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New York Attorney General Letitia James has sued digital asset exchange KuCoin for violating New York laws governing the trading of securities and commodities, and named ether, among other tokens, as unregistered securities the exchange has listed in the state. 

KuCoin “offered, sold and purchased and effected transactions in cryptocurrencies that were commodities and securities within New York, without having been registered as a commodity broker-dealer and securities broker or dealer in New York,” James argues in the suit brought against the Seychelles-based firm Thursday. 

James and her office also implicate ether, the second-largest cryptocurrency by market capitalization, as an unregistered security. That argument could have broader implications for digital assets beyond any punitive damages New York may win from KuCoin. 

“ETH’s development and management is largely driven by a small number of developers who hold positions in ETH and stand to profit from the growth of the network and the related appreciation of ETH,” the suit filed with the New York state Supreme Court argues.

It also cited the Ethereum Foundation’s initial coin offering as evidence of a securities offering. The suit argues that documents from the time of the initial coin offering describe it “as a means of promoting the development of the Ethereum blockchain by paying expenses incurred by developers, paying for legal contingencies, research, and further development.” This is similar to the capital formation purpose of security offerings in the U.S.

New York’s attorney general also claims that ICO materials promoted ether as, “‘a digital store of value because the creation of new ETH slows down over time.'” 

Non-binding remarks

A former Securities and Exchange Commission official famously made non-binding remarks in 2018 indicating that the agency saw the Ethereum network as sufficiently decentralized as to no longer consider ether a security, though he refrained from offering an opinion as to whether the ICO had violated any laws. After an ICO bubble formed in 2017 the SEC began cracking down on the practice, successfully pursuing dozens of unregistered securities offering cases. 

The network’s transition to a staking protocol, from proof-of-work validation of holdings and transactions, which occurred last year, is also cited in the suit. 

“Buterin and the Ethereum Foundation retain significant influence over Ethereum and are often a driving force behind major initiatives on the Ethereum blockchain that impact the functionality and price of ETH,” the suit argues, referring to Vitalik Buterin, the founder of Ethereum.

Common enterprise and value of an asset derived from the effort of others are common aspects of securities in the U.S.

“Most relevant here, Buterin and the Ethereum Foundation played key roles in facilitating the recent fundamental shift of the transaction verification method from proof-of-work to proof-of-stake.” 

There is disagreement at the federal level about whether ether is a security or a commodity, with Securities and Exchange Commission Chair Gary Gensler implying he believes it to be an unregistered security, while Commodity Futures Trading Commission Chair Rostin Behnam sees the cryptocurrency as a commodity. 

With additional reporting by Stephanie Murray. 

© 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.

Sam Bankman-Fried may request to delay his October trial, his lawyers said in a letter to a federal judge this week.

The disgraced FTX founder says he may need more time to review troves of evidence that prosecutors have collected. Bankman-Fried is under house arrest in California on a $250 million bond and could spend the rest of his life in jail if he is convicted on criminal charges in the U.S. District Court for the Southern District of New York 

“Depending on the volume of the additional discovery and the timing of the productions, it may be necessary to request an adjournment of the trial, currently scheduled to begin on October 2, 2023,” wrote Bankman-Fried’s lawyers, Mark Cohen and Christian Everdell.

Bankman-Fried has not seen a “substantial” portion of discovery in the case, which includes former Alameda Research CEO Caroline Ellison’s iPhone, FTX co-founder Gary Wang’s laptop, two other laptops that belong to former employees of FTX and Alameda and 30 Google accounts, his lawyers said in a letter to Judge Lewis Kaplan. Discovery is the process where lawyers exchange information about the witnesses and evidence they’ll present at a trial. 

Cell phones and laptops from members of Bankman-Fried’s inner circle could be crucial for prosecutors in his criminal case. Ellison and Wang both pleaded guilty in December to criminal charges tied to their roles at FTX and Alameda Research. 

