2018 January 29 - Volume.2 Issue.4

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2018 January 29 - Volume.2 Issue.4

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Cryptocurrency Exchange Thefts Near $1Bn Following Coincheck Heist

The largest heist in history took place last week with the robbers stealing close to $500Mn worth of NEM coins from Japanese exchange Coincheck. The sum brings the total cryptocurrency exchange thefts alone close to an astounding $1Bn.   


Last year, Japan began licencing exchanges to bring order to the rising popularity of cryptocurrency trading. Only half of the exchange applicants had been approved with licenses, while the other half were allowed to continue operations pending approval – Coincheck was one of the latter exchanges.

532Mn NEM XEM coins were stolen – Coincheck says they were trading at $0.95 at the time of the hack. As a public Blockchain, the NEM foundation is able to track the movement of these coins. As of press time, the funds had not been moved from the wallet that they were withdrawn too from the exchange. The hackers would require to use some form of tumbling service that obfuscates the traceability of the coins to attempt to move them to a fiat off-ramp, or run the risk of being identified.

Jeff McDonald, Vice-President of the NEM Foundation has stated that the organisation is reaching out to exchanges in an attempt to stop deposits of the those very stolen coins, effectively blacklisting almost 6% of the current NEM supply. The ability to mark supply - be it Bitcoin, or other - minimizes the fungibility of cryptocurrencies.

Approximately 260,000 traders were affected by the theft, but will be reimbursed the exchange said. Mr McDonald confirmed that Coincheck had at one point in time purchased 300Mn XEM coins. It's unclear how much of the stolen coins belonged to Coincheck, or were user deposited.

With this theft, a total of $953Mn have been stolen off cryptocurrency exchanges (see table). Coincheck and Mt Gox, another Japanese exchange that was hacked in 2014 account for 90% of the total stolen amount on the date of theft. Another $73Mn worth of cryptocurrencies from major thefts have also been stolen (excluding the Silk Road asset forfeiture) bringing the tally up above the $1Bn mark of stolen crypto (Diar, 18 December 2017).

The event further highlights the risks of trading and holding cryptocurrencies on centralized exchanges. In fact, a whopping 93% of thefts have happened on exchanges, followed by 6% from last years mining farm hack of NiceHash (Diar, 11 December 2017).

Cryptocurrency Exchange Thefts Inch Closer to $1Bn Mark

Period Exchange USD Value
Jan-18 Coincheck 496.850.000
Feb-14 Mt. Gox 357.500.000
Aug-16 Bitfinex 67.662.140
Nov-13 PicoStocks 6.633.000
Jan-15 Bitstamp 5.193.650
Jan-16 Cryptsy 5.005.000
Apr-17 Yapizon 4.903.560
Oct-17 OKEx 2.642.400
Feb-15 BTER 1.684.950
Oct-16 Bitcurex 1.587.000
Feb-15 KipCoin 735.000
Mar-14 CryptoRush 551.000
May-15 Bitfinex 379.440
Jul-12 Bitcoinica 320.000
Sep-12 Bitfloor 264.946
Dec-12 BitMarket.eu 253.638
Jan-15 796 Exchange 235.000
Apr-16 ShapeShift 201.201
Nov-13 Bitcash.cz 169.400
May-13 Vircurex 162.848
May-16 Gatecoin 113.250
May-12 Bitcoinica 92.735
Mar-14 Poloniex 64.020
Jul-12 BTC-E 36.000
Mar-16 CoinTrader 33.210
Oct-11 Bitcoin7 22.500
Aug-14 BitNZ 22.230
Jul-12 Mt. Gox 14.816
Mar-15 AllCrypt 12.180
Jan-15 LocalBitcoins 3.910
Total 953.349.024


Source: Diar


Davos WEF: Cryptocurrencies Receive Luke-Warm Welcome

A flurry of commentary regarding bitcoin and cryptocurrencies came out of Davos where world leaders met at the annual World Economic Forum. And while cryptocurrencies, headed by Bitcoin, have fallen on everyone’s radar, it seems evident that those steering potential regulation remain weary of the pseudonymous traits and possible illicit activity with cryptocurrencies. Leaders call for broad-sweeping regulations, possibly under the IMF supervision.


The World Economic Forum held its annual meeting from January 23 to January 26 in Davos, Switzerland. Top business leaders, economists and politicians came to discuss pressing economic issues and this year’s theme, which was ‘Creating a Shared Future in a Fractured World’. The topic of blockchain and cryptocurrencies was amongst the most discussed resulting from last year’s surge in popularity and awareness. There was a dedicated space ‘Crypto HQ’ that focused specifically on discussing the blockchain technology. And cryptocurrencies were also the focal point of two events – "The Remaking of Global Finance" and "The Crypto-Asset Bubble".

