Is Crypto About To Go Extinct?

[Nataliia Shulga/Al Jazeera]

It will likely survive, but only after more firms and currencies crash and burn. Here’s why.

As the Los Angeles Rams beat the Cincinnati Bengals in the championship game of the National Football League last February, an unlikely set of players made a splash off the field, in living rooms across the United States.

On one of American television’s biggest nights, with 99 million viewers, the Super Bowl broadcast was punctuated by a series of cryptocurrency advertisements. Social media buzzed with talk of how digital tokens had come of age as they grabbed primetime slots previously dominated by mainstream giants like Coca-Cola and General Motors.

One of the advertisements that night had comedian Larry David playing a Luddite dismissing humankind’s biggest inventions – from the wheel to Edison’s lightbulb to, the commercial suggests, the FTX cryptocurrency exchange. Told that the platform is a “safe and easy way to get into crypto”, David’s character says: “Ehhh, I don’t think so – and I’m never wrong about this stuff.”

With multiple big crypto firms collapsing in recent months, the sector that promised an alternative to the traditional global financial model now faces existential questions. In May last year, the TerraUSD and Luna coins crashed, losing almost all of their value overnight and wiping out $45bn from the crypto market in a day. Singapore-based crypto hedge fund Three Arrows Capital abruptly shut down. Crypto lenders Voyager Digital and Celsius Network – which had both loaned money to Three Arrows Capital – soon filed for bankruptcy.

And in November, FTX – the popular crypto trading platform in the Super Bowl advertisement – imploded. Its founder Sam Bankman-Fried was arrested in the Bahamas in December and has been charged with fraud. Bitcoin, the world’s best-known cryptocurrency, is today worth only a third of what it was at its peak in October 2021.

The FTX commercial with David ends with the tagline, “Don’t be like Larry.” Today, many of the 420 million people estimated to have invested in crypto might well be wishing they had been more like Larry.

So is crypto about to go extinct?

The short answer: As a concept, cryptocurrencies will probably survive, experts told Al Jazeera. But the sector will likely face increased regulation and an extended period of uncertainty. Many firms and currencies will perish. To stay alive, companies will face one challenge above all else: winning back customer trust.

Crypto ‘ice age’

Cryptocurrency trading platforms have traditionally drawn in customers with the promise of quick returns on investment. The offer: Park money in so-called crypto wallets – which are meant to function in a manner similar to savings bank accounts – and earn high interest rates, sometimes in double digits. For those who are distrustful of traditional finance, the opportunity to carry out transactions without worrying about a regulator as an intermediary is an added attraction.

But this allure dimmed once the US Federal Reserve and other major central banks around the world sharply raised interest rates through 2022, making more traditional investment options more lucrative than before. The US rate, for instance, shot up by more than 4 percentage points over the course of 2022.

Once TerraUSD and Luna went into freefall, a combination of safer alternatives and reduced trust in crypto led to a crisis that, according to experts, is far from over.

“I think we’ll see a lot more bad news before things start looking better for the sector,” Tim Leung, director of the computational finance and risk management programme at the University of Washington in Seattle told Al Jazeera.

With many potential customers now sceptical, crypto platforms will likely witness low trading volumes for a while, Leung said. The crypto sector likes to pride itself on its independence, but it depends on financing from traditional markets. How much of that funding will continue in the current climate is unclear, Leung suggested. With reduced trading and less funding, many smaller firms might go belly up, he warned.

Crypto mining companies, which generate virtual money – or coins – using energy-guzzling supercomputers, will suffer too, Leung said. Reduced demand for coins because of low trading volumes and high energy prices will squeeze the viability of their business model. “I see this phase lasting through 2023,” he said. “It’s more likely to be a crypto ice age rather than a crypto winter.”

The downturn isn’t surprising, suggested experts.

“This is a start-up industry with hundreds of firms and lots of innovation,” said David Yermack, professor of finance at New York University’s Stern School of Business. He told Al Jazeera he expects a chaotic period for cryptocurrencies in the foreseeable future but thinks that “ultimately best practices will emerge through competition”.

