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A rising influx of crypto traders are being drawn to bots integrated with the messaging app Telegram, some of them including Unibot, Swipe, WagieBot, and Bolt. Since May, over 63,000 crypto users have executed trades totaling close to $186 million using the bots, Dune Analytics data indicates.

Yet, as activity flourishes, experts are casting a critical eye, particularly concerning how the bots handle user assets.

The allure lies in the remarkable simplicity — trading with them is as easy as sending a message. Based on predefined rules, upon receiving a message they can identify trade commands, interpret them and then promptly execute trades on linked decentralized exchanges.

While the bots provide features that streamline the process for traders eager to quickly buy or sell coins on decentralized exchanges, many experts believe their security is among the poorest available in the crypto sector.

“I think the rise of Telegram bots a terrible development — closed source and you are handing over your private keys. This is even worse than back in the day when you sent some funds to an unknown exchange website,” Christian Seifert, a former Microsoft security lead and researcher-in-residence at the Forta Network, told The Block. “The bots might even be riskier than interacting with an unknown smart contract where you can specify and limit the approval. With bots, you essentially hand over everything and hope they don’t take your funds.”

The key concerns

To make crypto trading easier for users, Telegram bots are designed to streamline the intricate processes involved in establishing a crypto wallet and authorizing necessary permissions for smart contracts behind decentralized exchanges that handle asset transactions.

Initially, a crypto bot creates a wallet for its users, providing them with private keys to facilitate trading. Users are then asked to deposit funds into these wallets to start trading. This presents an issue, however, as it challenges the principle of maintaining secure self-custody of funds.

Blockchain security firm BlockSec has expressed apprehension regarding the growing trend of Telegram bots, with co-founder Yajin Zhou emphasizing the potential dangers associated with transferring tokens to third-party wallets created by the apps or disclosing private keys. He pointed out that while the bots excel in offering speed and ease of use, they often come at the cost of security.

When these services automatically generate a wallet for users, there’s an inherent risk pertaining to the continued storage of the private keys on the platform, Zhou explained. Should there be a data breach or hack, it could spell disaster for bot users, leading to potential loss of assets to cybercriminals.

“To use the bot, users must transfer tokens to a third-party wallet or share their private keys. Who can guarantee that these shared keys won’t be leaked, or that the bot owner won’t misuse them?” Zhou told The Block.

When a bot generates a wallet, it’s essentially creating a cryptographic key pair. The public key is the destination for incoming funds. The private key, being the exclusive access point to these digital assets, can potentially become a prime target; if compromised by malevolent actors, they can drain the associated funds. On the other hand, if a user misplaces the private key without a backup, they’re locked out of their own assets.

Zhou further elaborated that since users aren’t the ones generating the private keys, their security is not always assured, opening doors for potential misuse. He also cautioned about the grim prospect of dishonest bot developers exploiting users in the future. Drawing parallels with past market frenzies, like memecoin projects and DeFi, Zhou reminded that many were unmasked as exit scams, defrauding countless investors.

Operational ease

With the rising adoption of the bots, several experts amplified worries about the glaring absence of code security audits that suggests that the safeguarding of user assets could be at risk, especially if there’s a veil of opacity around the project’s mechanics.

“These bots lack a proper security audit, provide no insights into the storage methods for private keys, and there’s an utter void of security documentation on their websites,” said Dave Schwed, COO of the security firm Halborn.

Security audits, executed by third-party specialists, evaluate a system’s susceptibility to breaches. Their role is pivotal in ensuring that systems adhere to best practices, safeguarding both user data and assets. A lack of such audits raises red flags, signaling possible omissions or compromises, Schwed highlighted.

Moreover, Schwed drew attention to the missing end-to-end encryption on Telegram itself, presenting potential vulnerabilities. “While Telegram chats are encrypted, they lack end-to-end encryption. This means Telegram has the ability to decode messages, except when users choose ‘secret chats.’ Unfortunately, these secret chats don’t support bot interactions,” he said.

End-to-end encryption, featured in “secret chats,” guarantees that only the conversation participants have the capability to decrypt messages, effectively barring even Telegram from access. This distinct disparity carries significant consequences for both data privacy and security.

“Given that bots function within Telegram’s non-end-to-end encrypted domain, any instructions reflecting a user’s financial actions might be at risk,” Schwed added. Any confidential information relayed to the bot, be it transaction specifics or mere commands — stands the risk of potential exposure, he continued.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The move was fully anticipated by market participants who will now look to Chairman Jerome Powell’s imminent post-meeting press conference for clues about whether the central bank intends to continue tightening monetary policy.

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Blockchain Capital, one of the longest-running VC firms in the crypto space, launched today a new program to focus on post-investment support for founders while rebranding its website to showcase its network of portfolio companies.

Kinjal Shah, a general partner of Blockchain Capital, told The Block in an interview that the new program, dubbed Build, will focus on talent, go-to-market strategy and its partner network.

“It’s become increasingly important to make sure founders understand that we’re not just a capital provider, but there’s quite a bit that we’re working to do to ensure a company’s growth and long-term success,” Shah said.

Founded in 2013, Blockchain Capital now has $1.9 billion in assets under management and is actively investing out of its sixth multi-stage fund, according to a statement shared with The Block.

