DOJ’s First-of-its Kind Crypto Framework Targets Decentralized, P2P Platforms & Privacy

A 71-page long “Cryptocurrency Enforcement Framework” report has been published by the Attorney General’s Cyber Digital Task Force. It details the emergence of cryptocurrencies and the presenting opportunities for terrorists, rogue nations, and other criminals.

The report is described as “a cohesive, first-of-its-kind framework for those seeking to understand federal enforcement priorities in this growing space,” said Attorney General William Barr.

According to him, the US has been “enormously successful “ in blocking the criminals from using traditional currencies, and now wants to

“adapt our strategy and tools to 21st century financing, including to combat the use of cryptocurrencies to evade enforcement and harm our national security.”

The Attorney General recognizes the “tremendous promise” of cryptos and blockchain technology for the future, supporting the advancement of legitimate crypto uses and tech, but says it is “critical” that they follow the law as well.

Aiming for Privacy

The Framework divides the illicit use of crypto into three categories — financial transactions related to commissions of crimes, money laundering and covering legitimate activity from tax, and crimes like theft that directly implicates the crypto marketplace itself.

For this, DOJ, SEC, and CFTC are working together to explore legal and regulatory tools to address the threats and enforce federal law in the crypto space.

The report also points out the challenges the government is facing has been in respect to business models like kiosks, certain crypto exchanges, and casinos; and activities like “mixing” and “tumbling,” and “chain hopping,” which they say may facilitate criminal activity.

“Decentralized platforms, peer-to-peer exchangers, and anonymity-enhanced cryptocurrencies that use non-public or private blockchains all can further obscure financial transactions from legitimate scrutiny.”

According to the regulators, Web 3.0 in itself has a vision of — “humans will reclaim the internet, their data, and their anonymity from large outside forces” — can pose dangerous threats to public safety.

The agency is also fully aware of decentralized finance, which sees “exponential growth,” following the ICO boom.

The report came just days after deferral prosecutors went after crypto derivatives exchange BitMEX and its founders for preventing money laundering and arrested John McAfee over tax evasion charges and allegedly earning millions via crypto promotion.

The Department of Justice said in the report that it would “continue its aggressive investigation and prosecution of a wide range of malicious actors.” It further encouraged international cooperation in the investigations and making arrests.

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Author: AnTy

Ledger Hardware Wallet to Issue Exploit Fix to Prevent Users from Sending BTC on Accident

According to a blog published by Mo Nokhbeh, a crypto software researcher, the Ledger Wallet app is in danger of exploitation due to a vulnerability that has persisted on the platform since 2019. According to Mo, a user can send Bitcoin (BTC) instead of other Bitcoin forks such as the BTC testnets, Litecoin, Bitcoin Cash etc. without their knowledge if even if they had selected the ‘forks’.

To use the Ledger hardware wallet, a user must install the corresponding app on to the USB drive allowing users to hold different types of digital currencies. However, only one app is able to be open at a time to ensure security and total isolation of the apps.

An issue arises with BTC and its corresponding forks for example if your Litecoin app is open and live and you’d wish to send LTC, the wallet will prompt a confirmation of a Bitcoin transaction while the interface presents it as an LTC transaction to a Litecoin address. If you accept the confirmation, a fully valid BTC transaction will be sent out of your wallet instead of the cheaper altcoin forks.

Read More >> Data Breach at Popular Hardware Crypto Wallet Ledger Affects Million; Trezor Fires Shots

Interactions with Ledger

Mo has been vocal to the Ledger team on the vulnerability of their platform, but claims his cries fell on deaf years with the issue persisting for the past year and a half. In a response posted on Decrypt, a spokesperson from Ledger said the delays were mainly due to the communications channels the security researcher used. The spokesperson said,

“The researcher contacted us through many means—mainly Twitter DMs. The appropriate medium for bug bounty remains the dedicated email address [email protected] Due to this, our point of view on this timeline differs, and we are genuinely sorry for the miscommunication.”

However, Nokhbeh denies the claims saying the only time he sent a Twitter DM was recently in June 2020 after a number of failed tries through the official channels.