The amount of capital that entered the cryptocurrency market and recent Wall Street involvement has made cryptocurrencies impossible to ignore. While many speakers voiced their interest in the blockchain technology, the sentiment of cryptocurrencies was mostly negative and very skeptical. George Soros called cryptocurrencies a typical bubble but had some praise for positive use cases of blockchain, albeit, so far there has been little commercial adoptions of the technology (Diar, 30 October 2017). French President Emmanuel Macron along with British Prime Minister Theresa May, Swiss National Bank Chairman Thomas Jordan and U.S. Secretary of the Treasury Steven Mnuchin called for a regulatory framework for cryptocurrencies.

Robert J. Shiller, Nobel Laureate in economics and Yale professor, said that he is impressed with the blockchain technology but doesn’t see Bitcoin as a permanent feature of our lives. Cecilia Skingsley, deputy governor of Sweden's central bank, expressed that Bitcoin and other cryptocurrencies aren’t money because they're not a stable store of value as the volatility is too high so they can't be used as a medium of exchange.

Joseph Stiglitz, another Nobel Laureate in economics and professor at Columbia University, said that we already have a good medium of exchange in U.S. dollar and that he believes Bitcoin is mostly used for secrecy. Mr Stiglitz added that he thinks that if Bitcoin were to be sufficiently regulated then there would be no more demand for it. Christine Lagarde, managing director of the International Monetary Fund (IMF), has a similar sentiment as she thinks that the anonymity and lack of transparency allows Bitcoin to conceal money laundering and financing of terrorism.

However, Bitcoin is only pseudonymous, and blockchain analytics firms have assisted authorities in actionable evidence – a very fact that seems to have been lost on most attendees (Diar, 15 January).

Coinfirm, a company that specializes in analyzing the blockchain to determine which coins are suspected of being involved in illicit activity, says that approximately 10% of Bitcoin transactions are suspected in illicit involvement.

France and Germany have announced a joint-proposal that will be presented at the G20 Summit in March on a possible regulatory framework for cryptocurrencies.

Well, I think in areas like cryptocurrencies, like bitcoin, we should be looking at these very seriously precisely because of the way they can be used, particularly by criminals. And so that is something that has been increasingly developing, I think it's something that we do need to look at.

Theresa May – Prime Minister, United Kingdom

 

There is no intrinsic value for something like Bitcoin so it's not really an asset one can analyze. It's just essentially speculative or gambling.

Stephen Poloz – Governor, Bank of Canada

 

The anonymity and lack of transparency and the way in which [Bitcoin] conceals and protects money laundering and financing of terrorism, is just unacceptable. It needs to be taken into account but then there will be innovations coming out of these movements. We have already started monitoring, analyzing, surveying risk associated with the development of cryptocurrencies [as well as] the potential benefits of it.

Christine Lagarde – Managing Director, International Monetary Fund

 

I am in favor of the IMF having the mandate to monitor the entire international financial system, of which some areas escape regulation, like bitcoin, cryptocurrencies or shadow banking, which can trigger crises.

Emmanuel Macron – President, France

 

My number-one focus on cryptocurrencies, whether that be digital currencies or bitcoin or other things, is that we want to make sure that they’re not used for illicit activities. We encourage fintech and we encourage innovation, but we want to make sure all of our financial markets are safe. We want to make sure that the rest of the world -- and many of the (Group of) 20 countries are already starting on this -- have the same regulations.

Steven Mnuchin – U.S. Secretary of the Treasury

 

Cryptocurrency is a misnomer and is a typical bubble, which is always based on some kind of misunderstanding. Bitcoin is not a currency because a currency is supposed to be a stable store of value and the currency that can fluctuate 25% in a day can’t be used for instance to pay wages because wages drop by 25% in a day. It’s a speculation. Based on a misunderstanding. There’s also a very innovative blockchain technology, which can be used for positive or negative purposes. Currently it’s used mostly for tax evasion and for people and the rulers and dictatorships to build a nest egg abroad…. But it’s nevertheless a bubble typical which is always based on a misunderstanding like the tulip mania. But the blockchain technology can be put to positive use and we use it actually in helping migrants to communicate with their families and to keep their money safe and carry it with themselves.

