Bitcoin holds above $6,000 as Japanese exchanges hit by regulators

Bitcoin had been happily carrying on as if the latest exchange hack had never happened, until today. South Korean exchange Bithumb lost $31 million of client funds on 20 June in a security breach but bitcoin only fell 2% and bounced back soon enough to trade above $6,700. 

But that unexpected strength hasn't lasted and bitcoin is priced Friday lunchtime London-time at $6,255 on the Coindesk bitcoin price index in a confirmation that the bearish trend in evidence all year was not about to be broken with a breakout. Developments in Japan are likely to blame for the latest reversal as well as a belated negative reaction to the Bithumb hack.

The speed of Bithumb's response to the hacker intrusion, with prompt reporting to the Korea Internet and Security Agency and an early commitment to fully reimbursing customers who suffered losses, certainly helped to calm nerves. The initial somewhat muted reaction of the markets had seemed to suggest investors were becoming acclimatised to hacks due to their frequency, notwithstanding the obvious security implications of the breaches.

The Bithumb hack follows one  a week earlier that hit the much smaller Coinrail exchange and a huge one at Japanese exchange Coincheck in January in which $530 million worth of NEM tokens were stolen. 

In this week's Bithumb debacle, the company has admitted that tokens were stolen from the hot wallets, which are wallets kept on exchanges that are connected to the internet in order to guarantee exchange liquidity. 

However, Bithumb has not yet explained how the security breach was carried out, although it revealed that Ripple's XRP token was one of the assets targeted. As the investigation unfolds the exchange says it expects the estimated amount lost to reduce.  

Crypto exchange security has been an Achilles heel of the industry since inception but Litecoin inventor Charlie Lee has been quick to point out that the weakness of exchange security should not lead to a questioning of the fundamentals of top cryptocurrencies.

"Whenever there's an exchange hack, people get scared and the price drops. It happens all the time. The thing is it doesn't really change the fundamentals of Bitcoin and other cryptocurrencies," Lee observed in remarks to CNBC. 

However, the effect of the persistent security failings will be to speed up regulatory oversight and there are signs of that happening already.

Japan order improvements at six exchanges – bitFlyer closes to new business

Japan's Financial Services Agency (FSA) on Friday instructed six Japanese exchanges, including the country's largest, to immediately improve their business processes. The six exchanges are bitFlyer, Quoine, BTC Box, Bit Bank, BitPoint and Tech Bureau. The FSA has been conducting on-site inspections of exchanges in the wake of the Coincheck hack mentioned above.  

In addition to tightening know-your-customer (KYC) and anti-money laundering procedures the financial authorities in Japan and elsewhere are increasingly concerned about how markets actually operate and the lack of surveillance methods to track trading and guard against manipulation. The US Justice Department in May opened an investigation into manipulation of crypto markets.

The newness of crypto means there is something of an education barrier that regulators have had to scale as they seek to learn more fully how exchanges operate and areas such as hot wallet setup and the protection of clients funds.

BitFlyer, the leading Japanese exchange, has stopped opening new accounts after the FSA move and may be followed by others among the six subject to the FSA order, which they have to respond to by 23 July, outlining their planned improvements, specifically regarding AML and how far along they are with their implementation.

Japan is the largest cryptocurrency market worldwide and so adverse news in that jurisdiction is likely to impact heavily on prices, as seems to have happened today.

Crypto fundamentals challenged by EOS… 

Regarding crypto fundamentals, the latest happenings on the newly launched EOS network have raised cause for concern in some quarters. 

Just two days after the network went live it crashed and later seven accounts were frozen by the 21 block producers elected to run it. The account freezing took place to protect users from phishing attacks but has highlighted the centralised nature of the EOS blockchain and fears that it could be controlled by block producers collaborating behind the scenes.

However, others see a degree of centralisation as a good thing because it makes it easier to weed out bad actors and to implement software upgrades to make improvements and fix bugs. The Chinese government’s IT ministry, which now publishes ratings for blockchain networks sees centralisation as a positive, judged by its latest top five which places EOS first, followed by Ethereum, NEO, Stellar and Lisk. Bitcoin comes in at number 17, dropping from its previously ranked placing at number 13. 

An element of centralisation also enables a blockchain network to process transactions more quickly, as is claimed to be the case with EOS with its delegated proof-of-stake system, but there is a trade-off against security because greater centralisation tends towards the danger of a single point of failure, which in turn negates the supposed advantages of a decentralised blockchain.  

EOS has a constitution in which it is stipulated that an arbitration forum is meant to deal with issues such as freezing accounts, but it was by-passed by the block producers.

EOS has dropped 10% today, as the market interprets the network news as a negative. It is currently trading at $9.24.

…and the Bank for International Settlements

While we are dealing with negativity, the Bank for International Settlements (BIS) is worth a mention. In its annual report the banker to the world’s central banks was caustic about the prospects for crypto.