Read More>> Crypto Hardware Wallet Ledger: ‘Funds are Safe’ After ‘BigSpender’ Vulnerability Found

Solution to the Ledger App vulnerability

In a statement focusing on the possible exploits, Ledger said the vulnerability arose as a tradeoff between security and usability especially for the Bitcoin network. While the external security of the wallets remain solid, Ledger allows Bitcoin forks/derivatives that follow the same derivation path as the top crypto to derive public keys or sign Bitcoin transactions. It reads,

“Some BTC forks use the same derivation path as BTC. If we prevent these forks from using the BTC derivation path, this would simply prevent users from using the Ledger Nano S/X with these forks.”

The statement further states the solution to the issue has been released in a new update warning users when their intended and confirmation transactions do not match.

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Author: Lujan Odera

Bitcoin Mixers See Rapid Growth From the Darknet Markets: BitFury Crystal Blockchain Report

The latest crypto activity report, published by Crystal blockchain, suggests a significant surge in the use of bitcoin mixers on the darknet between the last quarter of 2019 and the first quarter of 2020. The rise is a whopping 294% which suggests the rapid adoption and use of mixing tools by these darknet entities.

The report also saw a similar trend for the US Dollar which increased from $3m in Q1 2019 to $67m in Q1 2020. The report read:

“The amount of bitcoin sent to mixers by darknet entities rose significantly this year — from 790 total bitcoin in Q1 2019 to 7,946 bitcoin in Q1 2020. The same growth was also observed in USD — an increase from $3m in Q1 2019 to $67m in Q1 2020. This indicates a rapid adoption of crypto mixing services by darknet entities.”

Some of the key findings of the report include:

BitFury Crystal Blockchain
Source: BitFury Crystal Blockchain

The amount of bitcoin (measured in BTC) transferred between darknet entities and other entity types declined in Q1 2020 compared to the same period one year ago; however, the value of the amount of bitcoin transferred (measured in USD) grew by 65%.

This is not just due to the increase in the USD value of bitcoin from 2019 to 2020. The amount of money being transferred by darknet entities is still growing, and they are continuing to use bitcoin as a medium of transport. The mass adoption of bitcoin, as well as its ease of use and popularity, is a contributing factor as well.

In Q1 2020, there was a rapid growth in the amount of Bitcoin sent from darknet entities to mixers. During that same period, the amount sent in Bitcoin to exchanges that required verification was reduced — indicating a reduction in the use of cryptocurrency exchanges for criminal and darknet activities in favor of more anonymous services like mixers.

The share of bitcoin sent from one darknet entity to another also grew in Q1 2020. It is possible that darknet users are trying to hide their bitcoin flow inside of the darknet, avoiding the detection of their activities. This also encourages darknet services to cooperate and grow their revenue internally.

The report concluded that even though the amount of bitcoin sent to darknet has decreased since 2017, the value of bitcoin in USD has increased significantly. Also, the amount of bitcoin being sent among darknet members have also seen a rise. While the use of privacy tools by these darknet entities was no secret, now with the help of many analytical tools and service providers, it is easier to track even the masked transactions.

Also Read: Twitter Hacker Managed to Scam Only 12 Bitcoin After Duping Major Accounts

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Author: James W

PayPal’s Letter to European Commission Confirms Its Plans to Develop Crypto Capabilities

In a letter to the European Commission published in March this year, the global payment service, PayPal, stated they are in works to enable cryptocurrency capabilities on the platform. The company has yet to disclose plans in the digital assets arena completely, but the addition of Bitcoin (BTC) to the platform could be on hand.

PayPal’s ambition in the cryptocurrency space has been clear since its entanglement with the Libra stablecoin project. In the letter to the European Commission responding to the consultation by the regulators on building an EU framework for markets in crypto assets, PayPal confirmed its interests in the digital asset space. The report reads,

“Since the project’s [joining the Libra Foundation] inception, PayPal has taken unilateral and tangible steps to further develop its capabilities in this area,” the report reads. “And to continue to focus on advancing our existing mission and business priorities to democratize access to financial services.”

PayPal’s entry into the cryptocurrency asset space will open up the crypto market to over 300 million global customers (95 million in the EU). In June, BEG reported the global online payment giant had started researching into integrating buying and selling crypto.

Read More: PayPal CEO Dan Schulman Reveals He Only Owns One Cryptocurrency, Bitcoin

A clear developmental EU framework

PayPal recommends a developmental framework that enables a well-regulated industry, promoting clarity to enable innovation and evolution of the industry. The letter recommends three fundamental principles that the EU could follow to ensure a stable developmental structure in crypto regulation.

