When it comes to cryptocurrency transactions, questions about alleged money-laundering quickly get thorny.

A Wall Street Journal investigation from last September, titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” claimed the crypto conversion platform ShapeShift had facilitated at least $9 million worth of money laundering over several years with “a parade of suspected criminals.”

Now, at ShapeShift’s request, the blockchain analytics firm CipherBlade recreated the 2018 report and found less than $3 million in transactions involving potentially “tainted” funds.

The main distinction here is that CipherBlade focused on allegedly tainted coins instead of the total value held in each affiliated wallet or account.

“Of the ShapeShift addresses which receive ETH within three hops from the initial dirty addresses, less than half of the ETH traded through them are tainted,” the CipherBlade report says. “Using the most generous assumptions, this is still only 23.53 percent of the WSJ’s claimed $9 million.”

Add to that ether to roughly 40 bitcoin, which ShapeShift itself found to be associated with suspicious wallet’s the WSJ identified, and the total estimate falls just shy of $3 million.

When asked about the investigative process, a WSJ spokesperson told CoinDesk:

“An analysis looking at individual tainted ethereum coins, rather than tainted wallets, would be a different project than what the Journal embarked on, and one we can’t comment on because we have not reviewed it.”

All parties agree the most pessimistic reading of the data still indicates questionable transactions made up a pittance of ShapeShift’s volume since the company was founded in 2014. According to a tweet by CEO Erik Voorhees, ShapeShift processed crypto worth $30.3 million a month in 2017 alone.

Still, experts such as Pawel Kuskowski, CEO of the analytics firm Coinfirm, told CoinDesk there’s no clear answer to how much may have been laundered through the platform – because until October 2018 ShapeShift did not perform know-your-customer (KYC) identity checks.

“If you don’t know the underlying clients, how do you know?” Kuskowski told CoinDesk. “This is why you have KYC in the first place, to understand the profile.”

When asked about whether it’s better to account for the whole wallet or focus on the tainted coins themselves, Kuskowski said the truth hides in the shades of gray in between. He said a complex analysis of the risks associated with the people involved in these transactions, along with “plausibility and some other rules,” all combine to reveal whether the wallets themselves should be considered tainted or suspicious.

In Coinfirm’s own report on risks associated with crypto platforms, ShapeShift was classified as “high risk” with regards to anti-money laundering procedures and compliance because of anonymous usage until the KYC policy began last October. According to Kuskowski, it often takes months for a traditional bank to de-risk after any association with money laundering.

“It’s a good direction, that’s for sure,” Kuskowski said of ShapeShift’s added KYC procedures.

That de-risking process actually began months before the WSJ report, according to ShapeShift Chief Legal Officer Veronica McGregor.

“Among law enforcement, ShapeShift is regarded as a very helpful and cooperative player,” she told CoinDesk. “Just because we started implementing those KYC procedures does not mean that we didn’t already have procedures in place to detect fraud and bad wallet addresses and theft, things like that.”

The company was already working with external consultants to identify and block transactions from suspicious wallets, McGregor said. Then ShapeShift underwent a compliance overhaul throughout the second half of 2018, mandating KYC identity checks for all users and working with three independent analytics firms, Chainalysis, ComplyAdvantage and IDology.

McGregor said ShapeShift continues to “tweak” its procedures, both in-house and through work with the three aforementioned services providers, in order to keep up with the evolving technology.

Richard Sanders, CSO and co-founder of CipherBlade, told CoinDesk he believes the claims in the WSJ report were “grossly exaggerated.”

“We did find around $3 million, which isn’t a great look for ShapeShift,” Sanders said. “But it is significantly smaller than what the Wall Street Journal reported.” CipherBlade says its independent analysis was not paid for by ShapeShift.

For his part, ShapeShift’s Voorhees continues request the WSJ retract the report, which was published in September 2018 during the company’s compliance overhaul. He believes the methodology used to tally questionable funds was fundamentally flawed.

“Crypto is bringing light, truth, and openness to finance,” Voorhees told CoinDesk. “And it’s a pleasant irony that the transparency of blockchains so easily vindicates us from the narrative that the Journal has imagined into existence.”

The multimillion-dollar blockchain Tezos has officially concluded its first round of voting for two competing system-wide upgrade proposals.