Tokenomics matters

Blockchain Capital, whose recent investments include Worldcoin, is keen to help founders with their projects’ token design as part of the new Build program, according to Shah.

“It’s really critical to us to sort of think about the second-order effects of whatever token design that you have,” Shah said. “I wouldn’t say that there’s like one model there, but understanding how the token plays a role within that particular ecosystem of protocol, making sure we understand how it captures value, [and] what are sort of like the long-term levers that can be pulled.”

She added, “Is it inflationary? Is it deflationary? What is the supply look like and how is that circulating across the token holders? What’s the incentive to hold the token? What’s the incentive to use the token? I think all of these questions are ones that we’re really making sure we go over with our portfolio company.”

International presence

Shah noted that the VC firm has seen growing interest among U.S.-based startups to expand overseas.

“We’re seeing more and more companies establish an international presence if they are based in the U.S.,” she said. “That’s very much part of a regulatory strategy to preserve optionality around where they’re based and seeking a jurisdiction that has a little bit more regulatory clarity.”

Bart Stephens, founder and managing partner of Blockchain Capital, told The Block in May that the company is weighing the benefits of several en vogue international crypto hubs amid a sector crackdown by authorities in the U.S.

Shah said that roughly 60% of its portfolio companies are based in the U.S.

“We really have seen the full gamut in terms of companies getting established in Europe and Asia and other potentially nice, friendlier jurisdictions,” she added.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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Senior members of the House of Representatives suggested that a deal to create a comprehensive framework in the U.S. around stablecoins could be close. 

But multiple Democrats at one of the committees considering a separate bill to overhaul how financial laws treat crypto assets signaled their opposition to that bill, arguing that it was too friendly to the crypto industry. 

“I am disappointed that Republicans have made the decision to move forward with a massive market structure bill to rewrite our nation’s investor protection acts,” said Rep. Maxine Waters, the top Democrat on the House Financial Services Committee that debated the bill on Wednesday. 

Waters and House Financial Services Committee Chair Patrick McHenry, R-N.C., were optimistic that ongoing last-minute negotiations could yield more agreement on stablecoins legislation paired with the market bill and due up for a similar committee vote on Thursday. 

“There is goodwill and much hard work by the Republican staff on the Financial Services Committee, and the Democrat staff on the Financial Services Committee, in coordination with Treasury conversations,” said McHenry. 

Democratic opposition complicates a path for the market bill to become law this Congress, as Democrats narrowly control the Senate. President Joe Biden is less likely to sign a bill into law if most members of his party oppose it. 

Waters notably said that SEC Chair Gary Gensler should have more input in the legislation, due to his current role and previous position as Commodity Futures Trading Commission chair. She wants SEC staff to provide more technical input to the complex bill.

House Republican members and staff of the committee say they wanted more “productive engagement” from Gensler as well, but did not receive a full response when they asked for technical assistance weeks ago. 

Several Democrats also invoked Sam Bankman-Fried, his push last year to shift more crypto regulation to the CFTC, and the collapse of FTX in opposing the bill. 

Democrat differences of opinion

At least two Democrats bucked Waters to support the bill though. 

“I am confident that this legislation, while not perfect, makes the status quo better,” said Rep. Jim Himes, D-Conn. Himes cited the lack of clarity over whether regulators have a consistent view of ether, the second-largest cryptocurrency by market capitalization, and the recent split decision in the Securities and Exchange Commission’s case against Ripple over XRP as cause for the bill. “I’m a deep skeptic of this industry but we deserve better than the status quo,” continued Himes.  

Himes added that House Financial Services Committee Chair Patrick McHenry, R-N.C., agreed to every change to the bill that the Connecticut Democrat requested. 

In a last-minute bid to gain more Democratic votes on the crypto market bill, House Republicans added $120 million in funding to the Commodity Futures Trading Commission for additional resources to oversee spot markets for digital assets, like bitcoin, that would fall under the commodities regulator’s jurisdiction if the bill were to become law, though the funding in the bill is redirected from the SEC in order to keep the bill deficit-neutral, which some Democrats objected to. 

In an exchange with Himes, McHenry said he would raise the funding level to $150 million over three years if it would help the bill across the line. In theory, the bill would shift more responsibility over digital asset markets to the CFTC, not only because the agency would be given more authority over spot markets for digital assets like bitcoin that are already treated as commodities, but regulators would also be directed to provide clear thresholds for when a network token could be considered decentralized enough to move from being treated as a security to a commodity, with lighter disclosure requirements. 

Only day one of crypto market debate

The market structure bill went through an unusual cooperative drafting process between the House Financial Services and Agriculture Committees due to each committee holding jurisdiction over one of the agencies and asset classes involved. 

Rep. David Scott, D-Ga., who sits on the Financial Services Committee but is the top Democrat on the House Agriculture Committee, previewed how a similar debate and vote is likely to proceed in that committee tomorrow. 

“This is not just a bad bill, it’s a cruel bill, it’s a deceptive bill,” said Scott. 

Debate remains ongoing for the bill, with amendments being offered to change its substance. Votes will take place on those, as well as the underlying bill itself, in the Financial Services Committee later on Wednesday.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.