Negotiating laptop use

Meanwhile, the former FTX CEO has for months been tied up in a legal dispute over his bail terms. Prosecutors have sought to curtail Bankman-Fried’s internet access after he used an encrypted app to contact a possible witness in his criminal case and a virtual private network, which he claimed he needed to watch the Super Bowl.

A judge will consider tighter bail terms for Bankman-Fried at a hearing on Friday. For now, the former billionaire is banned from using a VPN, contacting current and former FTX employees and using encrypted messaging apps. 

The VPN restriction could be an obstacle for Bankman-Fried’s evidence review, his lawyers say. The now-bankrupt FTX has prepared to give Bankman-Fried access to the FTX transactional database, but he can only access it via a VPN on a special computer. The database is referred to as the “AWS Database” in court filings. 

“The defense has built a custom laptop with the security protocols required by the FTX debtors and has been ready to send it to Mr. Bankman-Fried for some time,” Bankman-Fried’s lawyers said. “It may take some time before a new laptop computer can be built according to the specifications that the court may impose.”

“Accordingly, we respectfully request that the court order that, in the interim, Mr. Bankman-Fried may use the laptop computer that has already been built, which will be configured to allow him to access the AWS Database, and no other websites, via a secure VPN connection,” the letter added.

The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.

© 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.

An NFT buyer swapped testnet ether tokens — that are supposed to be worthless — for ETH, which was then used to buy a CryptoPunk NFT.

CryptoPunk #9682 was bought for 72.72 ETH ($111,600) earlier Thursday. On-chain data show the buyer swapped 527,281 goerli ether for ETH to fund the purchase.

Goerli is an Ethereum test network, or testnet. Developers use testnets to run tests on their smart contracts or applications before deploying them on the main network.

Tokens on a testnet are supposed to be free because they typically don’t have market value. Goerli ETH, like other testnet tokens, should come from faucets, websites that provide small number of tokens to users for free.

A shortage of goerli ether has, however, created a situation in which developers began to purchase the testnet token. This has created a market for goerli ether with some holders able to swap then for actual ETH.

The emergence of a monetized testnet market has led Ethereum developers to state that they will gradually sunset goerli. For now, 1 goerli ETH is worth $0.23 and has traded as high as $1.69.

© 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.

President Joe Biden’s proposed budget includes changing tax treatment for “wash sales” of digital assets.  

The administration’s fiscal year 2024 budget, released on Thursday, includes a provision that would make crypto subject to “wash sale rules,” which would eliminate tax deductions on losses incurred on selling and quickly rebuying the same or a similar crypto investment. Stocks and bonds are already subject to that tax treatment. 

The Biden administration estimates that change would raise approximately $31.6 billion in revenue over a standard ten-year budget window.  

Other crypto-related line items of the budget include:

• Information reporting by “certain financial institutions and digital asset brokers for purposes of exchange of information.”
• A change to mark-to-market tax rules to include digital assets.
• A requirement for U.S. individuals with large holdings in foreign digital asset accounts to report those holdings to the IRS. 

Added together the administration believes those changes would raise nearly $40 billion over the ten-year budget projection window standard to the U.S. government. 

Regardless of the administration, presidential budget requests in the current political era are never fully accepted by Congress and instead reflect the priorities of the administration and policies that could become law through a more piecemeal legislative approach. 

In 2021 Biden signed into law an infrastructure bill that included new definitions for “broker” among cryptocurrency network participants as part of a way to offset the cost of the law, a so-called pay-for, which the items in Thursday’s budget request could also become. The expanded definitions looked to increase the collection of taxes owed on digital assets, but the broker definition has been criticized as overly broad. Guidance for that new rule is expected to be released soon. 

© 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.

Cryptocurrency prices continued to trade in a relatively tight range, with volumes down following the collapse of crypto-friendly bank Silvergate. 

Bitcoin was trading around $21,650 by 11 a.m. EST, down about 2%, according to TradingView data. Ether followed suit, dropping 1.7% to $1,540. 

