SEC - Page 51

On July 30th, a significant security breach occurred on Curve Finance, a decentralized finance (DeFi) platform, resulting in the exploitation of several stable pools and causing losses exceeding $47 million.

The exploit was related to vulnerabilities in Vyper, a contract-oriented programming language utilized on the Ethereum Virtual Machine (EVM), specifically affecting versions 0.2.15, 0.2.16, and 0.3.0.

Vyper, known for its Pythonic characteristics, has been a popular choice for Python developers entering the world of Web3.

However, the investigation revealed that the affected versions failed to implement the reentrancy guard correctly.

This guard is crucial in preventing multiple functions from executing simultaneously, thereby safeguarding contracts from reentrancy attacks, which can deplete all funds from the contract.

Ancilia, a security firm, analyzed the affected contracts and reported that 136 contracts were using Vyper 0.2.15 with reentrant protection, 98 contracts used Vyper 0.2.16, and 226 contracts used Vyper 0.3.0. Vyper urged all projects relying on these versions to reach out immediately for further guidance and support.

Several DeFi projects were impacted by the exploit. For instance, decentralized exchange Ellipsis reported the exploitation of a small number of stable pools with BNB using an outdated Vyper compiler.

Additionally, Alchemix’s alETH-ETH witnessed an outflow of $13.6 million, while JPEGd’s pETH-ETH pool suffered an $11.4 million loss, and Metronome’s sETH-ETH pool lost $1.6 million.

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Moreover, Curve Finance’s CEO, Michael Egorov, confirmed that over $22 million worth of CRV tokens (32 million CRV tokens) were drained from the swap pool in a Telegram channel.

The security breach sent shockwaves through the DeFi ecosystem, leading to a flurry of transactions across pools and prompting white hat hackers to launch a rescue operation.

As a consequence of the news, Curve DAO (CRV), the utility token for Curve Finance, experienced a decline of over 5% in value, as reported by CoinMarketCap.

CRV’s liquidity had already dwindled in previous months, making it susceptible to significant price fluctuations.

Despite the severity of the attack, certain pools like crvUSD contracts remained unaffected.

Nevertheless, this incident added to a series of attacks and incidents that have targeted the Curve Finance ecosystem.

Just days prior to this breach, Conic Finance, a platform built on Curve Finance’s omnipool, was exploited, resulting in a theft of $3.26 million in Ether (ETH).

The DeFi space has faced numerous attacks and scams in recent months, with a staggering $204 million reportedly swindled in the second quarter of 2023 alone, according to a report by De.Fi, a Web3 portfolio app.

These incidents highlight the importance of robust security measures and continual efforts to fortify DeFi protocols against potential threats.

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Gary Gensler, the Chairman of the US Securities and Exchange Commission (SEC), expressed deep concerns over the prevalence of fraud within the crypto market.

In an interview with Bloomberg on Thursday, Gensler pointed out that the crypto market is plagued with fraudulent schemes and deceitful actors, overshadowing the presence of genuine participants.

Highlighting the challenges faced by investors, Gensler emphasized that the speculative nature of the crypto industry is not the sole issue.

He stressed that crypto investors should not assume they are receiving the same level of protection as provided by securities laws, even though some cryptocurrencies may fall under their purview.

Gensler raised alarm over the lack of full, fair, and truthful disclosures provided to US investors, with platforms and intermediaries engaging in practices that would not be acceptable on traditional stock exchanges like the New York Stock Exchange or Nasdaq.

This concern by the SEC Chairman comes in the aftermath of a US court ruling in favor of Ripple during the ongoing lawsuit brought by the SEC.

The court ruled that selling XRP on exchanges does not constitute an investment contract, but it recognized XRP as a security when sold to institutional investors based on the Howey Test conditions.

In response to recent collapses of prominent crypto companies, the SEC has intensified its scrutiny of the crypto industry.

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Lawsuits have been filed against major exchanges like Binance and Coinbase, as well as enforcement actions taken against Kraken, Bittrex, and Nexo.

The increased regulatory pressure has led some crypto companies to consider relocating to more favorable jurisdictions, with Coinbase establishing a presence in Bermuda and Bittrex ceasing operations in the US.