First, the EU should subject cryptocurrency service providers to the same scope of applicable KYC/AML compliance rules as other financial institutions to prevent money laundering and other illicit online trading activities.

The EU should also set clear definitions and rules on licensing and regulation to avoid loopholes and uncertainty. Finally, the EU regulators should take a step back not to stifle innovation in the rapidly changing world of cryptocurrency. The letter reads,

“Any regulatory framework in Europe should strive to be technology-neutral to support innovation and competition in this fast-evolving space.”

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Author: Lujan Odera

Fed Reserve of Philadelphia Research: Account-Based CBDCs May Replace Commercial Banks

A research paper published on June 1, 2020, by the Federal Reserve of Philadelphia shows account-based central bank digital currency (CBDC) could potentially replace the role of commercial banks if panic runs are managed and commercial banks are given a level playing field in the money market. This however poses a huge risk, the paper says.

The research titled, “Central Bank Digital Currency: Central Banking for All?” shows that a set of allocations in the private financial intermediation (commercial banks) could easily be replaced by a CBDC. The paper however claims that competition between the account-based CBDCs and commercial banks should be allowed and depositor runs minimized.

The paper is a collaboration of the research wing of the Fed Reserve of Philadelphia, the University of Chicago, University of Pennsylvania and Ecole Polytechnique. It looks deeper on the consequences of introducing a CBDC and its effects on the current financial system.

The paper looked into the introduction of an account-based CBDC system, whereby citizens will have a direct account with the central bank, and the implications of a CBDC on financial intermediation – the role current commercial banks play in the system.

Central banks stability during bank runs

Commercial banks are the major facilitators of maturity transformation – a process that sees short term liabilities converted to long term liabilities. For example, banks take in deposits (short term loans) and transform them into longer term instruments such as mortgages and commercial bonds.

However, banks are liable to bank runs whereby customers rush to withdraw their money all at once leaving the bank strained. Sometimes the deposits cash flow also dries up leaving the bank with no money to lend.

Possible risk in central bank’s CBDC implementation

Introduction of an account-based CBDC will offer central banks similar ability to current commercial intermediaries but will have to rely on the “expert knowledge of investment banks” to successfully transform deposits to long term side assets, the paper says.

With a clear and “rigid” partnership with investment banks, central bank may turn a monopolistic as more depositors open accounts with them from the commercial banks.

However, the paper notes a possible risk involved in the implementation of a CBDC. It reads,

“If the competition from commercial banks is impaired (for example, through some fiscal subsidization of central bank deposits), the central bank has to be careful in its choices to avoid creating havoc with maturity transformation.”

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Author: Lujan Odera

Silvergate Crypto Bank Client Base Grew 37% in Last Year; SEN Transfer Volume Is Up 324%

  • Silvergate Bank published its quarterly earnings report on Wednesday, revealing that it’s added 46 new cryptocurrency clients in the first quarter and, because of these clients, it also recorded a surge in its deposits and income fees.
  • Silvergate registered deposit levels from its digital clients primarily because of the uncertainty in the crypto market that followed the black Thursday crash.

Silvergate is among the few US-based banks that cater to crypto-traders among other crypto-related service providers. This situation provides them with a great source of revenue for the bank amid the growing interest of the public in the crypto space.

The bank went public on the New York Stock Exchange in November last year with $2.3 billion in total assets. The addition of 46 new crypto clients has taken the total number to 850. Out of these 850 crypto clients, 541 are institutional while remaining 249 are from different crypto backgrounds.

The bank seems to quite popular among the institutional given their high percentage among crypto clients, even the recent acquisition of 46 new clients, 32 of them were institutional investors. The bank also revealed that they have around 200 clients waiting to be approved as well.

Crypto Investors Biggest Depositors in the Bank

The quarterly report also revealed that deposits from the crypto clients make a significant portion of the total deposit. The first quarter saw an increase of 35% in deposit from these crypto clients taking the total amount of deposit to $1.7 billion out of the total $2 billion.

The figures are self-explanatory on the significance of crypto clients in the bank. While the deposit from these clients increases significantly, the other deposits took a massive dive of 45% in the first quarter.

Alan Lane, CEO of the bank revealed that the average balance of deposits was up by $100 million while it rose to $400 million for the period end deposits, mainly because institutional clients were putting more cash back into their accounts.