Governments around the world have signalled plans to step in to shield customers from that chaos. But regulators and analysts appear divided on how best to intervene.

Old laws for new tech?

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), argued in September that existing laws are adequate for the crypto sector. In his view, he said, most cryptocurrencies are similar to traditional securities – tradable financial assets like stocks or bonds.

Hilary Allen, professor of law at American University in Washington, DC, agrees with that approach. Cryptocurrencies and trading platforms, she said, must meet the standards of governance that the SEC demands from old-school securities – including registering with the regulator and demonstrating transparency over assets – or be shut down.

Creating new rules for the crypto industry would be wrong, she said. “That would legitimise the idea that crypto, somehow, is unique, and can’t be expected to meet the same standards as mainstream financial assets,” Allen told Al Jazeera. “That’s a dangerous message to send.”

But many other experts disagree.

“There’s a fundamental difference between securities and currencies,” said Bruno Biais, a professor of finance at the HEC Paris business school. People invest in stocks or bonds based on the cash flow or assets of the company offering them, he said. They buy currency – whether a dollar, a euro or a crypto token – trusting that the coin or note will be accepted by others at a later date.

Trying to fit an existing regulatory framework on cryptocurrencies without adapting it to new technology won’t work, said Christian Catalini, founder of the Massachusetts Institute of Technology (MIT) Cryptoeconomics Lab.

It won’t guarantee consumer protection, Catalini told Al Jazeera. “Worse, it may kill the innovation potential of the space without any meaningful benefit to the public,” he said.

Where most analysts do agree is that regulations for the sector must focus on one kind of cryptocurrency in particular: so-called stablecoins.

Making ‘stablecoins’ stable

Unlike tokens like Bitcoin, whose price can fluctuate wildly, the value of stablecoins is pegged to a regular currency, like the US dollar or other traditional assets like gold. For instance, each Tether coin, the world’s most popular stablecoin – which often trades even more than Bitcoin – is worth $1. That value stability positions stablecoins as tokens that, while still earning well through crypto wallets, are supposedly safer than other cryptocurrencies.

“The very term, ‘stablecoin’, conjures the image of a reliable currency that gives customers a false sense of security,” Biais told Al Jazeera. “The problem? Unlike regular currencies and banks, stablecoins are basically completely unregulated.”

So while in theory, those who own $100 worth of stablecoins should be able to redeem that amount whenever they want – as would be the case with a banknote – there’s no guarantee they’ll actually get that money back, said Biais.

The Financial Stability Board (FSB), a global advisory body set up by the G20 after the 2008 financial crisis, has been urging major economies to adopt regulations to ensure that stablecoins demonstrate their ability to pay customers back. In its October 2022 report, the FSB warned that many existing stablecoins “are issued by unregistered and unlicensed entities and do not have credible mechanisms to support their promise of price stability”.

While US regulators appear undecided on the need for new rules, many other nations and regions are moving towards laws specifically designed to govern the crypto sector and, in particular, stablecoins. These rules could help ensure that “good actors thrive, and bad actors disappear from the crypto ecosystem”, said Catalini.

The European Union’s new regulation, known as Markets in Crypto-Assets (MiCA), will require all crypto firms to register with authorities. Stablecoins will need to guarantee assets to pay customers back at any time. MiCA comes into force in 2024.

Japan passed a law last June under which only banks and other strictly regulated financial institutions can offer stablecoins. And the British government has proposed that the Financial Conduct Authority, the country’s top financial services regulator, would have oversight over crypto firms.

Meanwhile, India’s finance minister has said that crypto regulations would be a priority of the country’s G20 presidency in 2023. A global framework to regulate crypto is indeed essential, said Leung of the University of Washington, since many firms in the sector have a footprint across geographies.

ut for any of this to help revive the industry, crypto firms will first need to regain the confidence of customers, said experts.

Matter of trust

Many crypto enthusiasts will likely watch to see how big cases of fraud, such as the one involving FTX, play out, said Biais of HEC Paris. If they see justice, and if those who have lost money because of such scams get it back, that would help rebuild trust, he said.