George Soros – Investor

US Dollar Pegged Cryptocurrency, Tether, Raises Concerns

Major cryptocurrency exchanges who have found banking and regulation to be possibly problematic are accepting Tether, a 1 for 1 US dollar pegged cryptocurrency that claims to be backed by the corresponding reserves. But the lack of a professional audit and massive new issuance of Tether have left the community concerned of a possible systemic risk to the cryptocurrency industry.


Tether, a private company incorporated in Hong Kong issues digital currency whose price is pegged to traditional national currencies like the US dollar. In the first three weeks of January, Tether has issued $850Mn of USDT. Tether claims that every USDT is 100% backed by real USD held in their reserves. The company also states that its is fully transparent by publishing the reserve holdings daily and by being subject to “frequent professional audits”.

However, a lack of a professional audit has raised concerns in the cyrptocurrency community. In November, it was uncovered in the Paradise Papers that Philip Potter, CSO of Bitfinex, and Giancarlo Devasini, CFO of Bitfinex, established Tether in the British Virgin Islands in 2014. Bitfinex is currently the largest cryptocurrency exchange by volume. The link between Bitfinex and Tether has been suspected but hasn’t been officially confirmed. Tether trading pairs are actively traded in large volumes at Binance, OKEx, Huobi, Bittrex, Poloniex, HitBTC and many other exchanges. The only large exchanges that are currently not processing USDT are Bitstamp, GDAX and Gemini.

However, the largest worry is about the legitimacy of Tether’s claims of being 100% backed in US Dollar. A spokesman of both Bitfinex and Tether said on December 1 that a full audit will be released as soon as possible. Since then, Tether issued nearly $1.4Bn in USDT and there is now more than $2.2Bn of USDT in existence.

The latest accounting document, which was not a full audit but rather a public internal memo, was done by Friedman LLP in September and found that Tether had the corresponding $443Mn in reserves. However, the auditor noted that the money was stored in the account held in name of trustee and he couldn't attest whether Tether had an enforceable agreement with the trustee. Moreover, the name of the bank where the reserves were stored was redacted from the document.

Bitfinex and Tether lost their banking relationships with institutions in Taiwan and the U.S., most notoriously with Wells Fargo. The bank that Bitfinex and Tether currently cooperates with was speculated to be polish Bank Spółdzielczy w Skierniewicach but the authenticity of these claims was not confirmed or denied as of yet. Tether has discontinued their relationship with Friedman LLP in the past week.

In December, Tether’s legal site stated: “Tethers are not money and are not monetary instruments. They are also not stored value or currency. There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.”

Tether Issues Over 35% of Total Supply in January 2018


Source: OmniExplorer


As a result of the consequent criticism, Tether responded by saying that they can’t legally “guarantee redemption for money even though they have every intention of honoring redemption requests.” Since then, the text has been changed to “Tether must and does at all times reserve the right to refuse to issue or redeem Tether Tokens.” Tether, then, is not legally obligated to redeem any monies even though they claim that “redemptions will not be unreasonably denied.” The legal terms also state that “beginning on January 1, 2018, Tether Tokens will no longer be issued to U.S. Persons.”

Tether’s internal wallet was said to be hacked in November and $30Mn worth of USDT was stolen and listed as quarantined from the supply. Since Tether has full control of the network code, the stolen funds were frozen and thus rendered useless for the hackers.

Even though some people are using Tether on exchanges unknowingly instead of USD, the truth is that as a financial market utility, it is systemically important to the whole market. Tether allows exchanges to price cryptocurrencies in USDT without necessarily having bank accounts denominated in USD and complying with regulations, which incur high costs. Traders use Tether to hedge when the market is too volatile or when they want to move it fast between different exchanges that support Tether. Alternatively, some currencies still don’t have trading pairs with cryptocurrencies and as a result of regulations, they can’t purchase USD directly so USDT serves as a bridge currency for cryptocurrency trading.

A recent report whose author remains anonymous found that roughly half of Bitcoin’s price increase occurred in the two-hour periods after USDT arrival at Bitfinex’s wallet without accounting for follow-on effects and the psychological effects. It finds that Tether is issued primarily when the price of Bitcoin is falling suggesting that it could be responsible for reversing the market’s sentiment and starting a bull run. This of course, is not something that anyone can confirm is happening on purpose, or if indeed, actual new funds are entering the market. 

Banking Group Nordea Turns Regulator

Last week the largest Scandinavian banking group, Nordea, announced a sweeping ban for all its 31,000 employees from trading cryptocurrencies starting from 28 February. What is possibly the first such ban of its kind has turned the regions financial conglomerate into a regulator as neither the European Central Bank (ECB), nor the nations Central Banks have given such guidelines or directives. But the Danish Financial Federation isn't standing idly by but questioning the legality of such a ban. Danske Bank, while of similar mind as Nordea, has only discouraged its staff and clients from trading cryptocurrencies but has fallen short of announcing a ban.

