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WSJ’s ShapeShift Exposé Overstated Money Laundering by $6 Million, Analysis Says

When it comes to cryptocurrency transactions, questions about alleged money-laundering quickly get thorny.

A Wall Street Journal investigation from last September, titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” claimed the crypto conversion platform ShapeShift had facilitated at least $9 million worth of money laundering over several years with “a parade of suspected criminals.”

Now, at ShapeShift’s request, the blockchain analytics firm CipherBlade recreated the 2018 report and found less than $3 million in transactions involving potentially “tainted” funds.

The main distinction here is that CipherBlade focused on allegedly tainted coins instead of the total value held in each affiliated wallet or account.

“Of the ShapeShift addresses which receive ETH within three hops from the initial dirty addresses, less than half of the ETH traded through them are tainted,” the CipherBlade report says. “Using the most generous assumptions, this is still only 23.53 percent of the WSJ’s claimed $9 million.”

Add to that ether to roughly 40 bitcoin, which ShapeShift itself found to be associated with suspicious wallet’s the WSJ identified, and the total estimate falls just shy of $3 million.

When asked about the investigative process, a WSJ spokesperson told CoinDesk:

“An analysis looking at individual tainted ethereum coins, rather than tainted wallets, would be a different project than what the Journal embarked on, and one we can’t comment on because we have not reviewed it.”

All parties agree the most pessimistic reading of the data still indicates questionable transactions made up a pittance of ShapeShift’s volume since the company was founded in 2014. According to a tweet by CEO Erik Voorhees, ShapeShift processed crypto worth $30.3 million a month in 2017 alone.

Still, experts such as Pawel Kuskowski, CEO of the analytics firm Coinfirm, told CoinDesk there’s no clear answer to how much may have been laundered through the platform – because until October 2018 ShapeShift did not perform know-your-customer (KYC) identity checks.

“If you don’t know the underlying clients, how do you know?” Kuskowski told CoinDesk. “This is why you have KYC in the first place, to understand the profile.”

When asked about whether it’s better to account for the whole wallet or focus on the tainted coins themselves, Kuskowski said the truth hides in the shades of gray in between. He said a complex analysis of the risks associated with the people involved in these transactions, along with “plausibility and some other rules,” all combine to reveal whether the wallets themselves should be considered tainted or suspicious.

In Coinfirm’s own report on risks associated with crypto platforms, ShapeShift was classified as “high risk” with regards to anti-money laundering procedures and compliance because of anonymous usage until the KYC policy began last October. According to Kuskowski, it often takes months for a traditional bank to de-risk after any association with money laundering.

“It’s a good direction, that’s for sure,” Kuskowski said of ShapeShift’s added KYC procedures.

Compliance overhaul

That de-risking process actually began months before the WSJ report, according to ShapeShift Chief Legal Officer Veronica McGregor.

“Among law enforcement, ShapeShift is regarded as a very helpful and cooperative player,” she told CoinDesk. “Just because we started implementing those KYC procedures does not mean that we didn’t already have procedures in place to detect fraud and bad wallet addresses and theft, things like that.”

The company was already working with external consultants to identify and block transactions from suspicious wallets, McGregor said. Then ShapeShift underwent a compliance overhaul throughout the second half of 2018, mandating KYC identity checks for all users and working with three independent analytics firms, Chainalysis, ComplyAdvantage and IDology.

McGregor said ShapeShift continues to “tweak” its procedures, both in-house and through work with the three aforementioned services providers, in order to keep up with the evolving technology.

Richard Sanders, CSO and co-founder of CipherBlade, told CoinDesk he believes the claims in the WSJ report were “grossly exaggerated.”

“We did find around $3 million, which isn’t a great look for ShapeShift,” Sanders said. “But it is significantly smaller than what the Wall Street Journal reported.” CipherBlade says its independent analysis was not paid for by ShapeShift.

For his part, ShapeShift’s Voorhees continues request the WSJ retract the report, which was published in September 2018 during the company’s compliance overhaul. He believes the methodology used to tally questionable funds was fundamentally flawed.

“Crypto is bringing light, truth, and openness to finance,” Voorhees told CoinDesk. “And it’s a pleasant irony that the transparency of blockchains so easily vindicates us from the narrative that the Journal has imagined into existence.”

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UK Parliament Presented Showcase of Real-World Blockchain Applications

The U.K. Parliament has been presented demonstrations of real-world blockchain applications designed to educate policymakers.

Organized by the All-Party Parliamentary Group on Blockchain (APPG Blockchain), the Monday event featured live presentations from four firms working in the blockchain industry: IOTA, Oracle, Everledger and Lloyd’s of London. Among the audience were members of parliament, government officials and industry leaders, according to a statement from organizers.

The live demonstrations highlighted the potential of blockchain in real-life applications in supply chains for olive oil and diamonds (Oracle and Everledger, respectively), international trade (IOTA) and insurance claims and transactions settlement (Lloyd’s).