BTCUSD chart by TradingView

Altcoins could not beat the drop as sentiment in the market worsened following the latest major failure. Market maker GSR noted the collapse of Silvergate weakened the crypto ecosystem’s banking support. Binance’s BNB slipped 1.1%, Ripple’s XRP was down 1%, and Polygon’s MATIC shed 2.5%. 

“Sentiment does seem to have weakened, with both funding rates and the annualized basis on Binance heading lower,” Noelle Acheson, former head of market insights at Genesis, wrote in her daily newsletter.

‘Covered – not rated’

Silvergate announced its intention to wind down operations and voluntarily liquidate the bank on Wednesday. Bringing an end to one of crypto’s most prominent banks. SI was trading down 32% by 11:05 a.m. EST, according to TradingView data. 

SI chart by TradingView

The bank expects to make full repayment of all deposits. KBW analysts said in a note last night the bank had excess cash ($4.6 billion) relative to crypto-deposits ($3.8 billion) as of Dec. 31. Silvergate was downgraded to “cover – not rated” by KBW last week after it suspended the Silvergate Exchange Network. 

Coinbase shares were down 1.7% to about $61, while shares in Jack Dorsey’s Block traded down 0.2% to approximately $77.80. 

MicroStrategy dropped 2.2% to trade around $227. The software firm has an outstanding loan worth $205 million with Silvergate. KBW’s analyst said the loan was “significantly over-collateralized with bitcoin and performing as of year-end, we don’t have insight into how, or at what value this loan could be liquidated at.”

© 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.

Web3 art platform Wild raised a $7 million seed funding round led by Matrix Partners.

Actress Gwyneth Paltrow, LinkedIn co-founder Reid Hoffman and Twitch co-founder Kevin Lin also took part in the round, which closed late last year, said Wild founder and Chief Executive J. Douglass Kobs in a written interview with The Block. The startup declined to share its valuation. 

Kobs said that he and Paltrow became friends after meeting at a leadership summit in 2021, adding that she’s an “early adopter” of web3 and NFTs. 

Kobs, who previously founded proptech firm Apartment List, is aiming to create a platform where artists building with blockchain can be supported while fans and collectors can easily access creator-made collections. Part of this includes the Wild Residency, an application-based virtual residency program where artists are paired with advisers over 12 weeks for a crash course on creating NFT art. At the end of the program, the artists release collections, sold via auction on the platform. 

“Expecting an artist to be able to do it all on their own is a lot — from creating the work itself to promoting it, marketing it, branding it — there’s so much that goes into creating work and being able to leverage the experience, knowledge and network of fellow artists is invaluable,” said Kobs, noting that those new to the space can find it overwhelming. 

Along with the residency, Wild offers an NFT membership pass named Wild Oasis which grants holders early access to artist drops and auctions at fixed floor prices. While 399 of those 1,000 passes have been minted so far, the first 300 were distributed to artists taking part in its inaugural residency cohort, advisers, investors and the founding team. 

The startup will use the funding to further build out its residency and invest in infrastructure to power its experiential art. Many of Wild’s collections can be accessed through in-browser experiences without needing to connect a wallet. 

NFT art revival?

Wild’s funding round comes at a time when investor interest in the NFT art market is showing some signs of recovery. Between Feb. 19 and Feb. 26, close to 18,000 art and collectible NFTs were sold on the Ethereum blockchain, according to data collected by The Block Research. While that’s a far cry from its peak in the final week of August 2021 — when close to 30,000 pieces of NFT art were sold — it’s a significant improvement over the final quarter of last year when weekly sales barely tallied 7,000.  

The rebound could also have been influenced by floundering floor prices of key NFT collections, no longer able to garner the high price tags they once did during the bull market. CryptoPunks are currently trading hands at an average weekly sale price of around $86,000 compared to a peak of just over half a million, according to The Block Research. 

© 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.

Violet, which offers compliance and identity infrastructure for decentralized finance, launched its compliance-focused decentralized exchange, Mauve.

Coinbase Ventures and Brevan Howard joined the DEX’s $15 million funding round, according to the firm’s announcement. Ethereal Ventures, BlueYard Capital and Balderton were among the other backers. 

