Cryptocurrency: Q1 2019 key details

Ciphertrace, a leading Blockchain forensics firm, has recently released its Q1 2019 Cryptocurrency Anti-Money Laundering Report (found here), which makes for interesting reading. Some of the key takeaways, as we see them, are highlighted below:

• 1. According to Ciphertrace, the total amount lost by cryptocurrency exchanges and infrastructure to fraudsters and internal executives during the first quarter of 2019 reportedly totalled roughly US$1.2 billion, although the true value of such losses is expected to be much higher. This figure is said to include significant losses suffered by exchanges through theft/ hacks and "exit scams" (essentially executive embezzlement), notably (according to Ciphertrace):
• • in January 2019, the reported theft of US$16 million worth of assets from a New Zealand based exchange, amounting to 9.4% of the exchange's holdings;
• • in March 2019, the largest South Korean exchange was reportedly subject to its second sizeable hack in under a year, this time suffering losses of approximately US$14 million;
• • the implosion of Canada's largest exchange which, according to Ciphertrace and a number of news outlets (see for instance, CBC's article here), was seemingly precipitated by the death of its CEO and his sole access to a body of the firm's assets, amongst other unusual activity at the exchange. Whilst the exact details of the collapse of the exchange are still emerging, it reportedly owes its users approximately US$195 million or more;
• • in April 2019, the New York Attorney General alleged that a well-known exchange had lost US$851 million, and used substantial fiat currency reserves from its sister company to obscure the loss. Its losses were said to originally derive from its use of a Panamanian payment processor who submits that funds invested by the exchange were seized by the Portuguese, Polish and US authorities.

2. The report also highlights that cross-border cryptocurrency transfers from US exchanges to offshore exchanges has drastically risen over the past two years. An analysis of 164 million Bitcoin transactions showed that the proportion of such payments increased from 45% from the twelve months ending Q1 2017 to 66% in the twelve months ending Q1 2019.

3. The report also usefully discusses the varying approaches to cryptocurrency regulation across the globe.

The cryptocurrency sector is burgeoning, and whilst the regulatory environment surrounding cryptocurrency becomes more focussed and effective at reducing risk, for the time being, large scale fraud and theft continue to present an issue to guard against for exchanges and investors alike. Anyone operating in the offshore space should consider the safeguards and protections surrounding their arrangements, and should consider taking legal advice to best protect themselves, ideally in advance of issues arising. Mourant has the expertise to review prospective or existing arrangements with risk-management in mind, and is well placed to assist in the event that losses are sustained.