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Report for the first three months of the current year CipherTrace Cryptocurrency Intelligence (April 2019).

Cryptocurrency Thefts, Scams, and Fraud Could Tally More than $1.2 Billion in First Quarter 2019.

Criminals stole more than US$356 million from exchanges and infrastructure during the first quarter of 2019. Among these losses, exit scams—which CipherTrace is considering the implosion of QuadrigaCX to be one—robbed cryptocurrency users of nearly US$195 million. On top of these numbers, the New York Attorney General’s Office revealed what they allege is a fraud involving the loss of $851 million by a major cryptocurrency exchange, Bitfinex. Cyber criminals also developed ingenious new techniques to drain millions more from user accounts and wallets. These thefts only represent the losses that are visible. CipherTrace estimates the true number of crypto asset losses was much higher.

46% Increase in the Number of Cross-Border Payments from US Cryptocurrency Exchanges Over the Last Two Years.

CipherTrace research conducted in Q1 revealed a major hole in the current cryptocurrency regulatory fabric with respect to cross-border payments. An analysis of 164 million BTC transactions revealed that cross-border payments from US exchanges to offshore exchanges increased from 45% from the twelve months ending Q1 2017 to 66% in the twelve months ending Q1 2019. This is significant because according to the International Consortium of Investigative Journalists, “$8.7 trillion, 11.5 percent of the world’s wealth, is hidden offshore.”

Once these payments reach exchanges and wallets in other parts of the globe they fall off the radar of US authorities. For now, it is uncertain if these cross border inter-exchange payments trigger the FinCEN requirement that “MSBs must keep a five-year record of currency exchanges greater than $1,000 and money transfers greater than $3,000.” But experts recommend MSBs retain tax ID/SSN for these transactions.

A Significant Wave of Regulation Is Coming to the Cryptocurrency Economy.

Ultimately, thieves and scam artists will need to launder the cryptocurrency stolen or scammed in Q1 2019. Furthermore, this will require innovative new ways to cash out, and turn all that tainted virtual money into clean, spendable fiat currencies. And they will also need to get it done under the much more watchful eyes of government regulators and banks as a tsunami of tough new global anti-money laundering (AML) and counter-terror financing (CTF) regulations will roll over the crypto landscape in the coming year. As of April 2019, 17 countries plus the European Union within the jurisdiction of the Financial Stability Board had at least some regulation or standard-setting bodies dealing with cryptocurrencies. These bodies will be responsible for implementing regulations that enforce FATF policy and AMLD5.

In light of the huge losses suffered by users of QuadrigaCX, regulators in Canada and around the world are rethinking controls on the internal business practices and security operations of exchanges. In addition, regulators are beginning to recommend bans on privacy coins, as criminals are coming to prefer these new anonymous altcoins to bitcoin because they are more difficult to trace. Banks also continue to face problems coping with the coming wave of regulations as they increasingly recognize there are undetected cryptocurrency operations that are using their fiat payment networks and customer accounts. Plus, courts in some countries have ruled that banks must do business with licensed cryptocurrency companies.

Crypto Crime Evolves and Expands from the Virtual to the Real World.

The previous year’s crypto crime spree was dominated by major external exchange hacks around the globe—with the biggest occurring in Q1 2018. However, in the first quarter of this year, insiders, extortionists and scammers attempted a more diverse range of crypto crimes. As just one example, kidnappers in Norway demanded nine million euros (approximately US$10.3 million) ransom in Monero, a privacy coin, for a billionaire’s wife, who has not yet been returned. There were also two large insider thefts/misappropriations (QuadrigaCX and Bitfinex). This shift suggests that security against external hackers at exchanges is maturing under the pressure from regulators and customers to take necessary measures to prevent losses.

The geopolitical implications of cryptocurrencies also took center stage in Q1 2019 with countries competing to attract crypto businesses and foster related economic growth. Conversely, overt attempts to evade sanctions by hostile nations show that economic adversaries recognize the money laundering and terrorist financing potential of crypto assets. On March 6, 2019, the UN Security Council reported North Korean state-backed hackers successfully breached at least five cryptocurrency exchanges in Asia between January 2017 and September 2018, causing $571 million in losses.

Q1 2019 Crypto Crime Highlights:

- Thieves and scammers stole more than $356 million from exchanges and users.