Having raised a record fundraising amount of $232 million in an initial coin offering (ICO) in 2017, the Tezos blockchain officially launched last September. It was valued at over $1 billion at the time and presently sits at roughly $360 million in market capitalization, according to CoinMarketCap.

Not without its fair share of internal governance conflicts, today marks the official close of the first round of voting on the Tezos blockchain. The two proposals dubbed ‘Athens A’ and ‘Athens B’ are the first of its kind to undergo Tezos’ protocol amendment procedures, designed to roll out system-wide upgrades otherwise known as hard forks in an entirely automated and self-governing fashion.

Having gathered a total of 25,855 community votes, Athens A won the majority of bids from bakers, the equivalent to miners on a traditional proof-of-work (PoW) blockchain, with a total of 18,181 votes.

But not all bakers on the Tezos blockchain voted. Over half of the baking community actually chose to abstain from the vote.

The Tezos Foundation – a non-profit entity in charge of funding development on the blockchain and controlling roughly one-third of total baking power – explained in a blog post: 

“The Tezos Foundation decided to remain neutral by not upvoting any proposals …. As noted, this contributes to the required quorum and further elevates the voices of other members of the Tezos community in this historic first vote.”

Proposed Changes

Athens A is set to introduce two different backwards-incompatible changes to the network.

First, computation limits per block – also called gas limits – will be increased on the Tezos blockchain to allow for larger transaction throughput. As founder of Cryptium Labs – the second most popular baker on Tezos – Awa Sun Yin explains in a blog post:

“If the gas limit is increased, it would enable more computation in blocks and operations, meaning that not only the maximum of transactions per block could increase, but also the complexity of the transactions.”

Second, roll sizes – which are aggregated Tezos tokens that bakers hold in order to be randomly selected in the block creation process – will be decreased from 10,000 XTZ to 8,000 XTZ.

As Jacob Arluck from the Tocqueville Group – a for-profit business development entity funded by the Tezos Foundation – explains in a blog post, the amendment would “incrementally” lower the barrier to entry for baking and subsequently, block creation.

Neither of these changes according to Yin are all that radical, but are rather geared toward “testing the actual on-chain governance process and setting a precedent for future protocol upgrades and proposals,” as stated in another blog post.

Agreeing with Yin that “the main focus of this first vote is to demonstrate the amendment procedure itself and what it can achieve,” CTO of Nomadic Labs – the developer group who put forth both Athens proposals – Benjamin Canou told CoinDesk:

“It is worth mentioning that even though not radical and super technical, the changes are far from trivial. Take the proposed increase to the gas limit, for instance. It is mostly the change of a constant but just being able to have the community decide on this change is already a breakthrough.”

Now that the proposal voting period has ended, bakers on Tezos will enter into a roughly three-week period of “exploration.”

Next steps

The Exploration Vote Period is the second of four different stages the Athens proposal will move through before eventual activation on the live Tezos blockchain. In the exploration phase, bakers vote on whether to advance Athens A to a testing period.

After gaining a supermajority of votes to do so – that is 80 percent out of 80 percent quorum – the Athens proposal will advance to another three week period where the Tezos blockchain actually spawns a new but temporary blockchain network.

Lasting for 48 hours, this secondary blockchain will act as a test network activating the proposed code in advance and ensuring its proper function.

Given a smooth test activation, the last phase – also called the “promotion period” – reviews the proposal in its entirety for a final time and allows for one more community vote. Altogether, the whole process takes roughly three months to come to a conclusion.

As the first in a series of proposed upgrades to the Tezos’ blockchain still to come, Athens A will likely see activation sometime in late May.

“We are mainly interested in seeing the actual protocol upgrade and the entire Tezos’ community using the Athens protocol from the winning proposal,” said Andrew Paulicek – founder of Tezos baking service HappyTezos – to CoinDesk.

And pointing towards still more radical changes on the blockchain yet to come after Athens, Paulicek noted that he was particularly keen on seeing the integration of zero-knowledge cryptography such as zk-SNARKs also voted on in coming months.

Affirming these plans, Canou told CoinDesk:

“We are indeed working on adding zero-knowledge cryptography via a future protocol upgrade proposal later this year. The exact shape that this integration will take is not yet decided.”