Some experts, like Allen at American University, believe that crypto has little to meaningfully offer to the financial world in the future. “When you peel away the rhetoric, there really isn’t anything there that you can’t do using traditional finance instruments,” she said.

Others remain convinced that crypto, with its potential to enable peer-to-peer, decentralised financial exchanges, represents a transformational technology. “The technology is here to stay, even if a number of the initial projects in the crypto space are falling,” MIT’s Catalini said.

He described the moment as similar to the dot-com bubble that burst in the late 1990s when many early online firms went bust. Those – like Amazon – that survived or came up later are among “the internet giants of today”, he said.

Still, until the dust settles and reliable regulations come in, Leung at the University of Washington said it’s best to be cautious. “You don’t want to make decisions based on Super Bowl commercials,” he said. “This isn’t a game.”

By 

Source: Is crypto about to go extinct? | Business and Economy | Al Jazeera

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I Lost $17,000 in Crypto. Here’s How to Avoid My Mistake

Illustration: Yazmin Monet Butcher

In 2014, I bought 25,000 dogecoin as a joke. By 2021, it was briefly worth over $17,000. Problem was, I couldn’t remember the password. Determined to get my coins back, I embarked on a journey that exposed me to online hackers, the mathematics behind passwords, and a lot of frustration.

Although most people don’t have thousands in forgotten cryptocurrency, everyone relies on passwords to manage their digital lives. And as more and more people buy crypto, how can they protect their assets? We talked to a host of experts to figure out how to create the best passwords for your digital accounts, and, if you have crypto, what your basic storage tradeoffs are. Let’s dive in.

How to Hack Your Own Crypto Wallet

There are a few common ways to lose crypto. You might have a wallet on a hard drive you throw away. Your exchange could get hacked. You might lose your password, or you might get personally hacked and have your coins stolen. For those who lose their password, as I did, hackers actually present a silver lining. If you still control your wallet, you can try to hack your own wallet—or find someone who will.

So I contacted Dave Bitcoin, an anonymous hacker famous for cracking crypto wallets. He agreed to help break into the wallet, for his standard 20 percent fee—paid only if he is successful. Dave and other hackers are mostly using brute force techniques. Basically, they’re just guessing passwords—a lot of them.

You can also try to hack your own wallet with apps like Pywallet or Jack the Ripper. But I didn’t want to do it myself, so I sent Dave a list of password possibilities and he got started.

After a little waiting, I received an email from Dave. “I tried over 100 billion passwords on your wallet,” Dave told me over email. I assumed such a mind-boggling amount of tries meant my coins were surely recovered, but alas, we had only scratched the surface. The password was not hacked, and my coins remained lost. But how?

The Math Behind Strong Passwords

Each new digit in a password makes it exponentially harder to crack. Consider a one-digit password that could be a letter or a number. If the password is case-sensitive, there are 52 letters plus 10 numerals. Not very secure. You could simply guess the password by trying 62 times. (A, a, B, b, C, c … and so on).

Now make it a two-digit password. It doesn’t get twice as hard to guess—it gets 62 times harder to guess. There are now 3884 possible passwords to guess (AA, Aa, AB, etc.) A six-digit password with the same rules has around 56 billion possible permutations, assuming we don’t use special characters. A 20-character password with those rules has 62-to-the-20th-power permutations: that is, ​​704,423,425,546,998,022,968,330,264,616,370,176 possible passwords. That makes 100 billion look pretty small in comparison.

This math was bad news for me, since I’m pretty sure I had some sort of long password, like a few lines of a song lyric. Talk about facing the music.

Password Best Practices

Whether it’s for your email or crypto wallet, how can you balance creating a strong password that’s also memorable? “Choosing passwords is tricky,” says Dave, “If you go out of your way to create an unusual password for your wallet that you wouldn’t typically use, then it makes it quite difficult for you to remember and for me to help.

It’s easier to guess your password if you use consistent patterns. Of course, this is bad for security, and someone who is trying to hack your accounts will have an easier time.” Balancing security with memorability is ultimately a tough task that will depend on the individual’s needs and preferences.