The BIS says that bitcoin, if adopted on a nation scale, would break the internet.

“The associated communication volumes could bring the Internet to a halt as millions of users exchanged files on the order of magnitude of a terabyte,” the report claims. It continues: “To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months.” 

The BIS might need to do a bit more research because in order to transact on the bitcoin chain it is not necessary to download the ledger and interact with it directly - it is the nodes (computers) doing the mining that are required to have a copy of the ledger that is constantly updated with the latest version as opposed to consumers initiating transactions from the wallet on their smartphone.

Further, the report says that "technology is not substitute for trust", although it skips over the fact that the reason for the invention and growth of crypto was the lack of trust in central banks in the wake of the financial crisis of 2007/8. It is a legitimate concern though, although in the case of bitcoin its near 10-year record of functioning without issue means the BIS is focusing on the wrong target as far as bitcoin is concerned. 

However, network failures are a growing threat, as seen with the recent 51% attacks, where a nefarious miners gain control of a network. In recent months Bitcoin Gold, Litecoin Cash, Verge and Monacoin have all fallen foul to such attacks. The BIS concludes:

“Trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded.”

Goldman Sachs boss is not buying bitcoin… but not dismissing it either

And if that's not enough negativity for you, let's not leave out Goldman Sachs chief executive Lloyd Blankfein latest on bitcoin in which he says "it’s not for me".

"I don’t do it. I don’t own bitcoin.” He did add however, that it would be foolhardy to right off crypto per se, declaring “I'm not in this school of saying... because it's uncomfortable with me, because it's unfamiliar, this can't happen, that's too arrogant.”"

In more promising news for the sector payment startup Square, run by Twitter chief executive Jack Dorsey, has been granted a bitlicense by New York Department of Financial Services, which means it can now operate as a crypto exchange in the state.  The company's share price hit an all-time high of $66.2 on the news. Goldman Sachs is a major investor in Square.

Elsewhere, plans to upgrade the Ethereum network may see the two main technological improvements happen together instead of in serial fashion. Sharding, which would split the chain up into smaller chunks, and Casper, which would push transactions off-chain in a similar way to how Lightning works on the bitcoin network, are now being scheduled for simultaneous release.

Speaking at get together of Ethereum developer inventor Vitalik Buterin said of the new roadmap proposal:

“This is a substantial reworking of the intermediary steps in the roadmap, but of not the final product.”

Tether, the crypto pegged to the US dollar and used widely on exchanges as a proxy for the dollar, has received the thumbs up from law firm Freeh Sporkin & Sullivan (FSS). There has been much controversy surrounding Tether and in particular whether its issuance is fully backed by a corresponding holding of dollars. 

The review conducted by the law firm says that Tether is fully backed but its report is laced with caveats such as “FSS procedures performed are not for the purpose of providing assurance”, and it transpires that the dollars held are in the name of a trustee that FSS was unable to confirm Tether had a fully binding legal agreement with regarding control of those fiat funds.

UK MPS hear from crypto experts and that hash mystery

In the UK, the Treasury Select committee heard expert statements from crypto industry leaders and commentators as part of its investigation into cryptocurrencies. Appearing before MOs was the managing director of investment platform eToro and chairman of industry group CryptoUK  and Izabella Kaminska form the Financial Times a vocal critic of the nascent asset class. Citing Mark Carney's speech earlier this year entitled The Future of Money, she said crypto was good for little more than speculation. 

In the opposing camp Gandham countered:

“People don’t come to blockchain to speculate… they come to blockchain so that they can live, so that they can escape governments that have been irresponsible with their currencies, so that they can prevent their hard-earned savings from being nationalised.”

Gandham also drew attention to falling volatility in the crypto markets.

Other industry figures taking part in the discussion were Marco Santori from Blockchain and Obi Nwosu, the chief executive of Coinfloor, the UK's leading exchange.

Lastly, something to puzzle on over the weekend. What is the meaning of this:

00000000000000000021e800c1e8df51b22c1588e5a624bea17e9faa34b2dc4a? 

It is a bitcoin block hash, where the inputs are, among other things, the transaction data, timestamp, a random number called the nonce and the hash of the previous block, and the output is a 64 character hash. If the input is changed in any way the hash changes. Miners compete to find the hash for a block and it requires a lot of computing power to do so. 

The significance of this particular hash is the "21e800" part, which some have said is a reference to the 21 million currency supply and the unified field theory problem in mathematics for which there is as yet no proof, and is referred to as E8. The chances of these characters appearing randomly is low and because of that there has been rampant speculation on Twitter and Reddit that it is a message deliberately designed to appear by the creator(s) of bitcoin. Yet other theories postulate time travel or quantum computing is behind it! 

However, it is likely the explanation is down to errr, randomness, with that character combination likely to occur every 12 months or so, according to cryptographers.

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