“The risks are seen as too high and the protection is insufficient for both the co-workers and the bank,” a Nordea spokeswoman told Reuters. How the bank finds itself exposed is unclear as they do not offer cryptocurrency trading on their platforms.

|| THINKING LONG-TERM? VERY LONG-TERM?

Scandinavia is one of Europes leading regions in digital payments (see chart). In Sweden, spearheading the cashless effort is a consortium of nine Swedish bank, including Nordea, that operate Swish, an extremely popular app that provides instant and free peer-to-peer payments. The app also facilitates business transactions.

Swedens Central Bank, Sveriges Riksbank, is at the forefront of research on a Central Bank Digital Currency and will look to make a decision on whether or not the regulator will issue the eKrona by years-end (Diar, 20 November 2017). The Swedish Central Bank has said "if banknotes issued by the Riksbank in practice disappear, will we then have a situation where the general public only has access to commercial bank money?". 

The question isn't of small consequence. Cash is currently the only risk-free asset that people can claim against a central bank. And as consumers continue adopting digital and mobile payments, the whole economic payments infrastructure could potentially end up running in the hands of a few corporations.

The possible function of cryptocurrencies being used as a means of payment remains very far off – almost slim in the near short-term – considering the fees, lack of regulation, consumer protection and scaling issues involved. And even with such issues resolved, Scandinavian countries already have a free, instant and resilient payment system that has already been adopted. But as trust in banks continues to dwindle, consumers may seek to use alternative means (see chart).

Unproven might they be, new technologies that aim to offer free or low fees and fast transactions such as Bitcoin's Lightning Network, IOTA and RaiBlocks – may just be a potential threat to the control of the payments infrastructure. And country regulators may take cue from Nordea's latest move.

Swedish Preferred Method of Payment - Cash Dwindling (%)


Source: Sveriges Riksbank


% of Europeans who completely trust their primary financial institution


Source: EY (2016 Survey)


A central bank digital currency would be a solution to a non-existing problem in a country with an efficient payment system.

Governor Hugo Frey Jensen – Danmarks Nationalbank

Canada Begins Ethereum Blockchain Testing, Sans Ether

The Canadian government has officially launched a live trial of a public blockchain for transparent administration of government contracts. The Industrial Research Assistance Program (IRAP) of National Research Council of Canada (NRC) announced that it will start using Ethereum’s ledger to publish grants and contribution data in real-time. If the test proves to be successful, NRC will look into other processes where Ethereum’s blockchain can be utilized. NRP is using Bitaccess' Catena Blockchain Suite, which allows public institutions to publish complex datasets onto a Blockchain. NRP currently has no intention to use Ethereum’s underlying cryptocurrency but rather to use its public blockchain, which is secure and unalterable.

SEC Chairman Takes Aim at Lawyers on Initial Coin Offerings

Last week US Securities and Exchange Commission (SEC) Chairman Jay Clayton addressed the Securities Regulation Institute injecting a heavy dose of skepticism regarding the law firms who are advising clients who will potentially hold an Initial Coin Offering. Mr Clayton said that the "it depends" equivocal advice on whether or not a token is considered a security does not hold up as professional securities advice considering the 80 years institution of securities laws. However, Mr Clayton shared little more outlook on the prospect of regulation. It is clear that, first and foremost, the SEC will ensure that US persons are protected and that proper due diligence is conducted for ICOs who raise capital from American investors.

Coinbase Finds New Competition – Tech website Recode reported that Coinbase turned over $1Bn in revenue last year. Its success hasn't gone unnoticed - micro finance trading app Robinhood announced it will offer free trading to 16 cryptocurrencies in 5 US States.
Grayscale To Launch 5 Additional Crypto Trusts – The Bitcoin investment vehicle that institutional investors could use for exposure to the cryptocurrency announced an additional 5 Funds alongside Ethereum Classic and zCash. A stock-split also resulted in a surge in their stock price.
Bitcoin Loses Stripe – In another blow for Bitcoin as a currency and means of payment, popular payment processor Stripe announced its ending its support for the cryptocurrency citing volatility and fees. They did say that they are looking at other cryptocurrencies in the meantime.
bitFlyer Announces Expansion into Europe – Japans largest Bitcoin exchange, bitFlyer, announced that they have secured a license in Luxembourg. The exchange that launched in 2014, expanded to the US last year and now seeks to add to its $250Bn trading volume.

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