Moreover, the regulatory uncertainty in the US has driven away blockchain developers, as evidenced by a decline in the country’s share of blockchain developers from 40% in 2017 to 29% in 2020, according to a report by Electric Capital.

This trend suggests that the stringent regulatory environment may be discouraging crypto businesses and talent from operating in the United States.

In conclusion, Chairman Gensler’s apprehensions about fraud in the crypto market reflect the SEC’s growing concerns.

The recent legal developments and regulatory actions indicate a shift towards increased scrutiny of the crypto industry, leading some companies to consider more hospitable jurisdictions.

The impact of these regulatory moves may have significant implications for the future of crypto operations in the United States.

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SEC and Binance Oppose Eeon’s Intervention in Crypto Exchange Lawsuit

The United States Securities and Exchange Commission (SEC) faced a significant setback on July 28 when the United States Court of Appeals for the District of Columbia Circuit overturned a ruling by the regulator regarding SPIKES Index securities.

The court ruled that these securities should be treated as “securities futures” instead of regular futures, stating that the SEC’s initial order was “arbitrary and capricious.”

This decision is linked to a 2020 order in which the SEC exempted the SPIKES Index, a stock volatility index, from the definition of security futures.

The motive behind this move was to eliminate heavy taxes and regulatory requirements associated with the term “security” and promote competition among volatility indexes.

Chief Judge Sri Srinivasan pointed out that the exemption granted by the SEC was considered arbitrary and capricious because the regulator failed to adequately explain its rationale and neglected to consider important aspects of the problem.

The court also highlighted the SEC’s oversight in failing to consider the possibility that granting exemptive relief could lead to confusion among market participants.

As a result of the ruling, SPIKES Index futures are now categorized as “securities futures” rather than just “futures.” Market participants have a three-month window to wind down their transactions under this new classification.

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The decision’s implications may extend beyond the specific case, as it could offer insight into potential outcomes for legal battles between crypto firms and the SEC.

Interestingly, two of the panel’s judges are currently examining Grayscale’s challenge to an SEC decision that denied its request to convert the Grayscale Bitcoin Trust to a spot Bitcoin exchange-traded fund (ETF).

The ruling serves as a reminder that the SEC is not invulnerable and can lose court cases.

It also sheds light on the importance of clarity and sound reasoning in regulatory decisions, particularly when it comes to defining financial instruments and their associated regulations.

In conclusion, the recent Court of Appeals decision represents a significant setback for the SEC and highlights the need for well-reasoned and transparent regulatory actions.

As market participants adjust to the new classification, the ruling’s broader impact may influence future legal battles involving the SEC and other financial entities.

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Pro-XRP advocate, John Deaton, has voiced his belief that the actions taken by the United States Securities and Exchange Commission (SEC) against the crypto industry are not solely focused on protecting investors but driven by a broader motive to safeguard corporate capitalism.

Deaton has pointed out what he sees as an attack on cryptocurrencies, with specific reference to the SEC’s actions directed at Coinbase and Ripple.

In his statements, he has delved into several aspects, including the accredited investor rules, the SEC’s approach to regulating cryptocurrencies, and its treatment of retail investors in the Ripple case.

Taking to Twitter, Deaton has emphasized his conviction that the U.S. operates within a framework of corporate capitalism, rather than a genuine capitalist system.

He has cited various elements of the current financial landscape to bolster his argument.

One of Deaton’s key concerns revolves around the SEC’s allocation of limited resources towards Section 5 cases and its emphasis on targeting secondary markets on exchanges, rather than focusing on addressing fraudulent activities within the crypto space.

According to him, this misplaced focus could stifle innovation and hinder the growth of the burgeoning cryptocurrency industry.

In addition, Deaton has brought attention to the SEC’s opposition to allowing retail investors to participate as friends of the court (amici curiae) in the Ripple case.

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He suggests that this reluctance to consider the views of retail investors reinforces the perception that the regulatory body may prioritize the interests of larger financial institutions over those of individual investors.

Another major concern raised by Deaton is the perceived double standard in crypto regulation.

He criticizes the SEC for not engaging in dialogue with proactive entities like Coinbase while highlighting that SEC Chair Gary Gensler had multiple meetings with Sam Bankman-Fried, the former CEO of the collapsed FTX exchange.

