Crypto Crash Threatens North Korea’s Stolen Funds as It Ramps Up Weapons Tests
By Reuters | Updated: 29 June 2022
The nosedive in cryptocurrency markets has wiped out millions of dollars in funds stolen by North Korean hackers, four digital investigators say, threatening a key source of funding for the sanctions-stricken country and its weapons programmes.
North Korea has poured resources into stealing cryptocurrencies in recent years, making it a potent hacking threat and leading to one of the largest cryptocurrency heists on record in March, in which almost $615 million (roughly Rs. 4900 crore) was stolen, according to the US Treasury.
The sudden plunge in crypto values, which started in May amid a broader economic slowdown, complicates Pyongyang’s ability to cash in on that and other heists, and may affect how it plans to fund its weapons programmes, two South Korean government sources said. The sources declined to be named because of the sensitivity of the matter.
It comes as North Korea tests a record number of missiles — which the Korea Institute for Defense Analyses in Seoul estimates have cost as much as $620 million (roughly Rs. 4900 crore) so far this year — and prepares to resume nuclear testing amid an economic crisis.
Old, unlaundered North Korean crypto holdings monitored by the New York-based blockchain analytics firm Chainalysis, which include funds stolen in 49 hacks from 2017 to 2021, have decreased in value from $170 million (roughly Rs. 1300 crore) to $65 million (roughly Rs. 500 crore) since the beginning of the year, the company told Reuters.
One of North Korea’s cryptocurrency caches from a 2021 heist, which had been worth tens of millions of dollars, has lost 80 percent to 85 percent of its value in the last few weeks and is now worth less than $10 million (roughly Rs. 10 crore), said Nick Carlsen, an analyst with TRM Labs, another US-based blockchain analysis firm.
A person who answered the phone at the North Korean embassy in London said he could not comment on the crash because allegations of cryptocurrency hacking are “totally fake news.”
“We didn’t do anything,” said the person, who would only identify himself as an embassy diplomat. North Korea’s foreign ministry has called such allegations US propaganda.
The $615 million March attack on blockchain project Ronin, which powers the popular online game Axie Infinity, was the work of a North Korean hacking operation dubbed the Lazarus Group, US authorities say.
Carlsen told Reuters that the interconnected price movements of different assets involved in the hack made it difficult to estimate how much North Korea managed to keep from that heist.
If the same attack happened today, the Ether currency stolen would be worth a bit more than $230 million (roughly Rs. 1900 crore), but North Korea swapped nearly all of that for Bitcoin, which has had separate price movements, he said.
“Needless to say, the North Koreans have lost a lot of value, on paper,” Carlsen said. “But even at depressed prices, this is still a huge haul.”
The United States says Lazarus is controlled by the Reconnaissance General Bureau, North Korea’s primary intelligence bureau. It has been accused of involvement in the “WannaCry” ransomware attacks, hacking of international banks and customer accounts, and the 2014 cyber-attacks on Sony Pictures Entertainment.
Analysts are reluctant to provide details about what types of cryptocurrency North Korea holds, which might give away investigation methods. Chainalysis said that Ether, a common cryptocurrency linked to the open-source blockchain platform Ethereum, was 58 percent or about $230 million, of the $400 million (roughly Rs. 3100 crore) stolen in 2021.
Chainalysis and TRM Labs use publicly available blockchain data to trace transactions and identify potential crimes. Such work has been cited by sanctions monitors, and according to public contracting records, both firms work with US government agencies, including the IRS, FBI and DEA.
North Korea is under widespread international sanctions over its nuclear programme, giving it limited access to global trade or other sources of income and making crypto heists attractive, the investigators say.
‘Fundamental’ to nuclear programme
Although cryptocurrencies are estimated to be only a small portion of North Korea’s finances, Eric Penton-Voak, a coordinator of the United Nations panel of experts that monitors sanctions, said at an event in April in Washington, D.C., that cyberattacks have become “absolutely fundamental” to Pyongyang’s ability to evade sanctions and raise money for its nuclear and missile programmes.
In 2019, sanctions monitors reported that North Korea had generated an estimated $2 billion (roughly Rs. 16,000 crore) for its weapons of mass destruction programmes using cyberattacks.
One estimate from the Geneva-based International Campaign to Abolish Nuclear Weapons says North Korea spends about $640 million (roughly Rs. 5,000 crore) per year on its nuclear arsenal. The country’s gross domestic product was estimated in 2020 to be around $27.4 billion (roughly 2 lakh crore), according to South Korea’s central bank.