The bank also increased the cost of deposits from 0.84% in the last quarter of 2019 to 0.87% in the first quarter of 2020. The rise in deposit fee is significant if we compare it to the 0.08% charge in the first quarter of 2019.

The inflow of crypto clients and subsequent rise in deposit fees have made the bank an additional $300,000 from crypto clients alone. The bank’s net income rose by 22% to reach $4.4 million.

The Bank Doubles Number of Verified Transaction on its Silvergate Exchange Network (SEN)

The first quarter of 2020 saw bank’s Silvergate Exchange Network (SEN) handle a total of 31,405 transactions, more than double that of its last quarter of 14,400 and almost tripled from the number of transactions handled by SEN a year ago.

The trading volume also rose to $17.4 billion from last quarter’s $9.6 billion. The bank has since approved $12.5 million in bitcoin collateralized loan until now.

One of the key reasons behind its success with crypto clients is the ease of service, where it allows the customers to instantly move US Dollars between different exchanges and is also available during nights and weekends just like the crypto markets.

Looking at the success it has garnered from crypto clients, the bank is looking to launch several new features and products on SEN in the near future.

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Author: Silvia A

Chinese Court Legally Classifies Ethereum As A “Property” In ETH Theft Case

Chinese court rules Ethereum (ETH) is legal “property” in a case of theft published on April 22, 2020, on Chinese media outlet, 8BTC. According to the report, the Shenzhen-based court ruled that Ethereum’s ‘economic value’ as a medium of exchange and mining effectively makes the second largest cryptocurrency legally a property in the largest population in the world.

Chinese Court Rules: “ETH is a property”

In a ruling made by Shenzhen based court earlier this week, ETH was classified as property which legally gives the Chinese citizens power to own and distribute the crypto across the country. The case involves Li (defendant), who jointly built a project named ‘Haode Star’ with Xinyijia Company and Haode Trade Co., Ltd. (plaintiffs) launched last year April.

According to the plaintiffs, Li mastered the private key and password of the Haode Star blockchain just before resigning from Xinyijia Company in May 2019. In June 2019, Li used the password and private key to steal Ethereum tokens from a Haode subsidiary, imToken transferring them to OKEx exchange.

Li transferred 3 ETH and 4 million Haode tokens (total combining to about 6000 CYN) from the company’s wallet into his personal wallets. The court found him guilty requiring him to refund the full amount stolen charging him to seven months in prison and a fine of 2000 CYN.

This is one of cryptocurrencies largest wins in China’s courts as the ‘identification method of property’ rules showed that ETH is a property.

The Identification Method

Ethereum is a property due to two main reasons; first, property includes property, goods and “property-related interests such as virtual tokens. Secondly, ETH satisfies an economic value as it is exchanged for cash and mined showing it derives value.

Furthermore, ETH has value in the markets and can be traded publicly within China. Hence, when Li stole the ETH tokens from his former employers, the courts had a right to claim the theft as theft under criminal law applying to virtual currencies. The report from 8BTC reads,

“[This] can be interpreted as the property will not exceed the prediction possibility of the notional.”

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Author: Lujan Odera

Ripple CEO Brad Garlinghouse Raises Concern About BTC And ETH’s Energy Consumption

An article published by UK’s Telegraph stated that 1 Bitcoin transaction utilizes more energy compared to what an average British family uses in about two months. The article referred to data from Diginomist to show that Bitcoin’s energy consumption was at 77.78 terawatt hours which equals Chile’s total energy demands.

The report by Telegraph also indicated the carbon footprint was equal to what New Zealand records. It also stated that the carbon footprint was almost equal to the entire e-waste production in Luxembourg as well as the total power usage of a typical US household for more than 22 days.

Digiconomist founder, Alex DeVries, indicated that outdated mining equipment will eventually lead to huge amounts of e-waste in the near future. He explained that about 98% of the mining equipment being used to mine Bitcoin and Ethereum will be declared obsolete in the next two years.

The article prompted Brad Garlinghouse, Ripple’s CEO to come out to air his views stating that mining of both Bitcoin and Ethereum leads to major wastage and that there lacks incentives to accept the burden for such a carbon footprint, Bitcoinist reports.

