Crypto Initiatives Launch; Bitcoin Upgrade Activated; Reports Address DeFi, Tether; SEC Rejects Bitcoin ETF; DOJ to Sell $56M in Crypto Fraud Proceeds

By November 24, 2021Layer2
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Raising Municipal Funds and Rewarding Loyalty: New Cryptocurrency Use Cases

Earlier this week, a cryptocurrency nonprofit organization reportedly launched a Bitcoin-based digital asset designed to raise funds for New York City’s municipal government while simultaneously allowing individual stakeholders to earn rewards. According to reports, although NYC has yet to officially partner with the nonprofit, funds generated by the token will be stored in a secured wallet and can be claimed and used by the city at any time.

The NYC-related coin is the second in a series and follows Miami’s earlier adoption of its city-specific token in August. According to reports, the staking of the Miami cryptocurrency has reportedly generated over $21 million in revenue for the city. To celebrate and promote the success of its digital asset, Miami’s mayor is reportedly working on a plan to distribute a “bitcoin yield” dividend to each of the city’s residents.

In related news, a multinational hamburger fast food chain will reportedly reward loyal customers with cryptocurrency. According to reports, any customer who spends at least $5 at the restaurant will be eligible to receive digital tokens, including Dogecoin, Ethereum and Bitcoin.

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Bitcoin’s Taproot Upgrade Activated to Improve Network Security

This week, a 90 percent lock-in consensus from Bitcoin Network miners and mining pools (achieved in June 2021) resulted in the successful activation of the long-awaited and discussed Taproot upgrade, the first protocol upgrade to the Bitcoin Network in over four years implemented via soft fork. Taproot’s goal is to modify the way Bitcoin’s scripts operate to improve scalability, privacy and security. To do this, “the soft fork introduces the concept of Merkelized Abstract Syntax Tree (MAST),” which can increase the privacy and efficiency of smart contracts by revealing only their relevant parts when transacting.

A cryptocurrency network “fork” refers to a change in a cryptocurrency network’s underlying protocol (software or code), resulting in a split into two different chains. A soft fork differs from a hard fork in that soft forks are backward-compatible upgrades to the network software, with validators (nodes) running older versions of the software able to recognize network blocks added by validators running the newer software. In contrast, hard forks are not backward compatible and typically represent an ideological difference between validators, resulting in two separate, parallel blockchains and separate digital assets.

Not since SegWit, a community-implemented upgrade that occurred in August 2017, has a Bitcoin upgrade been so highly discussed and anticipated. Reports indicate that the Taproot upgrade will result in lower transaction fees and improved smart contract functionality.

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Reports Address DeFi Security, Tether Distribution and Liquidity

A report published earlier this month titled “Top 10 DeFi Security Best Practices” outlines numerous measures developers can take to improve the security of decentralized applications (dApps). This list includes measures to prevent “reentrancy attacks,” which is “when a contract calls an external contract before updating its own state.” The infamous DAO hack of 2016 reportedly fell victim to this particular flaw, resulting in $60 million in ether being stolen. The report also cautions against using decentralized exchange (DEX) or automated market maker (AMM) reserves as price oracles because doing so can allow users to “manipulate the spot price of an order book or AMM DEX, often through the use of a flash loan,” and recommends using a decentralized oracle instead. The report further recommends using Chainlink VRF as a verifiable randomness oracle instead of Keccak256 or Blockhash and encourages developers to incorporate DeFi security principles generally to ensure heightened security.

According to a study released last week purporting to have analyzed blockchain data from various sources, Tether, a company that distributes the Tether (USDT) stablecoin, distributed $108.5 billion USDT and received $32.7 billion USDT during the 2014-2021 time period. Of the total USDT distributed, 89.2 percent reportedly went to market makers, with two market makers receiving a reported 55 percent of all outbound transfers ever distributed and 60 percent of outbound transfers distributed over the past year. According to the study, the majority of the USDT transferred to these two market makers was done through just two exchanges – FTX and Binance.

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SEC Rejects Proposal for Spot Bitcoin Exchange Traded Fund

Last Friday, the SEC issued a decision rejecting a proposal for a spot bitcoin exchange traded fund (ETF), stating that the proposal failed to demonstrate that the ETF would follow federal securities laws, particularly the requirement that the ETF be “designed to prevent fraudulent and manipulative acts and practices” and “protect investors and the public interest.” While the proposal emphasized facets inherent to bitcoin and the bitcoin market that purportedly deter fraud and manipulation, the SEC found them inadequate.

Instead, the SEC explained that any bitcoin ETFs would need a “comprehensive surveillance-sharing agreement,” with a regulated market of significant size related to the underlying or reference bitcoin assets,” in order to get clearance for trading. Such agreements would provide for the collection and sharing of information about market trading activity, clearing activity and customer identity between parties. This, the SEC stated, would be a “necessary deterrent” to manipulation because it would make available information needed to investigate a manipulation should one occur.

The decision may seem inconsistent with the SEC’s October decision permitting ETFs linked to bitcoin futures contracts. However, SEC Chair Gary Gensler has pointed out that bitcoin futures trade on highly regulated exchanges, which is not the case with actual bitcoin.

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US and Canadian Authorities Pursue Fraud Schemes, Recover Stolen Crypto

The United States Department of Justice and the U.S. Attorney’s Office for the Southern District of California were granted court authority to liquidate almost $56 million in fraud proceeds recovered from a promoter of the cryptocurrency BitConnect, according to a press release this week. The government intends to sell the seized cryptocurrency and will hold the proceeds in U.S. dollars in furtherance of its effort to provide restitution to the victims. The BitConnect scheme is reportedly the largest cryptocurrency scheme to be prosecuted criminally, and the promoter is set to be sentenced in January 2022.

According to a report this week, a Canadian youth was charged with stealing $46 million in cryptocurrency from a United States resident through a SIM swap attack. The youth’s age was not released; however, the report notes that Canadian police, working along with the U.S. Federal Bureau of Investigation and the U.S. Secret Service, were able to crack the case after the thief used some of the stolen funds to purchase a gaming username. Seven million dollars in cryptocurrency was reportedly seized this week in connection with the case.

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