Fernando Santiago, blockchain research and project manager at Big Innovation Centre, suggested the event could mark an important step for the U.K.’s blockchain industry, saying:

“This is a pivotal moment for UK, which could define our future leadership in governance, commerce and competition.”

In the run-up to the event, the group also published the Online Blockchain Showcase, featuring videos of 10 companies working in the space.

The 10 firms also took to the floor at the live showcase, undertaking a “One-Minute Challenge” proposing how government could drive the use of blockchain, including in the healthcare and education sectors, as well as finance and industry.

According to its organizers, the event was inspired by the positive results of a 2018 analysis of the U.K. blockchain industry, presented by APPG Blockchain on its website along with associated organizations.

APPG Blockchain was set up by cross-party members of parliament to help ensure that the U.K. plays a “key role” in the potential opportunities that blockchain can provide for the nation’s economy, society, governance and provision of public services, according to its parliamentary web page.

U.K. Parliament image via Shutterstock; event images via APPG Blockchain

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Riot Blockchain to Launch Regulated Crypto Exchange in the US

Riot Blockchain is planning to launch a regulated crypto exchange in the U.S.

The publicly traded U.S. company that has faced regulatory issues for a sudden pivot to blockchain, revealed in a filing with the U.S. Securities and Exchange Commission (SEC) Friday that the new entity will be called called RiotX and will develop three main services: banking, trading and a digital wallet.

The application follows the firm’s change in business focus after almost two decades in biotech, when it rebranded to Riot Blockchain from Bioptix and shifted focus to crypto mining in October 2017. The firm later acquired a crypto brokerage and said it planned to build an exchange in March 2018.

The company was subpoenaed by the SEC a month later over its sudden shift to a blockchain business model and a resultant stock price hike.

During 2018 and 2019 the company also changed its board of directors, beginning with the resignation of its CEO.

In the SEC filing, made public on March 14, the company explains that the new exchange is expected to be handled by its subsidiary RiotX Holdings Inc, adding that its main focus is still on bitcoin mining.

For RiotX’s banking services, the company says it will launch an API created by software provider SynapseFi. Users will be able to create accounts connected to accredited banking institutions inside the U.S., allowing them to hold and transfer either fiat or crypto assets.

The API will also track the location and identity of users “in order to prevent fraud and improper use of its RiotX exchange”, as explained by the company. This includes the use of the service in U.S. states where crypto exchanges are not legalized, which points to a restricted range of customers to begin with.

As Riot Blockchain explained in the registration:

“SynapseFi’s API will enable to Company to know where the user is when accessing RiotX, thereby enabling the Company to prevent a user from Montana, a state where the exchange of digital currencies is permitted, from traveling to neighboring Wyoming, where the exchange of digital currencies is not permitted, and using RiotX in the prohibited jurisdiction.

Regarding the upcoming trading services, RiotX will be working with exchange software provider Shift Markets, having it terminated its contract with Canadian exchange Coinsquare during the SEC investigation in 2018.

The firm expects RiotX to ultimately operate in all U.S. states bar Hawaii and Wyoming by the end of 2019. At time of registration, the firm claims to already have approval in five states.

U.S. flag image via Shutterstock

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SEC’s Valerie Szczepanik at SXSW: Crypto ‘Spring’ Is Going to Come

The U.S. Securities and Exchange Commission’s Valerie Szczepanik is optimistic that regulation will ultimately boost the cryptocurrency market.

“I do think if we hope to smell the crypto spring in the air, it will take people walking with the regulators,” Szczepanik, the SEC’s senior advisor for digital assets, told a crowd Friday at SXSW in Austin, Texas. “But I do think the spring is going to come.”

In a Q&A session with attorney Daniel Kahan of Morrison & Foerster LLP, Szczepanik emphasized how the regulatory approach at the SEC is designed to let innovation flourish, though it comes at the cost of not providing completely clear guidelines for new kinds of businesses.

“The lack of bright-line rules allows regulators to be more flexible,” she said.

While respecting the desire from entrepreneurs to know whether they can or can’t run a business in full compliance with current securities laws, she said the principles-based approach allows more opportunities to arise from new technology.

She told attendees:

“I think if you were to propose a new regime of regulations in a precipitous way without really studying it, you might end up steering the technology one way or another.”

When asked for her thoughts on the rise of stablecoins, Szczepanik noted that there as several arrangements that allow these tokens to maintain a relatively stable price relative to other assets.

She singled out stablecoins that create two assets – one that maintains a fixed price and the other whose value fluctuates in order to help the first token’s price stay fixed (often referred to as algorithmic stablecoins).

With regard to that particular category of project, she said, “You might be getting into the land of security.”

“Folks like to put labels on things,” Szczepanik said of stablecoins, “but we’ll always look behind the label to see exactly what’s happening. We’ll give it the label it deserves under the law.”