- Customers suffered losses of approximately US$195 million when Canada’s major cryptocurrency exchange, QuadrigaCX, imploded after the CEO mysteriously perished in India, allegedly along with the passwords to virtually all of the exchange’s assets. CipherTrace analysis casts severe doubt that this was anything other than a theft, fraud, or foul play.

- On March 26, the New York Attorney General’s Office brought suit against the parent company of Bitfinex and Tether.
- The AG claimed Tether had failed to disclose a secret transfer of funds from the fiat pool of funds supposedly backing tether, which converted tether from asset-backed to debt-backed unbeknownst to tether holders.
- Bitfinex allegedly lost $851 million. The source of the loss was a Panamanian payment processor also used by QuadrigaCX.

- Iran announced the imminent launch of its long-rumored Crypto Rial, a state-backed stable coin developed with the express purpose of circumventing political sanctions and overcoming sanctions-related restrictions by SWIFT.

- The Russian Duma approved international use of the domestically developed SPFS as a ‘SWIFT alternative’ for cross-border payments in an effort to avoid political sanctions.

- The French government issued a report recommending a ban on privacy coins.

- The UN published the findings of a private report that concluded North Korean hackers looted $571 million from five cryptocurrency exchanges in Asia.

- Courts in some countries forced financial institutions to bank crypto asset businesses.

- The Bank of Mexico reportedly proposed banning financial institutions from transacting with crypto exchanges, citing money laundering and terror financing risks.

Source: CipherTrace.

Published in INDUSTRY REPORTS

Report of 2016, by Capgemini Consulting’s Digital Transformation Institute, documents what named executives at leading financial institutions are saying about the potential of ‘smart contracts,’ which differ from standard contracts in that they are electronically programmed and based on distributed ledgers such as blockchain technology.

They enable financial firms to automatically enforce actions like payments without the need for independent verification or manual processing. The report predicts mainstream adoption of smart contracts will begin in 2020 and save consumers over $500 in fees...

Source: Capgemini: Consulting, Technology, Digital Transformation Services.

Published in INDUSTRY REPORTS

There is a gap in the regulation of crypto-assets that Congress needs to fix. The gap is contributing to fraud and weak investor protection in the distribution and trading of crypto-assets. In “It’s time to strengthen the regulation of crypto-assets,” Timothy G. Massad discusses how better regulation will benefit crypto investors, further the development of new technologies, curtail the use of crypto-assets used for illicit payments, and reduce the risk of cyber attacks, which can result in collateral damage elsewhere in our financial system.

Crypto-assets cut across current jurisdictional boundaries and thus fall into gaps between regulatory authorities. While each of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) has some authority over crypto-assets, neither has sufficient jurisdiction, nor do they together.

The hype surrounding Bitcoin and other crypto-assets has contributed to regulatory distraction. Bitcoin’s creators promised it would solve the “trust problem” and reduce our reliance on centralized financial intermediaries. However, it has not reduced our reliance on financial intermediaries or eroded the power of our largest institutions. Indeed, crypto-assets have created new financial intermediaries that are less accountable than the big banks.

New crypto exchanges and trading platforms are not subject to the traditional standards required of securities and derivatives market intermediaries. As a result, investor protection is weak and allegations of fraud and conflicts of interest are frequent.

There are no specific rules to ensure protection of customer assets. One supposed virtue of distributed ledger technology (DLT) is to provide an immutable record of ownership. Yet some platforms do not actually record customer interests on the blockchain and may operate without sufficient assets to cover customer claims. It is like fractional reserve banking without the regulatory framework or insurance that protects depositors. There are no rules regarding how trades are executed.

Crypto exchanges are not required to have systems to prevent fraud and manipulation, nor are there rules to prevent or minimize conflicts of interest. Crypto exchanges can engage in proprietary trading against their customers, something the New York Stock Exchange cannot do. Regulations to minimize operational risk and ensure system safeguards are needed, just as with securities and derivatives intermediaries.

Inadequate regulatory oversight creates broader societal risks with respect to cyber security and illicit payments. Unlike banks and exchanges, crypto intermediaries do not face any specific cyber security requirements, and cyber hacks are common: “Hacking [against crypto institutions] is on the rise because it works.”

Source: The Brookings Institution.