Official sources of revenue for Pyongyang are more limited than ever under self-imposed border lockdowns to combat COVID-19. China – its biggest commercial partner – said in 2021 that it had imported just over $58 million (roughly 500 crore) in goods from North Korea, amid some of the lowest level of official bilateral trade in decades. Official numbers do not include smuggling.
North Korea already only gets a fraction of what it steals because it must use brokers willing to convert or buy cryptocurrencies with no questions asked, said Aaron Arnold of the RUSI think-tank in London. A February report by the Center for a New American Security (CNAS) estimated that in some transactions, North Korea only gets one-third of the value of the currency it has stolen.
After obtaining cryptocurrency in a heist, North Korea sometimes converts it to Bitcoin, then finds brokers who will buy it at a discount in exchange for cash, which is often held outside the country.
“Much like selling a stolen Van Gogh, you’re not going to get fair market value,” Arnold said.
Converting to cash
The CNAS report found that North Korean hackers exhibit only “moderate” concern over hiding their role, compared to many other attackers. That allows investigators to sometimes follow digital trails and attribute attacks to North Korea, though rarely in time to recover the stolen funds.
According to Chainalysis, North Korea has turned to sophisticated ways of laundering stolen cryptocurrency, increasing its use of software tools that pool and scramble cryptocurrencies from thousands of electronic addresses – a designator for a digital storage location.
The contents of a given address are often publicly viewable, allowing firms such as Chainalysis or TRM to monitor any that investigations have linked to North Korea.
Attackers have tricked people into giving access or hacked around security to siphon digital funds out of internet-connected wallets into North Korea-controlled addresses, Chainalysis said in a report this year.
The sheer size of recent hacks has strained North Korea’s capacity to convert cryptocurrency to cash as quickly as in the past, Carlsen said. That means some funds have been stuck even as their value drops.
Bitcoin has lost about 54 percent of its value this year and smaller coins have also been hit hard, mirroring a slide in equities prices linked to investor concerns about rising interest rates and the growing likelihood of a global recession.
“Converting to cash remains a key requirement for North Korea if they want to use the stolen funds,” said Carlsen, who investigated North Korea as an analyst at the FBI. “Most of the commodities or products the North Koreans want to buy are only traded in USD or other fiat, not cryptocurrencies.”
Pyongyang has other, larger sources of funding that it can rely on, Arnold said. U.N. sanctions monitors have said as recently as December 2021 that North Korea continues to smuggle coal — usually to China and other major exports banned under Security Council resolutions.
North Korean hackers sometimes appear to wait out rapid dips in the value or exchange rates before converting to cash, said Jason Bartlett, the author of the CNAS report.
“This sometimes backfires as there is little certainty in predicting when the value of a coin will rapidly increase and there are several cases of highly depreciated crypto funds just sitting in North Korea-linked wallets,” he said.
Sectrio, the cybersecurity division of Indian software firm Subex, said there are signs North Korea has begun ramping up attacks on conventional banks again rather than cryptocurrencies in recent months.
The firm’s banking sector-focused “honeypots” – decoy computer systems intended to attract cyberattacks – have seen an increase in “anomalous activities” since the crypto crash, as well as an increase in “phishing” emails, which try to fool recipients into giving away security information, Sectrio said in a report last week.
But Chainalysis said it had yet to see a major change in North Korea’s crypto behaviour, and few analysts expect North Korea to give up on digital currency heists.
“Pyongyang has added cryptocurrency into its sanctions evasion and money laundering calculus and this will likely remain a permanent target,” Bartlett said.
© Thomson Reuters 2022
FTX’s Sam Bankman-Fried Could Be Planning to Blame Lawyers Who Helped Launch Firm in Criminal Case
By Reuters | Updated: 1 June 2023
Indicted FTX founder Sam Bankman-Fried seems to be gearing up to blame the lawyers who helped him establish the crypto exchange.
That’s the subtext of a motion filed on Tuesday by his lawyers at Cohen & Gresser, who are defending Bankman-Fried against federal charges of fraud, conspiracy and bribery. They’re asking for access to documents from Fenwick & West, the Silicon Valley law firm that represented FTX and sister hedge fund Alameda Research from the companies’ inception through their collapse in November 2022.
Fenwick & West did not respond to my email queries. The firm has not yet filed a response to a civil suit by FTX customers who named Fenwick as a defendant.