Appropriate penalties

A topic that she returned to multiple times during the 90-minute talk was the SEC’s FinHub, where companies can come in and talk with staff about approaches they are taking. Kahan offered a rule of thumb: “It’s always better to find your regulators than to let your regulators find you.

Szczepanik emphasized that dialogue with the SEC yields better outcomes for companies. In particular, she highlighted recent regulatory action against Gladius, a cybersecurity company defending against distributed denial of service (DDoS) attacks. Its settlement was announced in February.

As the agency acknowledged in that settlement, it did not impose a penalty on Gladius because the firm self-reported and communicated with regulators throughout the investigation.

That said, rather than focus entirely on regulatory action against companies, Szczepanik also argued that businesses can do better by working with regulators from the start.

She acknowledged that some companies will go offshore in search of more lenient regulatory regimes, but she said the real opportunity is with companies that abide by the stronger U.S. rules. “There are benefits to doing it the right way. And when they do that they will be the gold standard,” she contended.

Beyond the U.S., Szczepanik said regulators around the world are in regular contact about distributed ledger technology. “I think there’s a lot of excitement around the globe about how DLT can be deployed to increase efficiency,” she said.

No-action letters

One form of relief that entrepreneurs have been seeking since the earliest days of the initial coin offering boom have been no-action letters. That is, letters from the SEC that acknowledge a review of a companies business process and affirm that the SEC will not take regulatory action against it.

Szczepanik has emphasized these before. However, attorneys in the space have noted that thus far no no-action letters have been issued.

Regardless, Sczczepanik’s fundamental message was that companies will have better outcomes if they interact with securities regulators. To that end, she is going on the road now to give more entrepreneurs the opportunity to reach her.

She concluded:

“We’d much rather have people come and ask us before they do something rather than coming and asking for forgiveness.”

SEC Senior Advisor for Digital Assets Valerie Szczepanik speaks at SXSW 2019

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Winklevoss Twins Claim Crypto Could Ultimately Be a Strong Social Network, But Will Increased Regulation Lead to This?

There’s no question that the relatively small and niche nature of cryptocurrencies in their current state leads them to have a strong community of avid supporters backing them, but on multiple occasions the crypto community has seen itself be divided along the lines of individual digital currencies.

Despite this occasional tribalism, the Gemini co-founders, Cameron and Tyler Winklevoss, recently explained that they believe crypto could ultimately be one of the strongest social networks in existence, and they hope to play a role in making that happen.

Winklevoss Twins: Money is Currently One of the Strongest Networks of Value

The twin’s recent comments regarding the future of cryptocurrencies as a highly social and uniting force came about during an interview with CNN, where the twins discussed their exchange – Gemini – as well as the relatively recent release of their exchange’s mobile app.

With regards to the perceived riskiness of the cryptocurrency industry, the twins explained that their goal is to provide users and investors with a highly regulated platform that is conducive to eliminating at least a portion of the risk that is inherent with all nascent markets.

Although this sentiment may seem reasonable to those who are new to the industry, crypto purists frown upon such sentiments, as a small sect of the crypto community believes that cryptocurrencies are a means to bypassing – and ultimately eliminating – the very centralized institutions that impose regulatory frameworks.

Recently, a Gemini ad campaign raised the eyebrows of these individuals – whose views tend to lean towards Libertarianism or in extreme cases, anarchism – as the exchange claimed that “crypto needs rules.”

Nick Foley, a former support representative at Coinbase and a Bitcoin enthusiast, reacted to the ads earlier this year in a tweet, saying that crypto doesn’t need increased government intervention via regulations.

“Rules like mathematics? Sure. Crypto needs that. Rules like ‘KYC AML licencing taxation Patriot Act bitlicense bullshit?’ No. Crypto doesn’t need that.”

Despite this, Gemini’s mission is clear, and as explained in the interview, their goal is to allow users to “engage with crypto in a regulated, compliant, trusted way.”

Building Trust is Critical for Positive Market Growth

While speaking at the South by Southwest conference in Austin, Texas, the two brothers doubled down on their credo that regulation is a key element of increasing trust in the industry, and pointed towards the recent QuadrigaCX imbroglio as a key example of why investors will continue to be weary of the industry so long as it remains an unregulated frontier.

“There are a lot of carcasses on the road of crypto that we’ve seen and learned from… At the end of the day it’s really a trust problem. You need some kind of regulation to promote positive outcomes,” Cameron Winklevoss explained, further adding that increased oversight and compliance will positively affect Bitcoin’s price.

Although it may be a controversial view amongst a few select Bitcoin and crypto enthusiasts, with the increased hype surrounding large financial institutions entering the rapidly evolving industry, as well as continued talk about the distant prospect of a Bitcoin ETF being approved, it is clear that investors are widely looking towards events that largely based on increased regulation as catalysts for the next bull run.

Featured image from Shutterstock.