Published in INDUSTRY REPORTS

At the beginning of the year, KPMG surveyed more than 100 of the largest companies and found out which technologies the Russian business is implementing, which budgets of the organization are willing to spend on such projects and how they generally approach the management of digital transformation.

Main conclusions:

63% of respondents indicated that they have developed a digital transformation program, but in reality this more often means a set of short-term pilot projects;

77% of responding companies expect increased operational efficiency and reduced costs through digitization of processes;

The most popular technologies that have already been tested by Russian companies: big data analysis and predictive analytics (68%), chat bots (51%), robotization of office processes (50%);

The position of the CDO (Chief Digital Officer) is only in 16% of companies, the committee on digitalization - in 13%. In most Russian companies, decisions on digitalization projects are made by individual consideration at the top management level;

65% of companies attract startups to implement pilot projects;

In 2019, 36% of companies are ready to invest more than 100 million rubles in the implementation of projects on digitization of processes, while 55% of respondents plan to spend less than 50 million rubles;

51% of companies expect that the investment will pay off in less than 2 years, another 43% expect return on investment within 2-5 years.

Source: KPMG | RU.

Published in INDUSTRY REPORTS

15 January 2019 - Initial Coin Offerings (ICOs) are one of the most prominent applications of blockchain for finance, allowing for an innovative and inclusive way of financing small and medium-sized enterprises (SMEs).

Although the lack of regulatory clarity currently exposes ICO participants to some risks, appropriately regulated and supervised ICOs offer a potential new way to raise capital for projects enabled by Distributed Ledger Technologies and the blockchain.

This report analyses the emergence and potential of ICOs as a financing mechanism for start-ups and SMEs, examines the benefits and challenges of this mechanism for small businesses and investors, and discusses the policy implications of ICO activity for the inclusive financing of SMEs and the real economy...

Source: OECD.

Published in INDUSTRY REPORTS

Released today, Chainalysis latest crypto crime research on $1.6B in hacks, darknet market activity, and Ethereum scams shows how they decoded each type of crime and what it means for AML compliance and investigations.

Crypto crime increased in 2018, but it made up a smaller slice of a much larger market. Indeed, according to they analysis, illicit transactions comprised less than 1% of all economic bitcoin activity in 2018, down from 7% in 2012.

Even so, crime remains a significant problem in the cryptocurrency ecosystem. Exchange hacks have generated billions of dollars in criminal proceeds, darknet market activities have netted hundreds of millions of dollars in illicit revenues, and scams targeting individuals have stolen tens of millions of dollars.

Moreover, criminal use of cryptocurrencies has become far more sophisticated. As a result, in this second edition of their Crypto Crime Report, they go deeper in analysis to seek out granular insight into three categories of criminal activity.

Then, they examine the surprising resilience of darknet markets as law enforcement takes aggressive action against them. In a report on the “whack-a-mole” problem with the darknet, they look at how transaction activity briefly subsides then quickly reroutes itself to new platforms when major darknet markets are closed down.

They also examine changing trends in Ethereum scams, where individuals are targeted, as last year’s phishing schemes lose their effectiveness and more complex Ponzi and ICO exit scams emerge to make outsized gains.

Finally, they discuss the role of cryptocurrency in the broader context of money laundering and highlight the importance of different types of services that are used to integrate illicit cryptocurrency into the clean economy...

Source: Chainalysis Research.

Published in INDUSTRY REPORTS
Friday, 08 February 2019 17:33

BLOCKCHAIN TECHNOLOGY DIGEST: JANUARY 2019

Mind Smith has prepared an overview of key materials, analytical reports, research, reports and research articles. All the most interesting in the industry for the month...

37 analytical studies and reports, 27 scientific articles, 5 documents of international organizations.

Since 2018, Mind Smith has been implementing strategic blockchain consulting. Helps answer the question about the use of technology blockchain in business, conducts research and strategic sessions for top managers.

The company believes in the blockchain technology, but understand its limitations. For effective implementation of a well-coordinated work of the business and technical team. Mind Smith is ready to go all the way from the search for possible scenarios and the preparation of the concept to the implementation of the pilot and the implementation of the solution in the business.

Download digest.

Published in INDUSTRY REPORTS
Sunday, 13 January 2019 17:43

THE STATE OF EUROPEAN TECH 2018

We are proud to present the single, most comprehensive data-driven analysis on European technology today.

