Crypto on-chain crime drama sees the good guys finally win
The crypto community has once again shown how decentralization and working together can avert most of the on-chain theft in the ecosystem.

The stories about people getting their private keys hacked or stolen are nothing new, with a number losing their life savings because of these thefts. However, in quite an anti-climax scene, a crypto user managed to save their crypto holdings despite losing their private keys.

Harpie, an on-chain security firm, revealed an instance of on-chain crime drama where the good guys eventually won. One of the users in their Discord group reportedly raised concerns about the suspected theft of their private keys. When the firm looked into said customer’s wallet, someone was indeed trying to transfer funds from the victim’s accounts.

However, the security group managed to act fast and move the victim’s funds to a noncustodial address before the hacker could transfer those funds. This contract allowed the victim to recover their lost tokens from a different, uncompromised wallet. The security firm was able to do so by offering a higher gas fee for transferring the victim’s address.

This was only possible because the victim protected their tokens with Harpie, allowing the security firm to intervene whenever a case of possible theft came to their attention. The firm said:

“When we detected the malicious transfer, we moved this user's funds to a noncustodial vault before that transaction could confirm by paying a higher gas fee.”

The on-chain security firm said that they have recovered about $700,000 worth of stolen funds and acts as an on-chain firewall for the community.

While what Harpie did was all about timely intervention and required access to the user’s wallet, there have been several instances where the crypto community has come together to retrieve stolen funds and nonfungible tokens as well. As Cointelegraph reported in May, the Solana community came together to “scam” a scammer in order to get back some stolen NFTs.

With blockchain and distributed ledger technology powering a majority of the cryptocurrencies, the tracking of any form of stolen funds becomes easier. On the other hand, stealing funds is only the first step for exploiters and it might take them years to move a small portion of funds, and there have been instances where they were caught even then.

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Alaska adds ‘virtual currency’ to its regulatory regime
The amendment to the local Administrative Code, adopted by the Division of Banking and Securities (DBS), will come into effect on January 1, 2023.

From Jan. 1, 2023, the term “virtual currency” will take its place in the money transmission regulations of Alaska. It will oblige the companies dealing with digital currencies to obtain a money transmission license in the state.

As reported by the law firm Cooley on Dec. 19, the state of Alaska amended its money transmission regulations to include the definition of “virtual currency.” According to the amendment to the local Administrative Code, adopted by the Division of Banking and Securities (DBS), virtual currency is:

“[A] digital representation of value that is used as a medium of exchange, unit of account, or store of value; and is not money, whether or not denominated in money.”

The most obvious impact of this change, which will come into force on Jan. 1, is the requirement to submit a licensing application for “a person engaging in money transmission activity involving virtual currency.”

According to other parts of the amendment, “virtual currency” will also be included in the “permissible investments” and the definition of “monetary value.” However, as the Cooley analysis notes, affinity and rewards programs, as well as online-gaming digital tokens still stay out of the “virtual currency” category.

Platforms dealing with crypto have, in fact, had to obtain the Alaska money transmission license even before the amendment. But the previous type of their Limited Licensing Agreement (LLA) with DBS explicitly excluded the notion of digital currency. Hence, these LLAs will be outdated from Jan. 1.

Alaska remains one of nine states that are still offering 0% capital tax gains to investors. The others are Washington, Wyoming, South Dakota, New Hampshire, Nevada, Texas, Tennessee and Florida. Nevertheless, according to recent research conducted by Invezz, it stands as only 36 out of 50 states in terms of crypto adoption.

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What blockchain analysis can and can’t do to find FTX’s missing funds: Blockchain.com CEO
Blockchain.com CEO Peter Smith said on-chain analysis can only reveal how much crypto users sent to FTX, not what the company spent it on.

Blockchain.com's founder and CEO, Peter Smith, believes that on-chain analytics will play a significant role in locating the billions in missing FTX customer funds, though it will have its limitations.

On Dec. 20, Fox Business host Liz Claman said that blockchain’s selling point was that it makes crypto transactions transparent and traceable, and asked Smith what could be traced in the case of FTX’s missing customer funds.

Smith said that blockchain sleuths have already done a fair bit of work in chasing the money trail, adding that it could in fact be the banking system where the trail could turn cold:

“The most challenging thing for [blockchain analytics] firms working on this today is when money moves off chain and into the banking system because they’re no longer able to track it.”

He cited an example of when Sam Bankman-Fried or associates purchased real estate, as that would have originated from a bank. Those assets would be hard to trace back to FTX or a blockchain once they leave the crypto ecosystem, he said.

The interviewer also questioned whether shadow banking was used. This is a system of lenders, brokers, and other credit intermediaries operating outside the realm of traditional regulated banking, which can be used to mask transactions.

Smith explained that for funds still in the crypto ecosystem, on-chain analytics will be tremendously helpful to liquidators in their efforts to untangle the FTX mess, “since those are records that can’t be changed or altered.”

Things that can be traced on-chain include where FTX lost its customers' money, such as in trading bets, liquidity farming or withdrawing it for real estate or venture investments. On-chain analytics can also be used to see how much crypto users deposited with FTX, he added.

“A lot of the money was lost in trading positions … real estate, venture capital investments … all of that occurs outside the on-chain ecosystem in crypto.”

In a related development, FTX’s new chief financial officer, Mary Cilia, told a procedural hearing on Dec. 20 that the firm has identified over $1 billion in assets.

FTX reportedly located about $720 million in cash assets in U.S. financial institutions authorized to hold funds by the Department of Justice. Cilia stated that around $130 million was being held in Japan and $6 million was being kept for operational expenses. Most of the remaining $423 million are stored at unauthorized U.S. institutions — mainly at a single broker, she said, declining to elaborate.

Prosecutors and liquidators have been sifting through the FTX wreckage trying to claw back as much as $8 billion in missing customer funds.

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This Daily Dose was brought to you by Cointelegraph.

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