Bankman-Fried has pleaded not guilty to the charges. The defense motion claims that Fenwick & West advised him, FTX and Alameda on at least four matters at the heart of the Manhattan federal court indictment against the onetime crypto billionaire.
The California law firm, for instance, allegedly provided counsel to FTX on the creation of shell companies that opened accounts at Silvergate Bank to receive deposits from FTX customers, according to Tuesday’s motion. Those shell company bank accounts are a critical element of the government’s bank fraud conspiracy charge.
Fenwick & West also allegedly advised FTX that it was not required to register with the U.S. government as a money transmitting business, according to the new motion. Prosecutors have charged Bankman-Fried with conspiring to violate wire transfer laws by failing to register but his lawyers said in the new motion that Fenwick’s alleged advice “directly contradicts the government’s theory.”
Bankman-Fried’s filing similarly contends that Fenwick & West reviewed internal agreements in which Alameda loaned money to Bankman-Fried and other FTX executives. The government alleges that the loans were an illegal misappropriation of customer deposits as part of a scheme to violate federal campaign finance laws. Bankman-Fried’s new motion argues that Fenwick & West’s legal advice on the tax consequences of the loans might rebut the government’s contention that the loans were improper.
Finally, the motion asserts that it was Fenwick that instructed Bankman-Fried to communicate with other FTX and Alameda executives via Signal and other ephemeral messaging apps. That alleged advice would undercut the government’s claim that Bankman-Fried directed his colleagues to use Signal and other encrypted communication apps to hide evidence of his crimes.
Bankman-Fried’s lawyers acknowledged in the motion that their assertions about Fenwick & West are based on a very limited set of documents.
The filing does not specifically invoke the words “advice of counsel” to refute government claims that Bankman-Fried acted with criminal intent. But Bankman-Fried’s lawyers seem to be headed in that direction, telling US District Judge Lewis Kaplan of Manhattan that they need to know more about Fenwick’s work for FTX and Alameda to determine if the law firm’s documents exonerate their client.
Those documents could help Bankman-Fried later argue at trial that he was following advice from FTX’s lawyers.
Tuesday’s filing asks Kaplan to order the government to turn over evidence from Fenwick & West or to authorize Bankman-Fried to subpoena documents from the law firm.
The firm would almost certainly rather not turn over client files to Bankman-Fried. Among other reasons, Fenwick & West has been named as a defendant in a sweeping class action by FTX customers. The plaintiffs’ lawyer who filed that case, Kerry Miller of Fishman Haygood, told me on Wednesday that he plans to monitor the Bankman-Fried criminal case for any Fenwick & West documents that might boost the class allegations.
Bankman-Fried’s lawyers from Cohen & Gresser declined comment on the new motion through a spokesperson. The Manhattan U.S. Attorney’s office also declined to comment.
Attorney-client privilege is often a complication for white-collar defendants who want to blame their companies’ lawyers for providing bad advice. Companies – rather than individual executives or outside law firms — control the right to insist that communications with their counsel remain confidential. Companies are typically reluctant to waive privilege for fear that their lawyers’ documents might be used in other cases.
Bankman-Fried’s new motion said his lawyers are in negotiations with FTX’s new counsel about whether the company intends to assert attorney client privilege over relevant Fenwick & West documents. (The motion did not name FTX’s new law firm but it is Sullivan & Cromwell.) Defense counsel also said that Fenwick & West told them it would not turn over any documents without FTX’s permission.
The motion floats two theories for why Bankman-Fried is entitled to access to certain Fenwick & West communications even if FTX claims privilege. Bankman-Fried said the law firm represented him personally in addition to serving as counsel to FTX and Alameda. That assertion seems to hint that Bankman-Fried will claim that he can personally waive privilege over some Fenwick & West communications.
Defense lawyers also argued that FTX, which is in Chapter 11 bankruptcy, has already waived its privilege over certain documents by turning them over to prosecutors. If that’s correct, said former federal prosecutor Harry Sandick of Patterson Belknap Webb & Tyler, it will be easier for Bankman-Fried to obtain Fenwick’s communications.
“It’s hard to see why the defense should be denied access,” Sandick said.
If Bankman-Fried’s lawyers believe that Fenwick documents can help them refute the government’s evidence of criminal intent, Sandick said, they will eventually have to make a strategic decision about how to get the law firm’s communications in front of a jury.
The documents must be introduced through a witness – presumably Bankman-Fried himself or a Fenwick & West lawyer. The strongest defense case, Sandick said, would probably feature testimony from a Fenwick & West witness to bolster testimony from Bankman-Fried about his reliance on advice from FTX lawyers. But contradictory testimony from a law firm witness could undermine Bankman-Fried’s advice-of-counsel defense.