“All I can really suggest is to either record all your passwords on paper (and take the risk that it will be found), or use a password manager,” Dave says. Ironically, the digital age is now making pen and paper a preferred security method. Russia’s state security agency supposedly reverted to typewriters after the Snowden leaks.

Are Coins on Crypto Exchanges Safe?

Losing my password made me a pretty big fan of storing crypto on exchanges. After all, if you forget your Coinbase password, the process is simple. You reset your password, and likely submit identification to verify that you own the account. On the surface, storing on big exchanges seems pretty secure.

Coinbase says they keep “over 98 percent of deposits offline in secure cold storage facilities” in addition to having an “extensive insurance policy.” Thus, it should be difficult or impossible for cybercriminals to access most of the crypto Coinbase controls.

Gemini, another popular US-based exchange, prides itself on its seemingly extensive security measures. At the same time, if your exchange suffers a major hack or goes bankrupt, it could take years to recover your crypto, if you get it back at all. That’s why many analysts recommend users maintain control over their coins…..Continue reading

Source: I Lost $17,000 in Crypto. Here’s How to Avoid My Mistake | WIRED

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Top 5 Security Hacks to Defend Your Crypto Wallet!

RWaltz Blockchain Solutions Experts

With a massive number of cryptocurrencies exploding in the market, crypto wallet application adoption is also rising at a faster pace. With the technological revolution, hackers have also fine-tuned their hacking methods and have now grown up smarter to hack your crypto wallets.
Generally, Cryptocurrency Wallet Development Company offers multi-layer security to the crypto applications developed by them. But, still can be prone to hacking attempts.

Hackers are Making a Way into Your Crypto Wallet! 

The initial 7 months of 2022 witnessed $1.9 billion worth of crypto coins being stolen which accounts for 60% more compared to last year. When a user downloads a trojan application on the device, it steals $600,000 worth of Bitcoins from your Crypto Wallet Application. This Android trojan is called Sharkbot which initiates money transactions from your crypto wallets bypassing the security systems. This is just one type of trojan, there are multiple trojans the hackers can attack your Crypto Wallet Application with.

Also, hackers normally try to exploit the interfaces that connect the crypto wallet applications to the backend service that supports them.

Security Hacks You Need to Ponder on for Defending your Crypto Wallets! 

Cold Wallet to be Your Savior! 

The best way to prevent cryptocurrency loss is to store your coins in a cold wallet or hardware wallet. These wallets store your funds offline, thus preventing hackers from accessing your cryptocurrencies online or through traditional methods.

A cold crypto wallet is much like a USB device, holding a private key that is used to access your cryptocurrencies. Storing your private key online will result in hackers easily accessing it and your account will be compromised. This will lead you to lose all your crypto investment. So, it is advisable to store your private key offline.Exchange platform that Keeps Hackers Away!

 Before you choose an exchange platform, make sure you carry out your research thoroughly on the security of the crypto exchange platform. Check online if the crypto exchange platform you are choosing has been compromised in the past or if any wallet on the exchange platform has been hacked. If the crypto exchange platform has been hacked, it depicts poor security protocols, where your crypto wallet or investment in it might be at risk.

Check if the crypto exchange platform is using multi-factor authentication or TLS/ SSL encryption to secure your wallet. In the last, verify if they have any safety measures in place like the transaction limits and notifications on every transfer or even the option to freeze the account and mitigate the damages.If you are looking for a crypto exchange development, here it is! RWaltz Software, Your trusted partner to launch your crypto exchange platform.

Multi-Factor Authentication to Authenticate Your Access!

Multi-Factor Authentication offers a layered defense mechanism by authenticating your wallet with independent credentials like passwords, security tokens, and/ or biometrics.  To set up multi-factor authentication, you can select either SMS or a 2FA application push notification.

Be Aware of Phishing Attacks!