Greek statues via Shutterstock

A startup offering a new twist on token airdrops has raised $2 million from a group of notable investors, CoinDesk has learned.

The investment in governance startup Commonwealth was led by 1confirmation, Canaan Partners and former Polychain partner Ryan Zurrer.

Commonwealth’s new distribution approach, called a “lockdrop,” looks to maintain the high levels of interest that airdrops inspire, while adding a hurdle meant to attract the right investors.

As Commonwealth co-founder Dillon Chen explained to CoinDesk in an email:

“Early active community members matter a lot. They create norms.”

With companies such as OpenSea, BloxRoute, Coinbase and Veil in its portfolio, 1confirmation is a familiar name in crypto, but Canaan is newer.

Founded in 1987, Canaan made successful investments in Web 2.0 breakouts including Match.com, LendingClub and Kabam. Canaan’s other blockchain-related investments include gaming startup Forte, scaling project Skale Labs, Tari and Paxos.

With Commonwealth, these investors are betting that innovations in governance will differentiate blockchain investments going forward. People care more about something if they pay for it. But if they have to pay too much, one could also exclude potentially valuable community members.

To attain that influx of community interest, but dissuade those that just want crypto candy, Commonwealth came up with a new spin on the airdrop called a “lockdrop” for its EDG token, a governance and utility token for its first product, Edgeware.

“Ethereum holders can participate in the lockdrop, they will be helping to provide security on a new network, kind of like a sidechain,” Chen told CoinDesk.

Edgeware will be a network built to serve as a smart contract layer for Polkadot, a project of the Web3 Foundation and ethereum startup Parity. Best known as the project that lost over $150 million worth of ether, Polkadot intends to bring interoperability to the world’s blockchains.

Edgeware will make it possible to bring smart-contract functionality to that network while running alongside it (on what Polkadot refers to as a parachain). Of note: Edgeware could be one of many smart contract parachains, depending on the needs of different developers.

“I’m backing Edgeware because I’m really excited about crypto-governance,” Zurrer, currently the director of the Web3 Foundation, told CoinDesk in an email.

How it works

The genesis block of Edgeware will create 5 billion EDG tokens, 90 percent of which will be distributed to participants in the lockdrop. After that, new tokens will be emitted at a fixed rate with each block.

To get EDG, users will need to hold ether. The amount of EDG they get will depend on how much they have and how long they decide to hold it.

“The lockdrop represents a novel way for people to get involved at very low opportunity cost,” Zurrer told CoinDesk. “Since you get your ETH back at the end of your lock-up, you can obtain EDG and experiment in this new community without sacrificing your plans for your Ether.”

Users have four options: they can lock up for three months, six months or a year. They can also just signal the chain from their wallet, but that’s by far the least lucrative.

So, a user with one ETH that locks for three months will get one share, six months gets 1.1 shares and a year gets 1.4. Signaling the smart contract only earns 0.6 shares and there’s a delay – the signal option won’t be paid out for a year after network launch, whereas all those who actually locked will get EDG as soon as Edgeware goes live.

An example: Let’s imagine that instead of 5 billion tokens there will be 500. And let’s imagine only four people take part, each choosing a different option with 10 ETH each. That would mean one had six shares, another had 10, another had 11 and the last had 14.

So, in this example, at network launch, the person who locked for three months would get 121.95 EDG. The person who locked for six months would get 134.146 EDG. The person who went for a year would get 170.73 EDG. A year after launch, the person who had only signaled would get 73.17 EDG.

But if instead of four people there were 40, with the same amount of ETH each and the same distribution, then each person would get only a tenth of the EDG as that shown in the example above.

It’s impossible to know at this point how many people will participate and how many will join at which level, but the point here is to give interested ETH holders a hurdle to their free tokens – but not too much of a hurdle.

“We think asking people to do the lockdrop can get us those early active community members,” Commonwealth’s Chen wrote.

The lockdrop will open on June 1 and potential participants will have until June 15 to choose their level of participation. Chen tells us that the blockchain should go live right after the contract closes, meaning that those in the lockdrop won’t need to wait to claim their new tokens.

“This will be very interesting, and I’m sure more novel mechanisms will emerge from this project that are beneficial to the whole industry,” Zurrer wrote.