That’s a concern for another day. Right now, Sandick said, Bankman-Fried’s lawyers just want to know whether Fenwick & West’s files will help their client.
“It’s an understandable motion,” he said. “They’re saying, ‘Let’s see what the documents say, then we’ll decide how to use them.’”
© Thomson Reuters 2023
Binance Australia Customers Seen Selling Bitcoin at Discount to Rival Crypto Exchanges
By Reuters | Updated: 30 May 2023
Bitcoin prices on the Australian arm of Binance, the world’s largest crypto-currency exchange, were almost A$9,000 (roughly Rs. 4.8 lakh) lower than prices on rival exchanges on Tuesday, in a sign customers were seeking to exit their positions quickly.
The price of the world’s biggest cryptocurrency, bitcoin, was at around AUD 34,000 ($23,062.20, or roughly Rs. 18.3 lakh) on Binance Australia, compared with A$43,000 on BTC Markets, an Australia-based cryptocurrency exchange.
Bitcoin was quoted at $27,790 (roughly Rs. 23 lakh) outside Australia.
Binance did not immediately respond to Reuters request for comment.
Earlier this month, the Binance unit said some customers in Australia will not be able to deposit or withdraw money after a third-party service provider cut off its service.
Binance on social media had said users were unable to make Australian dollar deposits by bank transfer with immediate effect.
“We are working hard to find an alternative provider to continue offering AUD deposits and withdrawals to our users,” Binance had said in a statement.
Binance has been battling regulatory suits and probes around the world. The company said in April it would close its Australian derivatives business after relinquishing a financial services licence amid a regulatory probe into its operations.
Binance also withdrew from Canada earlier this month, weeks after the country issued a series of new guidelines for cryptocurrency exchanges including investor limits and mandatory registrations.
“Unfortunately, (the) new guidance related to stablecoins and investor limits provided to crypto exchanges makes the Canada market no longer tenable for Binance at this time,” crypto exchange Binance had said in a tweet.
($1 = 1.4743 Australian dollars)
© Thomson Reuters 2023
Blockchain.com CEO Says US Debt Default Would Hit Cryptocurrencies Initially
By Reuters | Updated: 26 May 2023
A US government default would trigger an initial pull-back from cryptocurrencies followed by a “push upward” the CEO of London-based crypto firm Blockchain.com said on Thursday.
The US government could fall behind on its bills next month – and even default on its debt – if Congress does not raise a $31.4 trillion (roughly Rs. 2,59,54,29,80 crore) cap on government borrowing, a failure that could trigger economic calamity and panic on global financial markets.
In the short term, “a US default or a US recession is probably bad for crypto. These are risk assets, and you want to take risk off,” Blockchain.com CEO Peter Smith said at the Qatar Economic Forum, organised by Bloomberg.
“On a long horizon, these are probably good for crypto…If the US government defaults, we’ll probably see a quick pull-back and then a very strong push upward in the crypto market.”
The cryptocurrency market has followed cyclical patterns and while 2022 was “quite painful”, it is recovering this year and 2024 will be “another exponential year”, Smith said.
Blockchain.com, which offers users a crypto wallet and is also a crypto exchange, is considering an expansion of its small Middle Eastern office in the commercial center of Dubai.
“The (Dubai) governments in a very healthy, consultative process with the industry and about regulations…I think so long as those end up where we think they will, we’ll probably be investing heavily in Dubai,” he said.
Last September, Blockchain.com signed an agreement with Dubai’s crypto regulator Virtual Assets Regulatory Authority (VARA) and has since opened an office and hired staff.
Currently, the company is investing most heavily to shore up operations in Singapore and Europe, Smith said.
© Thomson Reuters 2023
Cryptocurrencies Like Bitcoin, Ether Should Be Regulated as Gambling, UK Lawmakers Say Citing Risks
By Reuters | Updated: 17 May 2023
Bitcoin, ether and other cryptocurrencies should be regulated as gambling given they are potentially used by fraudsters and pose significant risks to consumers, a panel of UK lawmakers said in a report on Wednesday.
Britain is planning its first rules for cryptoassets, which currently only comply with anti-money laundering safeguards.
Bitcoin and ether account for two-thirds of all cryptoassets and are not backed by any currency or asset, leading to volatility in prices and the potential for all money invested in them to be wiped out, the report from parliament’s treasury committee said.