Phishing attackers generally target users by posing as legitimate entities to gain access to your sensitive information. Avoid falling prey to these phishing attacks by making sure you log into the correct crypto exchange platform. Don’t click on the link received over emails, chats, or even text messages.
Save the exchange link or add it to your favorites. Lastly, always verify the details twice before you make crypto transactions.

Don’t forget to Change Your Passwords Regularly!

It is a cyber law, that how much ever tricky password you set, one day it will be compromised. So, the best way to prevent this theft is to set a complex password, store it safely and change it regularly. Make sure you don’t reuse the password or set any personal information as a key.
Instead of saving passwords on google, use password managers. Lastly, make sure your password is updated every six months.

BitcoinVB – Highly Secure Wallet Application by the Industry Leaders!

BitcoinVB is a highly secure wallet application developed by RWaltz for ensuring the secure storing and management of bitcoins.
Click here, to explore the portfolio! If you are looking for a similar wallet application, then RWaltz can be the right choice for you. We are a reliable cryptocurrency wallet development company that offers custom digital wallet app development.

Let’s Wrap Up!

Hopefully, the above article has enlightened your knowledge of digital wallet app security. If you have any queries, feel free to connect with our experts. Hurry up! Schedule a meeting now!

By: RWaltz

Source: Top 5 Security Hacks to Defend Your Crypto Wallet!.

Related contents:Polkadot Crypto DOT No Longer Security: “Token Has Morphed” U.Today

Former BitGo, Curv exec launches new crypto wallet security firm The Block

18:58 Fri, 04 Nov
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How To Buy Bitcoin At 26% Off The Regular Price

Here’s a scorecard on eight ways to own crypto. The most intriguing: a low-cost coin trust available at a nice discount.

Are you interested in virtual currency, now trading at half the price it had last fall? Shop around. Among the many ways to get a piece of the action, there are wide differences in ownership costs. My favorite: a somewhat obscure bitcoin trust to be found in Fairfield, Connecticut.

There are pros and cons to every means of getting cryptocurrency exposure, including the little outfit in Fairfield. This survey covers eight bitcoin bets in descending order of my views on their desirability. You may have a different ranking, especially if you are speculating on a quick turnaround.

#1. Osprey Bitcoin Trust

This quasi-fund (ticker: OBTC), created a little over a year ago, is a knockoff of the much better-known Grayscale Bitcoin Trust. Both trusts are closed-end, in that investors have no right to redeem shares in return for cash or underlying assets.

Osprey is a lot more cost-efficient, with an annual expense ratio of 0.8% versus Grayscale’s 2%. These expense figures incorporate both portfolio management and custody costs.

The trusts trade at discounts to the value of the bitcoins they hold: recently 26% at Osprey, 28% at Grayscale. With either, you are making a bet both on crypto and on that discount. If the discount widens, you’re worse off than you would have been with a coin purchase. If it narrows, you have a windfall.

What might widen the discounts: a continued fall in crypto prices. Bear markets have a way of doing double damage to closed-ends, depressing their share prices even faster than prices decline on the assets they hold. That’s been true of stock funds since the Great Depression and it’s likely to be true of crypto trusts.

It’s happening right now. A 12% fall in bitcoin between Friday afternoon on May 6 and Monday afternoon precipitated a 16% fall in Grayscale’s price.

But the discounts might go away. That would happen if the Securities & Exchange Commission permits exchange-traded funds to hold virtual currencies. Both Grayscale and Osprey have vowed to convert their closed-end trusts to ETFs as soon as such things are allowed.

The ETF structure allows market makers to cash in unwanted fund shares (or buy new shares when shares are sought after) via a swap for underlying assets. That sets up an arbitrage that keeps an ETF’s price close to the fund’s net asset value.

So far the agency has rejected every application for a coin ETF, although last year it did green-light an ETF that holds bitcoin futures contracts. Why the distinction? The futures trade on the heavily regulated Chicago Mercantile Exchange, while coins trade in somewhat murkier venues.

A bearish view of coin trusts comes from Tyler Odean, publisher of Something Interesting, an insightful Substack newsletter on crypto. “The time horizon [for an SEC approval] is long,” he says. “Between now and then the discount is likely to deepen as the number of competitive ways to hold bitcoin also deepens.”