However, it remains unclear why he used Ether as an example given that its annual energy consumption is only ten percent of the total Bitcoin’s use. Garlinghouse’s comments brought a heated conversation among the crypto enthusiasts with XRP worshippers defending the comments while others lambasted him.

Gabor Gurbacs, virtual assets strategist at VanEck, weighed on Garlinghouse’s comments. Though a tweet, Gurbacs stated that high energy consumption was essential as it is a necessity to ensure that networks remain secure as well as decentralized. He also explained that banks consume more energy than Bitcoin transactions.

Garlinghouse’s comments were not well received by the crypto community who in turn accused him and Ripple of making huge profits through XRP sales. However, the figures quoted by the Telegraph report could be misleading as most of Bitcoin mining activities are.

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Author: Joseph Kibe

Malta Financial Services Authority Addresses The Challenges With Security Token Offerings

On Tuesday, Malta’s Financial Services Authority (MFSA) published a document providing answers to questions relating to security token offerings (STOs) in the country.

The watchdog released a summary of a combined 2 months of feedback sent by market participants. The feedback referred to how STOs could be leveraged in a way that didn’t impede innovation. The consultation process had kicked off in July of last year.

It aimed to determine legal certainties and challenges of blockchain-based securities from the Maltese market perspective. Eighteen industry participants provided their feedback through September 2019. These participants included technology providers, national agencies, law and consultancy firms.

EU Legislation Looms Large Over Study

What featured heavily within the report were the implications of the broader EU legislation, specifically, the Market Abuse Regulation and the Markets Financial Instruments.

The MFSA concluded that digital ledger settlement could be utilized. But many of the respondents to the consultation argued that EU rules on central securities depository (CSD) present stumbling blocks to implementing it.

MFSA: Binance ‘Not Authorized’ in Malta

The release of this feedback comes just days after the MFSA announced that it wouldn’t provide the crypto exchange Binance with a license to operate in Malta.

There’s speculation that the feedback report was in response to Binance’s announcement that it still has its headquarters in the country.

Malta has tried, for some time, to lose its reputation as a money-laundering hub. With the resignation of Malta’s prime minister under facing allegations of involvement in the murder of Daphne Caruana Galizia, the MFSA also underwent a leadership change.

UK Specialists Working for the MFSA

The leadership of the MFSA now includes 3 UK nationals with experience in conduct supervision, financial crime compliance, and banking supervision.

According to a press release, the Maltese watchdog is trying to comply with European Central Bank (ECB) recommendations, especially after being warned by the Financial Action Task Force (FATF) that it may be put on its grey list for legal sanctions.

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Author: Oana Ularu

BoE Economist; Speculation in Crypto Markets Reduces Bitcoin’s Transactional Value

A senior Economist at U.K’s central bank has published a working paper on how speculation affects the value of digital currencies. Peter Zimmerman, a BoE economist, highlighted that crypto coin users are mostly speculative making it hard to realize the transactional value of digital assets like Bitcoin.

According to the paper, a speculative approach to the crypto market has seen more people acquire digital currencies for hoarding purposes. This traffic has however become overwhelming for some blockchain platforms that host the cryptocurrencies. Zimmerman argues in his paper that the decentralized networks become less efficient in process execution owing to the high number of participants.

It therefore beats logic for users to opt for a slower network when they need it most; if the assumption is crypto utility is based on transactions. The paper further emphasized that congesting the blockchain networks creates a competition for space eventually wiping out the monetary value of cryptocurrencies;

“Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage.”

The ‘Digital Gold’ PoV on Bitcoin

Zimmerman also observed that some Bitcoin and other token HODLers are now viewing the assets as ‘digital gold’. As mentioned earlier, the majority of BTC investors are looking to make a kill with this ‘investment product’. The paper explains this in basic household economics;

“When cryptocurrency is more valuable, households become reluctant to spend it on fees. Instead, they prefer to hoard it and endure slower settlement times. I call this a ‘digital gold’ effect: when cryptocurrency is more valuable, agents view it as an asset to store, rather than money to spend.”

A solution was also offered in the paper to help realize the value of cryptocurrencies in transactions. Notably was the diversification of speculative risk through derivatives that are settled on the crypto market. In addition, implementing the new lighting network could improve the operating capacities of platform’s like Bitcoin blockchain. The views in Zimmerman’s paper however do not represent those of the Bank of England (BoE).

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Author: Edwin Munyui