“Mauve is a direct response to the FTX fallout,” Co-Founder Markus Maier said, adding the collapse “significantly eroded trust in crypto globally” through the exchange’s misappropriation of funds.

Maier said the future of the space is dependent on the continued adoption of non-custodial crypto exchanges, something he says Mauve offers. 

Mauve users can trade without having to surrender custody of their assets. “This means no one can access, much less steal, any retail or institutional investor’s funds, helping to restore confidence among market participants,” Maier said. 

The DEX requires all users to pass “rigorous compliance checks” to give compliance-conscious users confidence when migrating to DeFi. The platform claims to be fully transparent and audited by smart contracts; it also offers users instant settlement without intermediaries. 

© 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.

Authors of perhaps “the most exhaustive study” ever done on the volatility of cryptocurrencies say they can now more accurately predict the intense swings gripping the digital-asset market.

 The Risk Protocol — billed as a digital-assets investment platform — on Thursday released a 44-page report evaluating the volatility among the world’s 50 “largest” cryptocurrencies. Utilizing the insights gleaned, the company said it was able to create “sophisticated” statistical models that are “proven” to more accurately predict volatility.

The Risk Protocol Founder and CEO Karamvir Gosal says his company’s report can help investors and institutions alike hedge future risk, even during crypto’s recent downturn, which has been riddled with turmoil and crisis.

“Before participating meaningfully in the crypto sector, institutions rightly want to understand the risk involved,” he said. “The rigor of this analysis will help them in that regard.”

After a spectacular bull run, the digital-asset market has entered an era of severe instability. The current market has been made worse by a series of bankruptcies and liquidity crises and cooling crypto interest among individual investors and traditional institutions. The Risk Protocol’s report embraces the volatile nature of cryptocurrencies and by extensively evaluating the top 50, hopes to position itself as a resource of information and, eventually, a platform that investors will use to modulate risk.

Some of the report’s key takeaways:

• Investors can’t “necessarily hedge long underlying crypto exposure by being long volatility.”
• The fickle nature of crypto is “strongly predictable.”
• Between 2020 and 2022 the “return correlation” became “positive” between Bitcoin and the Nasdaq Stock Market. Before 2019 there was “no significant correlation between” Bitcoin gains and “broader stock market returns.”

A veteran of traditional finance, Gosal said crypto has to be viewed through a different lens.

“Hedging that works in traditional finance might make things worse in crypto,” he said.

The report often compared digital assets to stocks, stating that the gain and loss asymmetry in cryptocurrencies is more “similar to broader equity markets” when compared to foreign exchange.

The Risk Protocol also asserted that the ebbs and flows of volatility are more intense depending on the time of the day or day in the week. It concluded that traders should buy when volatility shrinks.

© 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.

Crypto whitehat hackers are mostly interested in the Ethereum blockchain.

That’s according to a breakdown of the ethical hacker ecosystem compiled by web3-focused bug bounty platform Immunefi in its 2023 report, aimed at mapping the interests, challenges and opportunities of whitehats in web3. But money isn’t everything, with the majority motivated by solving the technical challenges of decentralized applications.

Blockchain preferences

Ethereum was the overwhelming preference among whitehats, with 92% of respondents attracted to the blockchain. Solana came in second place at 31%, with Avalanche (20.4%), Cosmos (13.3%) and Tezos (8%) making up the top five. Polygon, Arbitrum, Optimism, Near, Polkadot, BNB Chain, Fantom and zkSync were also on their radar.

However, interest in Ethereum fell from 96.4% in Immunefi’s previous survey. Solana witnessed the most significant decrease, down 51.6%, while Tezos saw the biggest spike, rising 122.2%.

Attack vectors

Reentrancy attacks (enabling malicious parties to repeatedly drain funds from smart contracts by exploiting the code execution order) were cited as the most common vulnerability whitehats discovered when reviewing code (43.2%), followed by access control (18.2%), input validation (9.1%), oracle manipulation (6.8%) and logical errors (6.8%).

