the trading of DPTs in a manner that trivialises the high risks of trading in DPTs, nor engage in marketing activities that target the general public.”

© Thomson Reuters 2022

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Dogecoin Jumps After Elon Musk Tweets Tesla Merchandise ‘Buyable’ With the Token

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By Reuters | Updated: 14 January 2022

Meme-based cryptocurrency Dogecoin jumped on Friday after Tesla chief Elon Musk said the electric carmaker will accept it as payment for merchandise.

“Tesla merch buyable with Dogecoin,” Musk tweeted.

His mid-December tweet saying such use of Dogecoin will be allowed on a test basis sent the cryptocurrency up more than 20 percent. Dogecoin price in India stood at Rs. 15.02 as of 4:30pm IST on January 14.
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Dogecoin, popular among retail investors, raced up 18 percent to above $0.2 (roughly Rs. 14) after Friday’s tweet.

Musk’s tweets on the cryptocurrency, including the one where he called it the “people’s crypto”, buoyed the meme coin and caused it to soar roughly 4,000 percent in 2021.

In other Tesla-related news, Musk tweeted on January 13 that Tesla is “still working through a lot of challenges with the government” in India. Musk said this in response to a question on when it would launch its electric cars in the country.

Tesla had plans to begin selling imported cars in India last year and has been lobbying the government to slash import taxes on electric vehicles (EVs) before it enters the market. In October, it took its demands to Indian Prime Minister Narendra Modi’s office.

Musk didn’t identify the “challenges” being worked on in his Twitter post.

© Thomson Reuters 2022

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Jack Dorsey Fintech Firm Block Wants Bitcoin Mining for All

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By Agence France-Presse | Updated: 14 January 2022

Jack Dorsey on Thursday announced that his digital payments firm Block is building a system to make it easier for people to mine Bitcoin.

Dorsey said in a tweet that Block, formerly known as Square, is “officially building an open Bitcoin mining system,” following through on an idea floated publicly late last year. Bitcoin price in India stood at Rs. 34.11 lakhs as of 12:00pm IST on January

In November, Twitter co-founder Dorsey announced his departure from the social media platform, allowing him to concentrate on his digital payments firm as it expands into cryptocurrency.

Block changed its name from Square late last year to denote a broader mission that includes blockchain and economic empowerment.

Hardware and software teams at Block will openly collaborate with the cryptocurrency community outside the San Francisco-based company, aiming to create a mining system that could be used by anyone, according to Dorsey’s tweets.

Block hardware general manager Thomas Templeton said on Twitter that the project’s aim was: “To make mining more distributed and efficient in every way, from buying, to set up, to maintenance, to mining.”

“We see it as a long-term need for a future that is fully decentralised and permissionless.”

No timeline was given for when Block’s system might be ready. Block is also working on a wallet for storing cryptocurrency, using similar open collaboration.

“For most people, mining rigs are hard to find,” Templeton said in a tweet.

“How can we make it so that anyone, anywhere, can easily purchase a mining rig?”

The price of Bitcoin hit record highs in 2021 thanks to support from traditional finance. But it slid below $40,000 (roughly Rs. 30 lakh) on Monday, falling to its lowest level since the end of September as the world’s leading cryptocurrency showed no end to its volatility.

Created following the 2008 global financial crisis, Bitcoin initially promoted a libertarian ideal and aspired to overthrow traditional monetary and financial institutions such as central banks.

In more recent times, climate change watchers have shone a spotlight on the huge amount of electricity used to power computers required to unearth new Bitcoin tokens.

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Digital Pound Could Hit Financial Stability and Erode Privacy, UK Lawmakers Warn

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By Reuters | Updated: 13 January 2022

A digital pound used by consumers could harm financial stability, raise the cost of credit, and erode privacy, though a version for wholesale use in the financial sector demands greater appraisal, British lawmakers said on Thursday.

Britain’s central bank and finance ministry said in November they would hold a consultation this year on whether to move forward on a central bank digital currency (CBDC) that would be introduced after 2025 at the earliest.

Central banks across the world have stepped up work on CBDCs to avoid the private sector dominating digital payments as cash use falls. The prospect of widely-used cryptocurrencies issued by Big Tech has also galvanised such efforts.

But an e-pound used by households and business for everyday payments could see people move cash from commercial bank accounts to digital wallets, said the report by a committee in the House of Lords, parliament’s unelected upper chamber.

That could spark financial instability in times of economic stress and increase borrowing costs as a key source of lenders’ funding would dry up, it said.

A digital pound could also harm privacy, the report added, by allowing the central bank to monitor spending.

“We were really concerned by a number of the risks that are posed by the introduction of a CBDC,” Economic Affairs Committee Chair Michael Forsyth told Reuters.

Many benefits for the consumers could be “achieved by alternative means with fewer risks,” Forsyth said, pointing to regulation as a better tool to ward off the threat of crypto issued by Big Tech firms.

However, a wholesale CBDC used to transfer large sums could make securities trading and settlement more efficient, the report said. Britain’s central bank and finance ministry should consult on its advantages over the expansion of the existing settlements system, it said.

Britain’s parliament should have the final say on any decision to launch a e-pound, the report said, calling for lawmakers to also vote on its governance.

A CBDC would have “far-reaching consequences for households, business and the monetary system,” Forsyth said. “That needs to be approved by parliament.”

© Thomson Reuters 2022

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