Decentralized Analysis-Finance: Last Front of the Crypto Hacking Problem

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LONDON (Reuters) – For most of cryptocurrency’s 13-year life, exchanges have been the epicenter of cyberheists. Today, a greater risk of hacking in the growing industry has exploded: peer-to-peer crypto platforms.

FILE PHOTO: A depiction of the Monero cryptocurrency can be seen in this illustration taken August 6, 2021. REUTERS / Dado Ruvic / Illustrationo

One such site, Poly Network, was at the center of a $ 610 million crypto theft last week, one of the largest on record. Days after the heist, the Decentralized Finance Platform (DeFi) said the white hat hacker (s) had returned almost all of the loot.

The unusual ending of the Poly Network saga belies the emerging risks in this growing corner of crypto, where an estimated $ 80 billion or more is held, according to interviews with industry executives, lawyers and analysts.

DeFi sites allow users to lend, borrow, and save – typically in cryptocurrencies – while bypassing traditional gatekeepers of finance such as banks and exchanges. Donors say technology provides cheaper and more efficient access to financial services.

But the heist of Poly Network – previously a little-known site – highlighted the vulnerability of DeFi sites to crime.

Potential thieves are often able to exploit bugs in the open source code used by sites. And with regulations still uneven, there is generally little or no recourse for victims.

Centralized exchanges, which serve as intermediaries between crypto buyers and sellers, were previously the main targets of crypto cyberheists.

Tokyo-based exchange Mt.Gox, for example, collapsed in 2014 after losing half a billion dollars in hacks. Coincheck, also based in Tokyo, was hit by a $ 530 million burglary in 2018.

Many major exchanges, under the regulatory limelight and striving to attract traditional investors, have since stepped up security and heists on such a scale are now relatively rare.

LESS SECURE

The security burden on major platforms such as Coinbase Global Inc has pushed less secure sites out of the way, said Ross Middleton, CFO of the DeFi DeversiFi platform.

What happened is that the big exchanges have gotten really good (security wise) and the small exchanges are no longer there, he said. The frontier is definitely DeFi now.

Crime losses on DeFi platforms hit all-time high, crypto intelligence firm CipherTrace said last week, thieves, hackers and fraudsters soaring with $ 474 million from January to July .

The spike came as funds poured into DeFi, mirroring the flows in crypto as a whole. According to DeFi Pulse, the total value owned at these sites now exceeds $ 80 billion, down from just $ 6 billion a year earlier.

DeFi specialists say security risks tend to be found on newer sites that may work with less secure code.

There is a growing security and risk gap between the old battle-tested DeFi protocols and the untested new DeFi protocols, said Rune Christensen, former head of the body behind the high-profile DeFi Maker app.

Proponents claim that the use of open source code means that vulnerabilities can be quickly identified and fixed by users, thereby reducing the risk of crime. DeFi can be controlled, they say.

Yet for financial watchdogs and governments around the world looking to regulate the crypto industry, DeFi is increasingly the center of attention.

IMPLEMENTATION MEASURE

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has indicated he will take a tough stance on DeFi.

Such platforms can be covered by U.S. securities laws, he said in a speech this month, calling on Congress to draft legislation to curb DeFi and crypto trading.

The SEC introduced its first enforcement action this month involving DeFi technology, alleging that the company issued unregistered securities and misled investors. The SEC did not respond to further questions about its position.

Officials at the U.S. Commodity Futures Trading Commission have also reported a more in-depth review.

In June, Commissioner Dan Berkovitz called DeFi a “Hobbesian market” – a reference to a 17th-century philosopher who saw life without a government as “wicked, brutal and short”. The unlicensed DeFi platforms for derivatives violated commodity trading laws, he suggested.

Elsewhere, travel is slower. DeFi is still a long way off the political agenda in Britain, for example.

A spokesperson for the UK financial watchdog said that while some activities of DeFi may fall within its scope, much of the industry is unregulated.

For some analysts, stricter regulation is inevitable, with little sign that DeFi sites can do the job on their own.

The unfortunate situation is that (Poly Network) was considered an average Tuesday in the DeFi world, said Tim Swanson of blockchain firm Clearmatics.

The industry likes to congratulate itself by claiming that it relies on transparent systems, but it has repeatedly shown that it is incapable of controlling itself.

Reporting by Tom Wilson in London; Additional reporting by Michelle Price in Washington and Gertrude Chavez-Dreyfuss in New York; Editing by David Holmes

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