What’s changed for European tech in the past 12 months? It’s been another record year for investment in European tech and the sector is powering growth in Europe’s stagnant economy. Yet not everyone is benefitting from the boom. The gains are not being democratized by investors. Companies need to address diversity and inclusion tools and unlock hidden talent pools.

This is the fourth edition of the State of European Tech report, the single, most comprehensive data-driven story of European technology today. We’ve gathered data from world-class data partners and a survey of 5,000 members of the tech ecosystem, from founders to students, investors to researchers. We’ve tried to tell the most important stories. We cover diversity and inclusion, talent, regulation, investment, research and development, and the great, global disrupters out of Europe...

Source: State of European Tech 2018.

Published in INDUSTRY REPORTS

Paris, 7 December 2018 - The United Kingdom has a well-developed and robust regime to effectively combat money laundering and terrorist financing. However, it needs to strengthen its supervision, and increase the resources of its financial intelligence unit.

The FATF has conducted an assessment of the United Kingdom’s anti-money laundering and counter terrorist financing (AML/CFT) system. The assessment is a comprehensive review of the effectiveness of the UK’s measures and their level of compliance with the FATF Recommendations.

The UK is the largest financial services provider in the world. As a result of the exceptionally large volume of funds that flows through its financial sector, the country also faces a significant risk that some of these funds have links to crime and terrorism.  This is reflected in the country’s strong understanding of these risks, as well as national AML/CFT policies, strategies and proactive initiatives to address them.

The UK aggressively pursues money laundering and terrorist financing investigations and prosecutions, achieving 1400 convictions each year for money laundering. UK law enforcement authorities have powerful tools to obtain beneficial ownership and other information, including through effective public-private partnerships, and make good use of this information in their investigations. However, the UK financial intelligence unit needs a substantial increase in its resources and the suspicious activity reporting regime needs to be modernised and reformed.

The country is a global leader in promoting corporate transparency and it is using the results of its risk assessment to further strengthen the reporting and registration of corporate structures. Financial institutions as well as all designated non-financial businesses and professions such as lawyers, accountants and real estate agents are subject to comprehensive AML/CFT requirements. Strong features of the system include the outreach activities conducted by supervisors and the measures to prevent criminals or their associates from being professionally accredited or controlling a financial institution. However, the intensity of supervision is not consistent across all of these sectors and UK needs to ensure that supervision of all entities is fully in line with the significant risks the UK faces.

The UK has been highly effective in investigating, prosecuting and convicting a range of terrorist financing activity and has taken a leading role in designating terrorists at the UN and EU level.  The UK is also promoting global implementation of proliferation-related targeted financial sanctions, as well as achieving a high level of effectiveness in implementing targeted financial sanctions domestically.

The UK’s overall AML/CFT regime is effective in many respects. It needs to address certain areas of weakness, such as supervision and the reporting and investigation of suspicious transactions.  However, the country has demonstrated a robust level of understanding of its risks, a range of proactive measures and initiatives to counter the significant risks identified and plays a leading role in promoting global effective implementation of AML/CFT measures.

FATF adopted this report at its Plenary meeting in October 2018...

Source: FATF-GAFI.ORG - Financial Action Task Force (FATF).

Published in INDUSTRY REPORTS
Wednesday, 19 December 2018 16:05

BLOCKCHAIN THREAT REPORT: MCAFEE

Blockchain, a revolutionary basis for decentralized online transactions, carries security risks. Learn about current security problems and specific incidents within blockchain implementations, and the techniques, targets, and malware used for attacks.

What spiked the movement, starting in fall 2017, toward cryptojacking? The first reason is the value of cryptocurrency. If attacker can steal Bitcoins, for example, from a victim’s system, that’s enough. If direct theft is not possible, why not mine coins using a large number of hijacked systems. There’s no need to pay for hardware, electricity, or CPU cycles; it’s an easy way for criminals to earn money. We once thought that CPUs in routers and video-recording devices were useless for mining, but default or missing passwords wipe away this view. If an attacker can hijack enough systems, mining in high volume can be profitable. Not only individuals struggle with protecting against these attacks; companies suffer from them as well...

Source: Securing Tomorrow. Today. | McAfee Blogs.

Published in INDUSTRY REPORTS
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