Just as Web3 is a catch-all term for digital assets and infrastructure – as highlighted last month Cryptopy pop-up – crypto is a catch-all for digital currencies used as a medium of exchange on the internet. This exchange occurs through technology that allows transactions to be aggregated into blocks of data (i.e. blockchain technology).
While crypto and blockchain technology has spurred seemingly limitless amounts of innovative data use — total transaction volume reached $15.8 trillion in 2021, up 567% from 2020 totals — crime cryptographic is also on the rise. Illegal addresses received around $14 billion during the same period. (To see The 2022 Crypto Crime Report by Chainalysis.)
Part of the problem is that, unlike traditional technologies, block chain is not managed by a single person or centralized entity – anyone can download a copy – leading to many innovation, privacy and data security challenges. As for the latter, incidents in the last year were monstrous. For example:
- poly network (August 2021): $610 million – resulting from a security breach in the “cross-chain” smart contracts used by the platform company.
- Financing of the cream (October 2021): $130 million – hackers stole all liquid assets held by this lending platform on the Ethereum blockchain.
- Forged Vulcan (December 2021): $140 million – top users of play-to-earn blockchain platform hacked and had tokens stolen.
- bit-mart (December 2021): $200 million – half of the losses are due to a “large-scale security breach” on the Ethereum blockchain.
These incidents highlight the seriousness of cybercrime in a dynamic industry. As crypto continues to grow and “are a growing part of the US financial system“, cybercrime will follow unless there are laws and regulations to strengthen the security and structure of crypto and blockchain technology.
States are trying. Last year, 33 states considered crypto and blockchain legislation. In previous years, Georgia, Tennessee, Delaware, Illinois and Wyoming have passed laws recognizing the legal authority to use blockchain technology for electronic transactions (i.e. contracts smart). As a favorite, Wyoming has over 20 blockchain-related laws. A pending bill in New York would recognize the use of blockchain technology and smart contracts in commerce. (AB 3760 and SB 1801 allow signatures, records and contracts secured through blockchain technology to be considered in electronic form and to be an electronic record and signature, and allow smart contracts to exist in commerce. The Senate passed the bill on February 10, 2021.)
Significantly, in 2017, Delaware amended the Delaware General Corporations Act to permit the use of distributed ledgers or blockchain technology for the creation and maintenance of corporate records, including a Delaware corporate stock register (8 Del. C. § 224). While there is arguably federal legislation that legalizes smart contracts, these legislative efforts are helping to clarify and promote their use. (The fact that smart contracts are written in code without a physical signature does not prevent their enforceability due to the United States Electronic Signatures in Global and National Commerce Act (E-SIGN Act) and the Uniform electronic transactions (UETA. See 15 USC § 7001 et seq.)
But ultimately, the federal government will have the most impact. As stated last August by Securities and Exchange Commission (SEC) Chairman Gary Gensler, “Right now, we don’t have enough investor protection for crypto. Frankly, at that time, it’s more like the Wild West. Last year, Congress introduced 35 bills targeting this technology, including:
Federal agencies vying to determine the most direct path for laws and regulations governing crypto and blockchain technologies include:
- The Securities and Exchange Commission
- Commodity Futures Trading Commission
- The Federal Trade Commission
- The Treasury Department
- The Office of the Comptroller of the Currency
- The Financial Crimes Network
Not to be outdone, a few weeks ago, the American secret services launched a cryptocurrency public awareness center. On its hub the Secret Service Highlights the “continued growth of decentralized financial ecosystems, peer-to-peer payment activity, and obfuscated blockchain ledgers” that “are being abused and misused.”
As Cryptopia’s top tech innovators have noted, laws, regulations, and industry standards are coming, and that’s not necessarily a bad thing. For more information on crypto and blockchain technology, contact author attorneys Armstrong Teasdale or register for their upcoming webinar on March 16, 2022, titled “The intersection of Blockchain, Crypto and DeFi with innovation, privacy and data security.”