Uncategorized

Crypto’s Compliance Conundrum

Published

1 месяц ago

13 января, 2025

admin

As Bitcoin continues to rise and institutional investors pour over $20 billion into crypto ETFs, a fundamental shift is occurring in digital asset markets. The appointment of Paul Atkins as SEC Chair, known for favoring market-driven solutions over heavy-handed enforcement, has fueled optimism that crypto can finally balance innovation with regulation.

But the crypto industry faces a stark choice that no amount of regulatory flexibility can overcome: either sacrifice the unlimited programmability that makes these systems revolutionary, or accept that their compliance from an anti-money laundering regulation perspective cannot be fully automated or built into the system. This isn’t a temporary technological limitation about one system or another – it’s as fundamental as the laws of mathematics.

Automating Market Integrity

To begin to see why, we can think about an economy where shells are money. If we pass a law that nobody can transact more than 10 times per day or hold more than 10% of the shells, we have an enforcement problem. How do we know who holds which shells when? Information asymmetry stymies compliance and compliance devolves to a surveillance challenge.

Blockchain technology solves that problem. If everyone sees where all the shells are all the time, then enforcement works. We can build compliance into a system and deny banned transactions. Here, the transparency from the blockchain enables automated compliance.

But the long-held premise of Web3 is to automate stock exchanges and myriad complex interactions. Doing so requires moving beyond shells to a system where users create their own assets and upload their own programs. And permissionless access to publish these complex programs causes trouble for users who may be exposed to malicious programs or scams, the system which may face congestion, and regulators who care about preventing financial crimes.

The core challenge lies in what computer scientists call «undecidability.» In traditional finance, when regulators impose rules like «no transactions with sanctioned entities» or «maintain capital adequacy ratios,» banks can implement these requirements through their existing control systems. But, in a truly decentralized system where anyone can deploy sophisticated smart contracts, it becomes mathematically impossible to verify in advance whether a new piece of code might violate these rules.

JPMorgan’s recent rebranding of Onyx to Kinexys illustrates this reality. The platform now processes over $2 billion in daily transactions, and participation is by participants who meet regulatory criteria before joining. Unlike typical cryptocurrency platforms where anyone can write and deploy automated trading programs (known as smart contracts), JPMorgan’s system maintains compliance by restricting what participants can do.

This approach has attracted major institutional players like BlackRock and State Street, which collectively have more than $15 trillion in assets under management. Many crypto enthusiasts view such restrictions as betraying the technology’s promise. These compromises are not just pragmatic choices – they’re necessary for any system that aims to guarantee regulatory compliance.

The Securities and Exchange Commission’s mandate to protect investors while facilitating capital formation has grown increasingly complex in the digital age. Under Gary Gensler’s leadership, the SEC took an enforcement-heavy approach to crypto markets, treating most digital assets as securities requiring strict oversight. While Atkins’ anticipated principles-based approach might seem more accommodating, it cannot change the underlying mathematical constraints that make automated compliance impossible in permission-less, fully programmable systems.

The limitations of fully automated systems became painfully clear at MakerDAO, one of the largest decentralized lending platforms with over $10 billion in assets. During March 2024’s market turbulence, when Bitcoin’s price swung 15% in hours, MakerDAO’s automated systems began triggering a cascade of forced liquidations that threatened to collapse the entire platform.

Despite years of refinement and over $50 million spent on system development, the protocol required emergency human intervention to prevent a $2 billion loss. Similar incidents at Compound and Aave, which together handle another $15 billion in assets, underscore that this wasn’t an isolated case. This wasn’t just a technical failure – it demonstrates the impossibility of programming systems to handle every potential scenario while maintaining regulatory compliance.

Towards Compliant Crypto

The industry now faces three paths forward, each with distinct implications for investors:

First, follow JPMorgan’s lead by building permission-based systems that sacrifice some decentralization for clear regulatory compliance. This approach has already gained significant traction: six of the top ten global banks have launched similar initiatives in 2024, collectively handling over $2 trillion in transactions. The surge in regulated crypto products, from ETFs to tokenized securities, further validates this path.

Second, limit blockchain systems to simple, predictable operations that can be automatically verified for compliance. This is the approach adopted by Ripple with its newly launched RUSD, designed to be compliant with the New York Department of Financial Services standards based on the limited purpose trust company framework. While this constrains innovation due to the restriction action space that users can make, it enables decentralization within carefully defined boundaries.

Third, continue pursuing unlimited programmability while accepting that such systems cannot provide strong regulatory guarantees. This path, chosen by platforms like Uniswap with its over $1 trillion in total trading volume in 2024, faces mounting challenges. Recent regulatory actions against similar platforms in Singapore, the U.K. and Japan suggest this approach’s days may be numbered in developed markets.