This unequal treatment raises questions about the effectiveness and fairness of the regulatory body, as well as the overall framework for digital assets.

Deaton fears that such disparate treatment of various industry players may hinder the growth of innovative startups while potentially favoring more established entities.

In conclusion, John Deaton contends that the SEC’s actions against the crypto industry are driven by a broader motive to safeguard corporate capitalism, rather than solely prioritizing the protection of investors.

His concerns about the misplacement of priorities, the treatment of retail investors, and the potential double standard in regulation call for a more transparent and equitable approach to nurturing the cryptocurrency industry’s growth.

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The United States Securities and Exchange Commission (SEC) and Binance have both responded to the involvement of the entity called “Eeon” in the SEC’s case against the crypto exchange.

In the U.S. District Court for the District of Columbia, both the SEC and Binance opposed Eeon’s request to intervene in the lawsuit, stating that Eeon does not meet the necessary legal requirements for intervention and consent.

The SEC argued that Eeon has a track record of repeatedly attempting to represent itself in court cases without success.

Furthermore, the Securities Exchange Act prohibits private litigants from intervening, making Eeon’s request impermissible.

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The SEC also contended that Eeon’s involvement in the lawsuit would have no significant impact, as their claims align with those of the defendants and do not fulfill the requirements for intervention.

Additionally, the agency pointed out that Eeon’s counterclaims are contradictory in nature.

Binance, in its response, cited three grounds for dismissing Eeon’s petition: the lack of consent from the SEC, Eeon’s failure to establish itself as a legitimate party of interest, and its inability to meet the necessary legal requirements for intervention.

Both the SEC and the defendants, Binance and its CEO Changpeng “CZ” Zhao, are unified in their opposition to any intervention by Eeon in the SEC’s lawsuit against Binance and its CEO.

Meanwhile, Binance has taken steps to dismiss the lawsuit brought against it by the U.S. Commodity Futures Trading Commission (CFTC).

The exchange argued that the CFTC’s attempt to regulate foreign individuals and corporations outside the U.S. exceeds the limits of its statutory jurisdiction.

However, due to extended court deadlines for responses by both the CFTC and Binance, the dismissal process is expected to extend into 2024.

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Ripple’s Chief Legal Officer, Stuart Alderoty, dismissed concerns about a potential appeal by the United States Securities and Exchange Commission (SEC) following the landmark ruling on Ripple earlier this month.

He believes that if the case goes to appeal, the court might further consolidate Ripple Labs’ partial victory over the financial regulator.

Alderoty reiterated his position that the XRP token does not qualify as an investment contract and that Ripple is ready to face any appeal brought by the SEC.

He expressed confidence in the judge’s ruling, stating that it was a faithful application of the law and that a court of appeals might even amplify it further.

The ruling on July 13 by Judge Analisa Torres concluded that XRP was not a security when sold to the public on cryptocurrency exchanges but could be considered a security when sold to institutional investors.

However, the SEC, in its ongoing case against Terraform Labs founder Do Kwon, expressed its dissatisfaction with the ruling and hinted at appealing the split-decision ruling in the future.

SEC lawyers asserted that retail sales of XRP should have been deemed securities and stated their intention to recommend further review.

SEC Chair Gary Gensler also expressed disappointment over the court’s decision on XRP, indicating that the regulator would continue to assess the ruling.

Despite the positive outcome for Ripple, Alderoty warned that the crypto sector still lacks a solid regulatory foundation.

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He criticized the SEC’s “regulation by enforcement” approach, which he believes has caused crypto laws in the U.S. to lag behind other jurisdictions.

Alderoty predicted that if the SEC continues to claim that crypto assets are securities, it will likely lose ongoing cases where such claims are made.

However, he stressed the need for a rational, comprehensive, and understandable regulatory framework for crypto in the U.S. to bring it up to par with the rest of the world.

At present, XRP is trading at around $0.70, showing a significant increase of nearly 43% in the last month, according to Cointelegraph data.

Despite the recent legal victory, Ripple’s legal battle with the SEC underscores the importance of establishing clear regulations for cryptocurrencies in the United States.

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