December 10, 2020

CipherTrace

Polling Indicates Supermajority of Financial Institutions Aren’t Confident Detecting Cryptocurrency Flows
China Confiscates 1% of Total Bitcoin Supply
US Treasury, SEC, House of Representatives Float New Regulations for the New Year
Lithuanian Government Sells Seized Crypto for $7.5M
Australia’s ASIC Charges Man Who Operated Unregistered Investment Scheme
Irish Man Will Get 3 Years in Prison for Stealing Over $2 Million in Crypto
ALERT: MetaMask Phishing Scheme

Only 22% of Bankers and Financial Investigators Feel Confident Detecting Crypto-Related Payments

In a CipherTrace poll this week of over 500 webinar attendees from various financial institutions and agencies, 78% did not feel confident detecting cryptocurrency related payments flowing through their institutions and/or investigations.

PlusToken Ponzi Scheme Leads to Seizure of 1% of Bitcoin Supply

Chinese authorities investigating the PlusToken Ponzi scheme have reportedly confiscated 14.8 billion Yuan ($2.2 billion USD) related to the case. This figure represents 1% of bitcoin’s total supply. PlusToken claimed to be a crypto trading platform, falsely promising users large payouts if they provided $500 worth of crypto assets. Over 2 million people were victimized; 15 people have been convicted in the scheme.

According to the Yancheng Intermediate People’s Court, the crypto assets that were taken by police will be transferred to China’s National Treasury after being processed into yuan, but the details of how that process will happen is still unknown.

Why it Matters: As one of the largest Ponzi schemes in crypto’s short history, the confiscation of funds related to PlusToken represents a major step forward for the industry. Ideally, the stolen funds would be redistributed to victims; the world will continue to watch to see what the Chinese Treasury ultimately does with the funds.

Treasury, SEC, House of Representatives Allude to Forthcoming Crypto Regulations

With only 41 days left in the Trump Administration, there are rumors that Treasury Secretary Steve Mnuchin plans to direct the Treasury Department to start tracking self-hosted wallet transactions.

The CEO of Coinbase, Brian Armstrong, tweeted in response, “This proposed regulation would, we think, require financial institutions like Coinbase to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party, before a withdrawal could be sent to that self-hosted wallet.”

A version of this rule is already in effect in countries like Switzerland and the Netherlands, where virtual asset service providers (VASPs) are required to prove who the owner is of a non-custodial wallet before crypto transfers can be initiated. However, even with a new administration on the horizon, the Blockchain Association, an industry lobbying group, told CoinDesk that they are working with members of the executive and legislative branches to provide further education about self-hosted wallets and the benefits associated with them.

These rumors follow a November 19th appearance by SEC Chairman Jay Clayton on CNBC’s Squawk Box, discussing bitcoin and regulation while a guest of CNBC’s Squawk Box. “We determined that bitcoin was not a security, it was much more a payment mechanism and stored value,” said Clayton, asserting that bitcoin has arisen primarily as a result of inefficiencies in existing payment mechanisms.

Clayton went on to say that the popularity of bitcoin could lead to regulation as a payment system. That regulation, however, would not be through the SEC, but rather through the IRS or FinCEN.

Several members of Congress have since voiced opposition to the rumors in a letter directed to Secretary Mnuchin on December 9. The letter explicitly asks Treasury to publicize its plans regarding self-hosted wallets.

Meanwhile, three Democratic members of Congress have proposed a bill, the STABLE Act, that would require stablecoin issuers to obtain a bank charter, get the blessing of state and Federal regulators, and insure their tokens through the FDIC or cash reserves. The representatives’ stated aim is to protect low- and moderate-income Americans from predatory practices; members of the crypto industry warned, however, that if passed the act would significantly inhibit financial innovation.

Why it Matters: There’s a constant tension between the foundational privacy and independence that are hallmarks of the cryptocurrency world and the desires of regulators and lawmakers to bring crypto into the structures of traditional finance. We expect this tension to endure as the U.S. transitions to a new presidential administration in January 2021.

Cryptocurrency Seized by Lithuanian Police has been Sold in First Ever Sale of its Kind

In February of 2020, Lithuanian authorities seized millions of cryptocurrency assets used in illicit activities; nearly a year later, the Lithuanian State Tax Inspectorate has converted these assets into 6.4 million Euro ($7.6 million USD) and sold the funds, representing the first sale of its kind in the nation.

Irina Gavrilova, a representative for the Lithuanian Tax Inspectorate, said that the conversion of cryptocurrency to Euro will make it easier to deal with future seizures of illegal cryptocurrency funds.

Few details are available as to how the funds were sold, but it is known that the Lithuanian government created its own digital currency wallet, to which state agencies can transfer cryptocurrency directly.

Why it Matters: This type of seizure and sale by a country’s government is becoming more common as a way to prevent and solve crimes within the digital currency space. The hope is that, as time goes on and money becomes increasingly digitized, governments will be able to better leverage the advantages of cryptocurrencies for their own aims. CBDCs are another example of how central banks and governments are deploying digital assets to further their own economic initiatives.

Promoter of Australian Cryptocurrency Lending Scheme Sentenced to 20 Years

John Bigatton, an Australian man who worked as a promoter for cryptocurrency lending scheme BitConnect, was charged by the Australian Securities and Investments Commission (ASIC) and sentenced to a maximum of two ten-year terms in prison. Bigatton was found to be operating an unregistered managed investment scheme that gave unlicensed financial services and lied to customers by providing misleading financial statements. At one point during the height of ICO mania, the BitConnect pyramid scheme was valued at over $2.5 billion.

Prior to Bigatton’s sentencing, the ASIC in September banned Bigatton from providing financial services. In addition to his prison sentence, Bigatton will also have to pay restitution of at least $80K in Australian currency (US$58.5K).

Why It Matters: Investment schemes like BitConnect were rampant at the height of the 2017 cryptocurrency bull market, which may hold lessons for the nascent DeFi sector. Just six months ago, the total locked value in DeFi was less than $1 billion. Total locked value is now over $14 billion, inspiring comparisons to the 2017 cryptocurrency bubble. Those looking to “get rich quick” by launching a DeFi protocol without taking proper security audit measures shouldn’t forget 2017. As the BitConnect case illustrates, the perpetrators of fraud and negligence are still being charged.

$2.5 Million in Crypto was Stolen Through SIM Card Hacks by Irish Man

Twenty-one-year-old Conor Freeman from Dublin, Ireland was given a three-year sentence last month after being found guilty of stealing over $2 million in cryptocurrency. Although his attorneys claimed that he acted alone, the prosecution found that Freeman was part of a group of six others who hacked crypto accounts during a three-day heist in 2018.

The group found their victims through social media, where they obtained their email addresses and phone numbers to put on SIM cards. Conor Freeman’s main job was to go through victims’ emails to find their cryptocurrency accounts. The $2.5 million in stolen funds was looted from three victims.

When Ireland’s National Police Force finally caught Freeman, they found that he already spent over $130K of the stolen funds, but upon arrest he provided the digital wallet and access keys so that police could retrieve the remaining amount.

Why it Matters: The thefts perpetrated by Freeman and his accomplices should be a reminder to cryptocurrency users of the importance of taking extra measures to secure their accounts. Emails and phone numbers are easily acquired and can be used to access passwords unless two-factor authentication and other security measures are deployed.

ALERT: Malicious Crypto Browser Extension—Masked MetaMask

CipherTrace reported on a sophisticated phishing scheme targeting MetaMask users last week. Read full details and the latest updates here: https://ciphertrace.com/alert-malicious-crypto-browser-extension-masked-metamask/