Manipulation Detected on ‘DEXes,’ Regulations Develop, Industry Initiatives Advance, Hacks, Money Laundering and Enforcement Continue

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Academics Detect Manipulation on ‘DEXes’ as Cryptocurrency Trading Expands

By: Joanna F. Wasick

A recent academic paper by researchers at Cornell Tech and other academic institutions describes rampant trading manipulation on decentralized cryptocurrency exchanges (DEXes). While the vast majority of cryptocurrency trading volume occurs over centralized exchanges (which custody customer assets and settle trades), DEXes allow for more direct trading, and their use is expected to grow. This paper, however, reports on new high-frequency trading firms that deploy autonomous, algorithmic trading programs that anticipate and take advantage of ordinary users’ trading patterns, allowing for front-running (i.e., seeing orders ahead of others and placing their own trades first), aggressive latency optimization and other market manipulation techniques. The paper also found bots engaging in priority “gas” auctions , competitively bidding up transaction fees in order to get priority orders (early block position and execution) for their transactions. A contributor to the paper stated at a blockchain conference last week that these findings should incentivize those in the blockchain and exchange communities to create new exchange designs to combat the problem.

Despite vulnerabilities, cryptocurrency trading continues to expand. Coinbase announced that it will increase crypto-to-crypto conversions and trading services to 11 more countries, which will give the company a presence in 53 countries across four continents. In addition, micro, small and medium-sized companies ill now be able to make bitcoin and bitcoin cash payments to a major U.K. business travel management services company, thanks to its partnership with BitPay, a global cryptocurrency payment processor. And one of Japan’s largest e-commerce companies recently announced that it will accept account registration for its new cryptocurrency exchange, expanding cryptocurrency-based payments in the Asian online retail market.

Volume over exchanges is up too. eToro, a multi-asset trading platform, has unveiled a regulated cryptocurrency exchange geared toward “professional traders.” The platform offers 37 trading pairs, with the ability to convert six cryptocurrencies into fiat, including the dollar, Euro and Swiss franc. According to a popular blockchain news source, estimated profits for Binance, another major cryptocurrency exchange, totaled $78 million in Q1 – up 66% from the previous quarter. Even endowment funds, with a reputation among some as more conservative investors, are entering the space. A 2018 Q4 survey of 150 endowments found that 94% had invested in cryptocurrency-related initiatives in the past 12 months. The endowments, most of which were U.S.-based, reported that the most attractive crypto-assets were those with robust regulation, sufficient capital flow and liquidity, and account security.

For more information, please refer to the following links:

New Tokenized Securities Announced; Global Regulatory Regimes Develop

By: Brian P. Bartish

Blockchain startup 20|30 reportedly raised 3 million pounds ($3.93 million) through the sale of Ethereum-based equity tokens on the London Stock Exchange Group (LSEG) turquoise equity trading platform. Working in collaboration with LSEG and the U.K. Financial Conduct Authority, along with distributed ledger startup Nivaura, 20|30 aims to demonstrate that company equity can be tokenized and issued with a fully compliant custody, clearing and settlement system, and intends to offer secondary transfers of the tokenized equity following the success of the initial pilot. Last Friday, Arca, a Los Angeles-based digital asset manager, filed a prospectus with the SEC seeking approval for a tokenized bond fund envisioned as a quasi-stablecoin with a target net asset value of $1 per share. The fund would help protect investors against high volatility through investments in U.S. Treasury securities. With the proliferation of new use cases, a major multinational technology company is spearheading the development of a “Token Taxonomy Framework” to begin developing common technical standards for tokens across various blockchain protocols.

Recent analysis by the Congressional Research Service noted the high degree of regulatory overlap and confusion likely to result from 2018 Federal court decisions that upheld the Commodities Futures Trading Commission’s broad enforcement authority to act against fraud in the sale of virtual currencies due to their status as commodities. In other U.S. regulatory news, the Congressional Blockchain Caucus, led by Rep. Emmer, has called on the IRS to update its 2014 guidance regarding how virtual currency holders should calculate and track the basis of their holdings. In Japan, according to reports, the Financial Services Agency will soon require cryptocurrency exchanges to exercise greater internal oversight over cold-storage wallets to help protect against insider theft. And in France, after establishing one of the first national laws that allows organizations to apply for certification to issue and trade cryptocurrencies, the French government is calling its European Union partner states to adopt the same framework, which seeks to offer greater protections to investors while generating tax revenues.