Still, I think the bet in favor of an eventually favorable ruling from the regulators is a reasonable one. Risky, yes, but not as risky as the underlying asset. It’s far more likely that bitcoin will crash another 50% than that the discount will make a comparable move from 26% to 63% (meaning: Your trust collapses from 74 cents on the dollar to 37 cents).

One more concern: liquidity. Osprey has but $100 million of coins in its vault, and its average daily share volume over the past year would be worth $400,000 at today’s share price. Big bettors have to step in cautiously.

#2. Your wallet

You can purchase bitcoins on an exchange, then have them exported to your cold-storage wallet. Market analyst Odean has used this for his long-term bets.

Pros: No counterparty risk. No management fee. If you do it right, no hacker risk.

Con: You might not do it right.

Self-storage entails a fairly elaborate procedure to protect your private key from being lost or stolen. Next week you might walk into an open elevator shaft, so you need some mechanism for survivors to retrieve that key. The computer you use to generate the private and public keys for your coin repository has to be permanently isolated from the internet. The medium on which the secret is stored must be secure; Odean mentions an etched piece of metal as an option.

There are services (Casa, Ledger and others) that make this process less painful, but ease of use comes with some increment of risk.

#3. Exchange storage

You could leave your coins for safekeeping at a coin exchange. If you want that asset segregated, and thus safe from the exchange’s creditors, yours’ll have to pay a custody fee.

At Coinbase Global, where the minimum account size for this service is $500,000, the fee is 0.5% a year. Some customers get a better deal. Osprey, which recently switched its custody from Fidelity Investments to Coinbase, appears to be paying 0.25% or less (its financial statements don’t reveal an exact amount).

If you can stomach some counterparty risk, or you just want assets available for trading, you can leave your coins in a deposit account at no charge. This is the crypto equivalent of keeping your Tesla shares in a margin account. But, unlike stocks at a brokerage firm, coins left with an exchange have no Securities Investor Protection Corp. to back them if the middleman gets into financial trouble.

#4. Foreign ETF

While our SEC bides its time, the Canadian regulator has authorized exchange-traded funds that hold cryptocurrency. One of them is the Purpose Bitcoin ETF, which holds coins now worth just over $1 billion.

Pro: The fund trades at very close to net asset value. The shares that are quoted (in Toronto) in U.S. dollars see $4 million of average daily volume.

Cons: The 1.5% annual expense ratio is a lot higher than Osprey’s. It’s not easy to get your hands on these shares in the U.S., as most brokers will refuse the buy order. On the Fidelity platform you can find Purpose under the ticker BTCC_U:CA, but it takes some digging.

#5. Grayscale Bitcoin Trust

This entity (GBTC) is the elder cousin of Osprey.

Pro: Liquidity. This trust has $20 billion of coins and sees an average daily share volume now worth $140 million.

Con: The stiff fee, 2% a year.

#6. Futures

CME Group’s Chicago Mercantile Exchange lists bitcoin futures contracts, each for five coins. Trading volume, almost all of it in the nearest month, typically runs to $1 billion a day. Settlement is in dollars; no wallets are involved.

Pros: Good liquidity, minimal counterparty risk and the potential for leverage. You can control $2 of crypto by putting down $1 of cash.

Cons: Taxes, trading costs and contango. Bitcoin futures share these three afflictions with many commodity futures.

At tax time you have to declare paper gains and losses on futures, with 40% treated as short-term (at high tax rates).

Rolling over your futures position monthly, which you probably would do in order to stay in the most actively traded contract, will cost you 12 commissions and bid/ask spreads per year.

The contango is a big deal. It means that the futures price at which you’re buying is at a premium to the spot price. On bitcoins the contango is a volatile number usually falling between 3% and 6% annualized. Contango reflects both the cost of financing a stockpile of a commodity and the cost of securing it. In the case of crypto, securing the asset against hackers is not simple (see #2 above).