Built to rule

Edgeware is also ready-made for crypto’s inevitable controversies.

Once live, it will come with a native voting mechanism so that no one will need to build a solution when a major controversy arises (as the ethereum community had to do after the DAO was hacked).

“It solves the problem of an insecure vote,” Chen wrote.

Following launch, Commonwealth looks forward to several new projects built around Edgeware, including creating an encrypted email platform that sends between various blockchain addresses, an anonymous voting system, becoming a Polkadot parachain and facilitating decentralized autonomous organizations.

“We think Edgeware is complementary to both Ethereum and Polkadot,” Chen wrote, adding:

“The goal is to serve a more progressive segment of developers through WebAssembly contracts and instant finality. “

Update (March 20, 18:55 UTC): Added additional clarity regarding the Edgeware parachain and the parties involved in the Polkadot project.

Photo of 1confirmation founder Nick Tomaino at Token Summit II via CoinDesk archives

Canadian law firms Miller Thomson and Cox & Palmer have appointed a steering committee to help them represent potentially 115,000 former customers of failed cryptocurrency exchange QuadrigaCX.

In a court notice dated March 19 and posted online Wednesday, Miller Thomson announced that it had selected its Official Committee of Affected Users. The committee, made up of QuadrigaCX customers who are affected by the exchange’s collapse, will guide the law firm’s work as Quadriga and its court-appointed monitor, Ernst & Young (EY), try to recover the exchange’s $136 million worth of missing cryptocurrencies.

According to the legal filing, Parham Pakjou, David Ballagh, Eric Bachour, Ryan Kneer, Magdalena Gronowska, Eric Stevens and Nicolas Deziel have been appointed to the committee, with Richard Kagerer and Marian Drumea assigned as alternates. Both Nova Scotia Supreme Court Judge Michael Wood, who is overseeing the case, and EY have signed off on the committee and alternates.

Notably, Bachour has experience with another distressed exchange where funds went missing, as a former customer of the long-defunct Mt Gox, according to Tuesday’s filing:

“Bachour is also a creditor of Mt. Gox in 2013, and has direct experience with arbitrage and market trading in cryptocurrency. Through the Mt. Gox process he gained exposure to the legal side of bankruptcy and insolvency.”

Going forward, the committee will “provide input and direction” to Miller Thomson and Cox & Palmer. Specifically, they will be tasked with communicating or responding to communications from other Quadriga creditors, reviewing court documents and other materials filed by the representative counsel and potentially other tasks.

A total of 119 individuals applied to join the committee, with roughly 960 customers overall reaching out to the law firms to claim losses.

Image via Nova Scotia Supreme Court

“Hey are you set up with lightning? To send and receive lightning payments?”

The day I held the Lightning Torch was the day I learned how the lightning network works.

Living in Venezuela, the experimental payments network had somehow skipped my Twitter feed until I received the following message from renowned crypto advisor Jill Carlson.

She had the Torch and she wanted me to join.

I quickly came up to speed on the new game, and why it was attracting an increasing number of bitcoin users. (You can read here how it’s grown from a simple Twitter experiment to a payment that has now reached participants in over 50 countries.)

The Lightning Network Torch – better known by the Twitter hashtag #LNTorch – is a symbolic transaction, meant to teach how this new form of payment lets you send bitcoin faster and without paying fees on the blockchain every time.

Being a non-technological person, this didn’t promise to be fun at all. I accepted anyways. (I was also lucky enough to have Carlson as a technical guide through the process.)

Glitch in the Torch

Holding the Torch, however, is the easy part.

To receive the payment, I first needed to download a wallet that worked with Lightning Network (my regular bitcoin wallet wouldn’t do).

In my case, I chose BlueWallet. This allowed me to accept an invoice for the next amount to be paid in the chain (eg. 3,390,000 satoshis), respond to the tweet of the person announcing that holds the torch and wait to be chosen.

The next part wasn’t so simple. Something to take into account is that funding a Lightning wallet can take hours.

While the payment itself is very quick, it took Jill two hours to send the funds to my lightning wallet and another six hours for me to transfer them to the next person.

[AUTHOR’S NOTE: Lightning Labs CEO Elizabeth Stark, whose company is building a software implementation for lightning, says the delay is due to a bug in Bluewallet’s wallet software.]

