Blockchain Bites: EY's Auditing Slip and Bitcoin's Long Line of Pseudonymous Developers

Balancer fell victim to a "flash loan" exploit, a mining conglomerate sees potential in blockchain and a shareholders association said EY should have caught Wirecard's multi-billion-dollar blackhole earlier.

Flash loans are one of many novel financial products made possible through decentralized technologies. But with innovation comes risk. Here's the story:

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Flash loans & hacks A hacker exploited a smart contract loophole early Monday to drain $500,000-worth of tokens from DeFi liquidity provider Balancer Pool. CTO Mike McDonald said in a blog the attacker had borrowed $23 million-worth of WETH tokens in a flash loan from dYdX, and used those token to trade against themselves with a variety of investment-grade Stratera tokens. A flash loan was used in February to cripple the bZx exchange. These types of attacks leverage a protocol’s built in capabilities and novel financial instruments, rather than hacking the code base. This hack follows news of 870 bitcoins stored on Blockstream’s Liquid Network being made vulnerable to network moderators’ seizure last week, said Summa founder James Prestwich.

Blockchain deals Mining conglomerate BHP completed a $14 million deal with a Chinese metals giant using the blockchain-based MineHub platform to process contract terms, exchange documents online and provide visibility and accountability along the supply chain. Elsewhere, the South Korean government chose blockchain startup Sendsquare to develop a proof-of-concept blockchain registry to help analyze, anonymize and store clinical data for diabetes.

Privacy and pseudo-anonymity Bitcoin’s culture is heavily influenced by the rights to pseudonymity and privacy online. Beginning with Satoshi Nakamoto, a long line of crypto developers have taken the route of remaining pseudo-anonymous for personal safety as well as to maintain consistent worldviews. Sometimes seen as needless obfuscation, masked identities allow people to “be who you are,” Engineer Kee Hinckley said. It also informs the projects being built, such as the many privacy-forward experiments on Bitcoin.

Auditing slip A German shareholder body has accused “Big Four” auditor Ernst & Young of failing to spot a $2.1 billion black hole in Wirecard’s books soon enough. Shareholders’ association SdK filed criminal damages against EY Friday for not flagging Wirecard’s accounting practices earlier, reports CNBC. The group holds EY, and two current and one former employee in particular, responsible for not alerting the authorities and investors sooner, which ultimately culminated in the precipitous drop in the Wirecard share price.

SEC Chair Crypto Mom? Commissioner Hester “Crypto Mom” Peirce could become SEC chair, if President Donald Trump’s nomination of current Chairman Jay Clayton to U.S. Attorney for the Southern District of New York goes through. If Clayton is confirmed, the president will likely appoint, as is tradition, the senior-most commissioner belonging to his political party; that would be Crypto Mom.

Back in the green Bitcoin chalked out minor price gains on Sunday, ending its longest run of daily losses for half a year. The leading cryptocurrency by market value jumped 1.2%, having suffered losses in each of the preceding five days, according to CoinDesk’s Bitcoin Price Index. Prices last took a beating for five consecutive days in early December 2019. Both five-day drops saw prices decline by around $900 over the 5-day periods. Sunday’s rise has kept the multi-week long trading range of $9,000 to $10,000 intact.

Volatility trends Recent market data suggests that bitcoin is becoming less volatile, while stocks are increasingly volatile, CoinDesk Head of Research Noelle Acheson said, in the latest Crypto Long & Short newsletter. If the trend continues, it could have profound effects on bitcoin’s adoption, as Fidelity found the biggest barrier to entry is crypto’s market turbulence. “With the narrowing of the differential, that barrier could disappear, or at least significantly diminish. It’s not just that bitcoin’s volatility seems to be trending down – if volatility overall is more acceptable, bitcoin’s swings could be seen as less of a negative,” Acheson said. Though for some, she remembers, volatility is the whole point. “Where else are you going to get high potential returns?” Subscribe here to get Crypto Long & Short in your inbox.

Valuing bitcoin Nearly half of investors in a recent survey said a lack of fundamentals keeps them from participating. In a 30-minute webinar July 7, CoinDesk Research will explore one of the first and oldest unique data points to be developed by crypto asset analysts: Bitcoin Days Destroyed.

Is the Travel Rule good or bad for crypto? Both Professor Malcolm Campbell-Verduyn and blockchain researcher Moritz Hütten break down what is sometimes thought of as an “existential crisis” for crypto: Financial Action Task Force’s “Travel Rule.” They argue the new requirements will lead to a bifurcation in the industry, with one path moving closer to the regulatory schema big banks follow and one diverging towards underground, grey market dealings.