Most whitehats (76.1%) saw the attack surfaces in crypto growing. However, the majority (88.5%) also agreed that projects’ security measures were improving.

Bug bounty rewards

Bounty size was cited as the main factor (66.4%) for whitehats when selecting bounty programs, though trust, scope and efficient communication were also highly valued. 

After paying out over $52 million in rewards to ethical hackers for finding vulnerabilities in web3 protocols last year, Immunefi has come to dominate crypto bug bounty rewards. In contrast, the second-most popular platform, HackenProof, has paid a total of $4.8 million to whitehats.

Immunefi claims to have paid out more than $65 million in total bounties since 2020, helping to secure $25 billion in user funds across protocols like Chainlink, MakerDAO, The Graph, Polygon and Synthetix. The highest bounty facilitated by Immunefi was a $10 million award for a vulnerability discovered in Wormhole, a generic cross-chain messaging protocol. 

Last month, Immunefi reported that crypto ransomware payments generated more than $69.3 million from the top 10 attacks since 2020. In January, an Immunefi security researcher was awarded a $1 million bounty after saving a potential theft of $200 million from three Polkadot parachains.

Demographics and lifestyle

Most whitehats (54%) fall into the increasingly dominant 20-29-year old bracket, up from 45.7% in the previous period, with 21.2% of respondents between 30 and 39 and 12.4% between 40 and 49. Despite an increasing number of women joining the ethical hacker community, up 45.8% to 3.5%, male whitehats still make up the largest share (95.5%).

The majority of respondents have worked in crypto for around four years, and most (55.8%) considered hacking their primary job, though that’s down from 60.2% in the previous period. Outside of interest in solving technical challenges (77%) and gaining financial rewards (69%), career opportunities (62%) and community (38%) were also strong motivators.

Challenges and opportunities

When asked about the biggest challenges whitehats had experienced in web3 security, most respondents highlighted the steep learning curve required regardless of previous background or experience and a need for more available resources. The rapidly evolving nature of the technology was another pain point, along with the complexity of Solidity coding, protocols and possible attack vectors.

In terms of opportunities, respondents were excited about the challenge of learning and working on new technology, considering web3 a well-paid industry with long-term career potential in high-impact roles.

© 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 HBAR Foundation, the organization behind the Hedera blockchain, said network irregularities are affecting various Hedera decentralized applications (dApps) and their users.

Hashport, a bridge project, said it temporarily paused services due to the smart contract irregularities on Hedera. Yet another project, Pangolin, a decentralized exchange in the Hedera ecosystem, advised users to withdraw liquidity from the platform.

“Due to some Hedera network irregularities, Hashport has paused their bridge, and we’d encourage anyone with HTS tokens in Pangolin Pools and Farms to withdraw immediately. This is a time critical moment, so we’ll update as soon as we have more information,” Pangolin said in a tweet.

The HBAR Foundation said it’s working with affected partners and monitoring the situation to resolve the issue.

Exploit fears

SaucerSwap Labs, a DeFi project on Hedera, claimed there may be an ongoing exploit currently impacting the network. The exploit, according to SaucerSwap, targets the decompiling process in smart contracts.

The HBAR Foundation didn’t immediately respond to a request for comment on the possibility of an exploit. 

SaucerSwap further alleged that an unknown attacker has already targeted Pangolin and HeliSwap decentralized exchange pools containing wrapped assets, but it was not able to clarify if any tokens had been stolen.

“An ongoing exploit have hit the Hedera network this morning. The exploit is targeting the decompiling process in smart contracts. At time of writing attackers have hit Pangolin and HeliSwap pools containing wrapped assets,” SaucerSwap noted.

In the context of smart contracts, decompiling is the process of converting compiled bytecode back into its original human-readable code. Decompiling can be used to analyze and understand the behavior of a smart contract. However, it can also be used by malicious actors to gain unauthorized access or manipulate the smart contract. Still, the exact nature of the alleged exploit remains unclear.

© 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.