The payment works when two users create a payment channel on the bitcoin network, and once the channel is created (which can take a while), the network routes the payment from one node to another. This makes the transactions instant on the lightning network layer, but it takes a long while to get there.

While transactions fees are supposed to be practically nonexistent, in reality, various users have complained about losing money while sending transactions using BlueWallet, one of the most commonly used wallets with lightning network integrated.

And in order to hold the torch and pass it on, one must, of course, give away some money. A very low fraction of 0.0001 BTC that will be added to the trust chain. In my case, I was advised to have enough money in the BlueWallet to pay unexpected fees. I was to receive 0.0392 BTC and pay 0.0393 BTC to the next holder.

Even though I didn’t lose money, I came close to it since the application insisted that I lacked enough funds. The lightning fees are supposed to be below 100 satoshis, and I had an extra 300,000 satoshis available to make the payment.

When asked about this error, the BlueWallet team’s response was that the service still has bugs and that users must remember that it’s still in its beta phase.

For someone who has never used the Lightning Network before, this was a quite contrasting experience with more established bitcoin wallets, and definitely more stressful.

The worst part was the uncertainty of whether the funds had been sent properly or if I had “dropped” the torch!

Passing the Payment

Luckily, this didn’t happen.

Not only did the payment go smoothly, but Jill and I were able to send a message about how bitcoin as a technology that can transcend borders.

I felt a sense of responsibility.

This was a platform to shine a light on Venezuela’s situation indeed. That’s why I passed the torch to the project BitBros, a team from Caracas that survived the blackout with an active node using a 12V motorcycle battery.

Since then, the game has helped to spread awareness of projects like @btcven, a Venezuelan initiative that has received help for their fundraising through the Lightning Torch.

As a result, we’re all listed alongside Andreas Antonopoulos, Erik Voorhees and Meltem Demirors on an official website set up by Lightning Torch creator @Hodlnaut that tracks how the payment has been passed.

For now, the count keeps growing. The Lightning Torch has reached to 250 participants in 53 countries, going from 0.0001 BTC to 0.0395 BTC at press time.

But the torch won’t burn forever, as it’s creator assured. “There are only 33 spots left before we reach the limit of 4.29 million satoshi. I expect it to happen within a couple of weeks,” HODLnaut told CoinDesk.

Now that my turn has passed, the overall experience left me with a sense of belonging with the bitcoin community. It was an inspiration to keep learning more about the blockchain world.

Thanks again, Jill and all those building lightning.

Image via TakeTheTorch.com

Cryptopia, the cryptocurrency exchange hit by a major hack in mid-January, has just announced that it’s restarted trading services.

The New Zealand-based exchange posted a notice on Twitter Wednesday, saying:

“We have resumed trading on 40 trade pairs that we have quantified as secure. We will continue to expand this list as we clear more coins.”

The company is providing a full list of the available pairs on its support pages.

On Jan. 16, Cryptopia went offline stating that it “suffered a security breach which resulted in significant losses.” Since then, the firm has largely been quiet about the hack as it sought the help of local police to try and find the attackers and the missing funds.

On Feb. 27, Cryptopia disclosed the scale of the likely losses from the breach, saying:  “We are continuing to work on assessing the impact incurred as a result of the hack in January. Currently, we have calculated that worst case 9.4% of our total holdings was stolen.”

The firm has not yet, however, put an official dollar figure on the loss or indicated which cryptocurrencies were affected. A blockchain data analytics firm estimated after the attack that as much as $16 million in ether and ERC-20 tokens could have lost.

From March 4, Cryptopia allowed users to access the site in read-only mode, and has since allowed very limited functionality, such as trade and standing order cancellations. It also said in a letter to users on March 17 that it is preparing to reimburse users who lost funds in the hack.

While it has restarted trading in some cryptocurrencies, the company said it still has issues with its fiat services.

On its news page, Cryptopia said today that New Zealand dollar deposits and withdrawals are “currently suspended due to issues with banking service provision for NZDT.”

It continued:

“We are working closely with our banking partners and hope to resume NZ dollar deposit and withdrawal services as soon as possible. Finding a solution is a high priority and we will notify our community as soon as there are further developments.”

Open sign image via Shutterstock