For more information, please refer to the following links:

Food Supply Chain Initiatives Grow, Government Spending Expected to Rise, Blockchain Enterprise Tools Released

By: Diana J. Stern and Robert A. Musiala Jr.

Major grocers continue to “harvest” blockchains for their transparency by participating in networks designed to increase visibility across food supply chains. This week, the U.S.’s second-largest grocer joined a large Food Trust network, which the Blockchain Monitor first covered last summer. According to reports, the grocer will pilot a romaine lettuce track-and-trace use case in order to improve food quality and recalls. Other members of the Food Trust also made headlines this week: A prominent French multinational supermarket and the world’s largest food and beverage company announced they will allow consumers to view information recorded on a blockchain by simply scanning a QR code. Consumers of instant mashed potatoes will be able to see what kinds of potatoes were used, when and where they were stored, and more.

In other supply chain news, researchers at Portland State University reportedly have published a blockchain protocol specifically designed to combat counterfeiting in pharmaceutical supply chains. Another announcement this week described the debut of a blockchain solution for the employee benefits industry, developed by a major global consulting firm and a multinational employee benefits firm, that seeks to streamline the operating model for employee benefits such as life, short- and long-term disability, accident, and healthcare insurance. According to a report released this week by a large market intelligence firm, over the next four years blockchain spending by the U.S. government is expected to grow from $4.4 million in 2017 to $48.2 million in 2022, with early spending focused on “supply chain and asset management solutions” and later spending expanding to include “identity management and complex financial transactions.”

Established technology and consulting firms appear to be preparing for blockchain market growth. This week, a Big Four accounting and consulting firm announced plans to release a free public blockchain protocol that operates on Ethereum and that has been developed specifically for enterprise-grade use cases such as supply chain management, intracompany transactions and public finance. The protocol leverages zero-knowledge proofs to enable private transactions to take place on the public Ethereum blockchain. The same “Big Four” firm recently launched a blockchain analytics tool designed to improve blockchain-based “financial reporting, forensic investigations, transaction monitoring and tax calculations.”

For more information, please check out the following links:

Crypto-Mining Malware, Dark Market Money Laundering, SIM Swap Hacks and FinCEN Enforcement

By: Marc D. Powers

Two Romanian cybercriminals were convicted in Ohio on 21 felony counts related to the infecting of 40,000 computers with malware to steal credit card and other information to sell on the dark web. The schemes included taking control of the victim’s computers, which allowed the defendants to use the processing power of the computers to engage in cryptocurrency mining for the financial benefit of the group. The victims incurred losses of millions of dollars.

The NYC District Attorney reported the indictments of several individuals who operated two dark web storefronts to sell Xanax and other controlled substances in 43 states. The defendants allegedly laundered $2.3 million in cryptocurrency proceeds from their illicit activities to load prepaid debit cards, and withdrew $1 million in cash from ATMs in New York and New Jersey.

This week, the U.S. Financial Crimes Enforcement Network (FinCEN) assessed a civil money penalty against an individual for “willfully violating the Bank Secrecy Act’s (BSA) registration, program, and reporting requirements” in the course of the individual’s operation as a “peer-to-peer exchanger of convertible virtual currency.” According to a FinCEN press release, the individual failed to file required reports related to, among other things, suspicious activity involving darknet marketplaces and purchases of bitcoin for cash. The individual cooperated with FinCEN, paying a fine and agreeing to an industry bar on engaging in “money services business” activity.

Finally, it has been reported that hackers have stolen over $50 million in cryptocurrencies from wallets within the past 15 months using a new technique known as SIM Swapping. This scheme involves a criminal taking a new SIM card to a store, impersonating the victim, and switching the victim’s wireless carrier number to his or her new SIM card. Soon the criminal has access to the victim’s texts and can learn two-factor authentication or other information to gain access to cryptocurrency wallets. According to reports, many of these hackers are relatively young, between the ages of 18 and 26. At least one of the hackers caught has been sentenced to 10 years in prison.

For more information on these developments, please follow these links:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Updated: May 25, 2018:

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Privacy Officer
JD Supra, LLC
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