Futures aren’t bad for day-to-day trading. They are a poor choice for someone hoping to achieve a long-term gain.

#7. Futures ETF

The ProShares Bitcoin Strategy ETF (BITO) holds long positions in bitcoin futures. Here, atop the steep contango of the Chicago trading pits, you have the opportunity to fork over an additional fee: the 0.95% a year assessed by the fund.

ProShares has attracted $900 million for this product. From naïfs.

#8. MicroStrategy

Chairman Michael Saylor has turned this business analytics firm into a crypto betting parlor. The corporation has used mostly borrowed money to acquire 129,200 bitcoins.

The stock had an interesting day May 9. With bitcoin down 14% from where it was Friday afternoon, MicroStrategy shares went down 26%.

Tyler Odean sees these shares as a simultaneous bet on three things: crypto, a mediocre software business and Saylor’s ability to withstand margin calls. He likes the first bet but not the other two.

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to

Source: How To Buy Bitcoin At 26% Off The Regular Price

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Sanctioning Russia On The Blockchain: Following The Money To A Network Of OTC Providers

Sanctions can only work if those who are supposed to enforce them understand exactly what to do so that they cannot be circumvented easily. Russia’s extensive network of Over-The-Counter (OTC) providers requires an extensive review by sanction committees, as they might be adopted to circumvent sanctions.

As described in the previous release, due to the limited liquidity of cryptocurrencies and Decentralized Finance space in general, it remains close to impossible for Russia to circumvent SWIFT-based systems by using crypto. However, Russians might still hold up to $200 Billion USD in crypto assets, besides running the third-largest crypto mining industry in the world. These funds can potentially be cashed out with Russian OTC providers.

The fifth EU sanction package on Russia limits the crypto asset holdings of Russian nationals, individuals, and legal entities established in Russia to €10,000 (with the same account, wallet or custody provider). The use of Russian OTC providers, which represents a network of physical providers offering cash payouts from crypto, could be adopted to circumvent these sanctions.

In oversimplified terms, OTC refers to a process in which individuals theoretically could agree on a price and meet to complete a transaction. An example of such a process could be a personal meeting in which one side brings bags with cash or any other pre-agreed means of value, and the other side could conduct a transaction on the blockchain on the spot. Transactions primarily with larger sums of money could be risky, to say the least.

Contrarily to peer-to-peer exchanges (P2P) which involve independent parties, OTC exchanges act comparable to physical pawn shops. At dedicated physical locations with announced opening hours, individuals can visit and exchange their cryptocurrencies in Russia for cash or bank transfers.

Depending on the business models of virtual assets service providers (VASPs), both OTC and P2P providers have existed in various jurisdictions since the beginning of financial interactions between individuals.

An example of such a platform in the EU is LocalBitcoin, registered with the Finnish Financial Supervisory Authority. Unlike Russian OTC providers which are subject to the 6th Anti Money Laundering Directive of the EU and connected to its so-called Counter-Terrorism Financing (CTF) legislation, LocalBitcoin is a unique case.

Existence of such a platform in the EU is only possible in Finland, as the rest of the EU has followed the recommendation of the Financial Action Task Force (FATF) to define and include Digital Assets in the national legislation and created an oversight program as a regulator.

It can be argued that the current regulatory frameworks remain far from perfect, but there is increased interest in incorporating DeFi into traditional financial compliance programs.

Such requirements to register a P2P or OTC exchange are way different within the Russian Federation. On the one hand, Russia approved use of cryptocurrency as an investment tool or a payment method as of Q1 2021 but on the other its national bank proposed a long list of bans that should outlaw the circulation of cryptocurrencies within the country.

Due to such unclear legal circumstances, licensing and supervisory programs are close to non-existent. In the absence of platforms that have chosen ‘compliance excellence’ as their differentiating business strategy, for example, Coinbase or some Scandinavian VASPs, many Russian providers have to operate in the gray space to say the least.

What is surprising is the fact that even though Russians store up to one fifth of the national bank’s reserves in digital assets, the public side has decided to not provide much clarity for the VASPs or any other players in Decentralized Finance (DeFi).