Regulating retail trading and investment in unbacked cryptocurrencies could create a ‘halo’ effect that leads consumers to think the activity is safer than it is, or protected when it is not, it said.
“We therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’,” the report said.
The Financial Conduct Authority has repeatedly warned consumers they could lose all of their money invested in cryptocurrencies.
Cryptoassets globally have a total market capitalisation of about $1.2 trillion (roughly Rs. 98,84,900 crore), a tiny part of the financial system, but the collapse of crypto firm FTX exchange last year introduced greater urgency into regulating the sector.
“The events of 2022 have highlighted the risks posed to consumers by the cryptoasset industry, large parts of which remain a wild west,” said Harriett Baldwin, chair of the treasury committee.
Around 10 percent of UK adults hold or have held cryptoassets, according to official figures.
The European Union approved the world’s first set of comprehensive rules for crypto markets on Tuesday. International regulators are due to propose global norms shortly.
The underlying technology used by cryptoassets has the potential to improve efficiency in payments, the report said.
© Thomson Reuters 2023
EU States Approve World’s First Comprehensive Set of Rules to Regulate Crypto in Wake of FTX Collapse
By Reuters | Updated: 16 May 2023
European Union states on Tuesday gave the final nod to the world’s first comprehensive set of rules to regulate cryptoassets on Tuesday, piling pressure on countries such as Britain and the United States to play catch up.
An EU finance minister meeting in Brussels approved rules that were thrashed out with the European Parliament, which gave its approval in April.
Regulating crypto has become more urgent for regulators after the collapse of crypto exchange FTX.
“Recent events have confirmed the urgent need for imposing rules which will better protect Europeans who have invested in these assets, and prevent the misuse of crypto industry for the purposes of money laundering and financing of terrorism,” said Elisabeth Svantesson, finance minister for Sweden, which holds the EU presidency.
The rules require firms that want to issue, trade and safeguard cryptoassets, tokenised assets and stablecoins in the 27 country bloc to obtain a licence.
Crypto firms say they want certainty in regulation, putting pressure on countries to copy the EU rules, and on regulators to come up with global norms for a cross-border activity.
Britain has outlined a phased approach, starting with stablecoins and broadening out to unbacked cryptoassets later on, but there is no firm timetable.
The United States has focused on using existing securities rules for enforcement action in the sector while it decides on whether to introduce bespoke new rules and who would apply them.
Hester Peirce, one of the commissioners at the US derivatives regulator CFTC, said last week that a number of federal and state authorities are trying to figure out what oversight role they could play in the crypto sector.
“We are wandering the in the desert a bit,” Peirce told a conference.
© Thomson Reuters 2023
Binance Crypto Exchange Pauses Bitcoin Withdrawals Citing Large Volumes
By Reuters | Updated: 8 May 2023
Cryptocurrency exchange Binance halted Bitcoin withdrawals on Monday for the second time in a day, citing large volumes.
“Our team is currently working on a fix and will reopen (Bitcoin) withdrawals as soon as possible,” the company said in a tweet.
“There is a large volume of withdrawal transactions from Binance still pending as our set fees did not anticipate the recent surge in (Bitcoin) network gas fees,” Binance said, referring to payments made to crypto miners who process transactions on the blockchain.
Earlier in the day it had paused withdrawals for about an hour.
In March, Binance, the world’s largest crypto exchange suspended deposits and withdrawals citing tech issues. Bitcoin was down about 1 percent to $28,191 (roughly Rs. 23 lakh), its lowest in nearly a week.
Last month, Binance confirmed that the software that underpins the second-biggest crypto coin Ether was upgraded.
The move is said to give investors access to more than $30 billion (roughly Rs. 2,45,877 crore) of the digital tokens.
Known as Shapella, the latest upgrade to the Ethereum blockchain since its Merge upgrade will enable investors to redeem an offshoot of ether tokens that they have deposited in return for interest on the blockchain network over the past three years.
“The Shanghai/Shapella Upgrade is complete. Deposits & withdrawals for ETH, OP, ARB and ERC-20 tokens via the Ethereum, Optimism, and Arbitrum networks are now back online,” Binance said in a tweet.
Binance also closed its Australian derivatives business after relinquishing a financial services licence last month amid a regulatory probe into its operations.
The Australian Securities and Investment Commission (ASIC) had been conducting a “targeted review” of Binance, first confirmed in February, when Binance said it had misclassified some retail investors as wholesale.
© Thomson Reuters 2023
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