For investors navigating this evolving landscape, the implications are clear. The current market enthusiasm, largely driven by regulated products like ETFs, indicates the industry is moving toward the first option. Projects that acknowledge and address these fundamental constraints, rather than fighting them, are likely to thrive. This explains why traditional financial institutions’ blockchain initiatives, despite their limitations, are seeing dramatic growth – JPMorgan’s platform reported a 127% increase in transaction volume this year.

The success stories in crypto’s next chapter will likely be hybrid systems that balance innovation with practical constraints. Investment opportunities exist in both regulated platforms that provide clear compliance guarantees and innovative projects that thoughtfully limit their scope to achieve verifiable safety properties.

As this market matures, understanding these mathematical constraints becomes crucial for investors’ risk assessment and portfolio allocation. The evidence is already clear in market performance: regulated crypto platforms have delivered average returns of 156% over the past year, while unrestricted platforms face increasing volatility and regulatory risks.

Atkins’ principles-based approach might offer more flexibility than Gensler’s prescriptive rules, but it cannot override the fundamental limits of automated compliance. Just as physics constrains what’s possible in the physical world, these mathematical principles set immutable boundaries in financial technology. The impossible dream isn’t cryptocurrency itself – it’s the notion that we can have unrestricted programmability, complete decentralization and guaranteed regulatory compliance all at once.

For the crypto industry to deliver on its revolutionary potential, it must first acknowledge these immutable constraints. The winners in this next phase won’t be those promising to overcome these mathematical limits, but those who design intelligent ways to work within them.

Uncategorized

Ethereum ‘Roll Back’ Suggestion Has Sparked Criticism. Here’s Why It Won’t Happen

Published

1 час ago

22 февраля, 2025

admin

On Friday, cryptocurrency exchange Bybit was allegedly hacked by North Korea’s Lazarus group, which drained nearly $1.4 billion in ether (ETH) from the exchange.

Following the hack, Arthur Hayes, BitMEX co-founder and claiming to be a major ether (ETH) holder, wrote a post on X to Ethereum co-founder Vitalik Buterin on whether he will “advocate to roll back the chain to help @Bybit_Official.” Meanwhile, in an X spaces session, Bybit’s CEO Ben Zhou revealed that his team had also reached out to the Ethereum Foundation to see if it was something the network would consider, noting that such a decision should be based on what the network’s community wants.

Hayes’s post immediately provoked a fierce reaction from the Ethereum community, which was firm in its belief that it wouldn’t happen. Some even questioned whether the BitMEX founder was joking. CoinDesk reached out to Hayes over X to clarify his comments.

Ethereum members, like the core developer teams, are vastly against “rolling back” the network because it would override core elements of decentralization. If Buterin decided on his own that it would happen, then that would be seen as the end of Ethereum’s ethos, which heavily involves various developer teams and other community members when it comes to the health and state of the blockchain.

“Rolling back the chain would give ETH no purpose. What’s the point if you can just change rules,” said user @the_weso in a post on X.

Some outside the Ethereum community pointed to the 2016 DAO hack as an example when $60 million in ETH was stolen. The network went forward with a hard fork, splitting the old network into two, and the new chain continued on as Ethereum.

That hard fork was not a “rollback,” though; it was known as an “irregular state transition.” Ethereum technically can’t “roll back” the network because it relies on an account model, where accounts hold users’ ETH.

At the time of the hack, developers upgraded their nodes to a new client or software. Those who didn’t upgrade their nodes were still on the old chain, which became known as Ethereum Classic.

When the nodes upgraded to the new software, the stolen ETH could move from one Ethereum account address to the next.

“The ‘irregular state change’ that they implemented at the time of the DAO hard fork was this: they airlifted all the ETH in the DAO smart contracts out to a refund contract that would send you 1 ETH for every 100 DAO tokens you sent in,” wrote Laura Shin of Unchained in a post on X.

Uncategorized

Bybit Sees Over $4 Billion ‘Bank Run’ After Crypto’s Biggest Hack

Published

2 часа ago

22 февраля, 2025

admin

Major cryptocurrency exchange Bybit has seen total outflows of over $5.5 billion after it suffered a near $1.5 billion hack that saw hackers, believed to be from North Korea’s Lazarus Group, drain its ether cold wallet.

The total assets tracked on wallets associated with the exchange plunged from around $16.9 billion to $11.2 billion at the time of writing, according to data from DeFiLlama. The exchange is now looking to understand exactly what happened.

In an X spaces session, Bybit’s CEO Ben Zhou revealed that shortly after the incident, he called for “all hands on deck” to serve their clients with processing withdrawals and responding to inquiries about what was going on.

During the session, Zhou revealed that the security breach saw the hackers make off with roughly 70% of their clients’ ether, which meant that Bybit needed to quickly secure a loan to be able to process withdrawals. Yet, Zhou found that ether wasn’t the most withdrawn token, with most users instead withdrawing stablecoin from Bybit.