By not providing clarity for players in the Digital Assets space, the governments in Moscow and Minsk continue to lose on potential tax revenues and regulatory oversight of over 623 crypto platforms identified so far, associated with Russia and Belarus. The logic to continue to lose out on easily taxable capital gain from crypto investments remains questionable.

“Is it not paradoxical that despite the Russian Prime Minister stating that Russians hold $200 Billion USD in crypto, Russia has not yet formulated a comprehensive legislation to legalize crypto or set a taxation process for it?” — Dominika Kuberska, PhD, Faculty of Economic Sciences, University of Warmia and Mazury in Olsztyn.

With the absence of regulated players in Russia, there is a well-developed gray market of OTC exchanges that facilitate the trade of Digital Assets in exchange for rubles using both cash and bank transfers.

Sources, who desire to remain anonymous, underline that bank transfers to individuals or entities from OTC brokers are labeled as payments for IT or consultancy services. The Russian government will officially tax profits from such transfers with personal or corporate income tax (PIT, CIT).

Moreover, for customers that desire to purchase or exchange a significant amount of digital assets, there are at least ten physical brokers in Moscow or even price comparison websites like BestChange.ru that display the current rates of OTC providers in various regions.

Due to the nature of the business model, customers can often exchange cash for digital assets at the physical offices of these exchanges which can be visited by both individuals and the members of the Russian financial supervisory authorities, in case they would acknowledge their existence.

The majority of OTC providers operate without identifying their customers. Multiple sources report on direct cooperation between dedicated Ponzi schemes or sanctioned brokers with OTC providers. Even if hard evidence such as an agreement or email exchange between confirmed parties is continuously being collected, blockchain based analytics continues to provide indications for illicit transactions.

Russia has been connected with an elevated amount of illicit activities for a country that has a population of 144 million, which is 1.5 times bigger than that of Germany.

“Russia has surprisingly large amounts of confirmed illicit “Unicorns” like BTC-e/WEX exchange, Hydra dark web marketplace, dozens of pyramid schemes like PRIZM, the largest ransomware attacks and other cybercrimes which experts consider to be possibly parts of state-sponsored-activities” – Oleksii Fisun, Co-founder of Global Ledger Protocol.

With so many confirmed illicit activities coming out of one jurisdiction, it remains worth investigating how profits from illegal activities could be potentially cashed out. As described extensively in the previous article, the advantage of a public blockchain is that it remains visible and traceable.

An example of such confirmed illicit activity that could be cashed out with a Russian OTC provider, would be funds allocated in a cryptocurrency wallet provider called Konvert.im. It includes more than 100 transactions and has more than 69% exposure to funds originating from newly sanctioned Hydra Darknet Marketplace.

As Konvert.im represents an exchange, most certainly, their compliance must be aware of the origination of those funds from sanctioned Hydra. It is within such schemes the funds might be mixed with other funds that could potentially be forwarded to OTC providers for cash out.

Regardless of the choice of the provider used for Blockchain based analytics, due to the nature of Blockchain based investigations that accumulate all of the funds and its traces on the Blockchain between different brokers, there will always be a certain exposure to illicit traffic, which most likely will be at a single digit percentage wise.

Similar to accepting a physical banknote at the local farmer’s market, there could be a possibility that this banknote was used to conduct illicit activity in the past. This connection to illicit activity remains invisible on the banknote itself, but such a transaction is perfectly visible on the Blockchain.

Having said that, it remains impossible to state that an exposure of 69% to Hydra has been a technical mistake. It should rather be perceived as a dedicated action and tracing the money from Konvert.im to a Russian OTC provider might serve as a symbol that this strategy can and might be adopted to circumvent SWIFT-based sanctions and easily bypass a limitation specified in the fifth EU sanction package.

I’ve specialised in the topics on the intersection between Information Systems, Fintech, Insurtech, Cryptocurrency, Blockchain – Distributed Ledger Technologies

Source: Sanctioning Russia On The Blockchain: Following The Money To A Network Of OTC Providers

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