The exchange, Zhou noted, has reserves to cover these withdrawals, but the crisis deepened as, in response to the incident, Safe moved to temporarily shut down its smart wallet functionalities to “ensure absolute confidence in our platform’s security.”

Safe is a decentralized custody protocol providing smart contract wallets for digital asset management. Some exchanges integrated Safe, which allows users to maintain custody of their funds and has multisig functionality to enhance the security of their cold wallets.

While the exchange had reserves to back up users’ withdrawals, $3 billion worth of USDT was in a Safe wallet that had just been shut down as the wallet moved to understand the situation, according to Zhou.

On social media, Safe said that while it had «not found evidence that the official Safe frontend was compromised,» it was temporarily shutting down «certain functionalities» out of caution.

While Zhou and Bybit’s team were figuring out how to securely withdraw their $3 billion, withdrawals were mounting. Within two hours of the security breach, the exchange was facing requests to move over $100,000 off its platform, Zhou revealed.

Responding to the situation, Zhou told his security team to engage Safe to “find a better way to get this money out.” The team ended up developing new software with code “based on Etherscan” to verify the signatures “on a very manual level” to move the stablecoins back to their wallet and cover the withdrawal surge.

The exchange’s team had to remain up all night to be able to fulfill withdrawals, according to Zhou. As the exchange managed to move the $3 billion in stablecoin reserves, it was facing a bank run of “about 50%” of all the funds within the exchange.

Zhou said that since the incident, the exchange has moved a significant amount of funds off of Safe cold wallets and is now determining what system it will use to replace Safe.

Pushing to «Roll Back» Ethereum Was not Off the Table

Since the security breach, Bybit has engaged authorities. During the session, Zhou said that the Singaporean authorities took the issue “very seriously” and that he believes it has already been escalated with Interpol.

Blockchain analysis firms, including Chainalysis, were engaged. Zhou said, “As long as Bybit is there and continues to track [the stolen ether], I hope we can get these funds back.”

Notably, he revealed that pushing to «roll back» the Ethereum blockchain, which was suggested by some industry players on social media, including BitMEX co-founder Arthur Hayes, had been on the table for some time if the community agreed with it.

“I had my team talking to Vitalik and the Ethereum Foundation to see if there’s any recommendations they can offer to help. I do really thank all these guys on Twitter asking if there is a possibility to roll back the chain. I’m not sure what was the response on their side, but anything that would help we would try,” Zhou said.

When asked if «rolling back» the chain is even possible, Zhou responded he doesn’t know. “I’m not sure it’s a one-man decision based on the spirit of blockchain. It should be a work in process to see what the community wants,” he said.

It’s worth noting that a blockchain «rollback» refers to a state change that would allow for the funds to be recovered. While rolling back the Bitcoin blockchain is technically possible, such a state change on Ethereum would be more complex, given its smart contract interactions and state-based architecture.

Nevertheless, any state change would require consensus and likely lead to a contentious hard fork, drawing criticism from the community. This would likely split the Ethereum blockchain into two networks, each with its own supporters.

As for what exactly caused the hack to occur, is still unclear. Per Zhou, Bybit’s laptops have not been compromised. He said the movements of the transaction’s signers have been scrutinized but appear to have been routine.

“We know the cause is definitely around the Safe cold wallet. Whether it’s a problem with our laptops or on Safe’s side, we don’t know.,” Zhou added.

Uncategorized

Binance Research Survey Shows 95% of Latin American Crypto Users Plan to Buy More in 2025

Published

2 часа ago

22 февраля, 2025

admin

A vast majority of Latin American cryptocurrency users—95%—plan to expand their holdings in 2025, according to a Binance Research survey of more than 10,000 investors in Argentina, Brazil, Colombia, and Mexico.

The findings show that 40.1% of respondents are expecting to buy more crypto within the next three months, 15.3% are looking to do so in the next six months, and 39.7% within 12 months. Only 4.9% have no plans to keep on investing this year.

Latin America led the world in crypto adoption in 2024, growing by 116%, according to research from payments firm Triple-A quoted in the report. The region now has 55 million cryptocurrency users, making up nearly 10% of total cryptocurrency users.

This rapid expansion has been fueled by rising asset prices, regulatory advancements, and new financial products like spot bitcoin exchange-traded funds (ETFs). Brazil has just last week become the first country to approve a spot XRP ETF.

Market performance has also bolstered investor confidence. «Latin America is a rapidly expanding region for the crypto sector, and the results of this research reinforce what we have observed in our operations,” Binance’s regional VP for Latin America, Guilherme Nazar, said.

Binance’s research shows that half of those inquired already use cryptocurrencies for over a year, with most entering the space expecting significant returns and searching for financial freedom.

Portfolio diversification, privacy, and protecting their money were also quoted as motives to invest in the space.
Read more: How a $115M Crypto Fund With Big Ambitions Plans to Invest In Latin America