Bitmain Adds 5 New Billionaires to China’s Wealthiest List

China’s latest rich list for 2018 sees five billionaires joining China’s wealthiest for the first time thanks to Bitmain’s market lead on cryptocurrency mining. The Hurun Research Institute 2018 Hurun Rich List now includes Bitmain’s founders, CEO and Vice President. The five have a combined wealth equalling nearly $9 billion USD. Bitmain Billionaires Though Jihan Wu is the name most associated with Bitcoin, co-founder Ketuan Zhan is the largest shareholder of Bitmain. Wu owns 20.25

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China’s Central Bank Seeks Digital Currency Specialists

The Chinese central bank has opened four job positions that require crypto-related skills, shortly after a report on the advantages of a yuan-backed stable coin.

The Chinese central bank, the People’s Bank of China (PBoC), has opened four positions for crypto-related professionals, according to a document published Wednesday, Oct. 10 on the bank’s website.

Per the paper, PBoC is seeking two engineers at their Digital Money Institute with experience in blockchain and cryptography, security, and chip design. The bank wants the engineers to develop a secure big data platform and a chip processor that would allow crypto transactions.

The engineers will be responsible for digital currency related software systems, encryption technology and security models, as well as transaction terminal chip technology research and development.

PBoc is also seeking experts in economic law and finance who will be responsible for legal research, the analysis of economic mechanisms, risk management, and policy research on “legal digital currency.”

The move comes shortly after an op-ed published by CN Finance — a local finance journal affiliated with the PBoC — where the bank’s experts describe the recently launched USD-backed stablecoins that they claim could negatively influence other fiats, such as the yuan. The experts further stated that China should evaluate launching its own yuan-backed stablecoin while keeping the current ban on cryptocurrencies.

The Chinese government first opposed cryptocurrencies back in 2017, when all of the country’s cryptocurrency exchanges were closed and Initial Coin Offerings (ICO) banned. Later PBoC repeatedly issued warnings on risks of crypto trading.

After the ban, China has focused on blockchain solutions. This autumn PBoC announced the launch of a blockchain trading and finance platform in Shenzhen. The network will also spread to Guangdong, Hong Kong, and the Macau Bay Area and allows cross-border trading. An official blockchain pilot zone was later established in the Hainan province within a dedicated tech park.

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Bitcoin Miner Imprisoned for Stealing Power from Trains

A Chinese bitcoin miner from Shanxi province has been jailed after admitting to the theft of 104,000 yuan ($15,000) worth of electricity from a train network.  Cheap Day Return Obviously, stealing that much power would take an awful lot of train travel. No matter how many seats with power sockets you reserved, the ticket price alone would far outweigh the potential return. So Xu Xinghua tapped directly into the Datong train network’s power grid to

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Annual List of China’s Richest Includes Crypto Entrepreneurs

China’s Hurun Research Institute has released a catalogue of the richest individuals in the country, listing cryptocurrency entrepreneurs among others.

The annual Hurun China Rich List, a catalogue of individuals in the country with a net worth over 2 billion yuan ($209 million), has listed several crypto entrepreneurs among China’s financial elite, according to a release published Oct. 10.

The Hurun Research Institute released the 2018 Hurun China Rich List of the richest individuals in the country, with at least 13 entrepreneurs whose business is related to cryptocurrency mining and trading.

The ranking includes such industry players as Micree Zhan Ketuan, co-founder of computer chip manufacturer of and software firm Bitmain Technologies, in the top 100 richest people in China, with an estimated wealth of 29.5 billion yuan ($2.4 billion). The next richest crypto entrepreneur is Bitmain co-founder Wu Jihan, taking the 204th place, with a personal worth of 16.5 billion yuan ($2.3 billion).

Zhao Changpeng, the founder of the largest cryptocurrency exchange Binance, was ranked 230th, with an estimated wealth of 15 billion yuan ($2.1 billion). Zhao is followed by OKCoin crypto exchange founder Star Xu and founder of Huobi Li Lin.

Zhang Nangeng, founder of computer hardware manufacturer Canaan Creative, and Hu Dong, founder of Bitcoin (BTC) mining machine producer Ebang International Holdings are listed in the Hurun report as well.

The list also includes BTC whale and serial investor Li Xiaolai, with an estimated wealth of 7 billion yuan ($1 billion). Recently, Li said that he will no longer invest in future blockchain projects. “So, if you see ‘Li Xiaolai’ associated with any project (I have been associated with countless projects without my knowledge, 99% is not an exaggeration), just ignore it,” Li warned.

In recent months, Bitmain has been making headlines, claiming to have the participation of high-profile investors like Chinese tech conglomerate Tencent, investment firm DST Global, and Japan’s SoftBank, in the firm’s pre-IPO in August. The companies have subsequently denied their involvement. A Softbank official told Cointelegraph that “neither the SoftBank Group Corp. nor the SoftBank Vision Fund were in any way involved in the deal.”

Singapore-based investment company Temasek also officially denied its participation in Bitmain’s IPO, stating that “Temasek is not an investor in Bitmain, and has never had discussions with, or an investment in Bitmain. News reports about our involvement in their IPO are false.” DST Global also confirmed that it had “never invested” in Bitmain’s pre-IPO.

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China Should Consider Launching its Own Stablecoin, Central Bank Expert Says in Op-Ed

An expert from the People’s Bank of China thinks the country has to study USD-backed cryptocurrencies and to launch its own yuan-backed stablecoin.

The Chinese government should consider launching its own yuan-backed stablecoin despite the current ban on cryptocurrencies, an op-ed in Chinese financial journal CN Finance reports Tuesday, Oct. 9.

An expert from the People’s Bank of China (PBoC), Li Liangsong, and professor of Fudan University Wang Huaqing wrote an article called “Analysis of Digital Stable Coins” for CN Finance — a bimonthly journal affiliated with the PBoC.

In the opinion piece, the authors provide a brief review of USD-backed coins, such as Tether, the Gemini dollar, and Paxos Standard. The researchers expect them to increase the role of dollar on a global stage and to suppress other fiats, with the yuan among them.

The authors suggested that China should analyze other companies’ experience and “double its efforts” to create a local stablecoin. However, other digital currencies have to stay prohibited in China, they stated.

Stablecoins have recently seen a boom with two USD-backed coins launching in the U.S. in September.

The Winklevoss twins, founders of crypto trading platform Gemini, acquired permission from New York regulators to release their own stablecoin, the Gemini dollar. Later, Circle — through a consortium that includes Bitmainannounced it is launching a USD-backed digital token dubbed the “USD Coin.”

Shortly after, the audit giant PricewaterhouseCoopers (PwC) partnered with decentralized lending platform Cred to offer their expertise in launching its USD-backed coin, especially in terms of transparency and “substantiation,”

The Chinese government first started its anti-crypto campaign in 2017 by closing all of the country’s cryptocurrency exchanges and banning Initial Coin Offerings (ICO). Following the move, the PBoC has repeatedly warned citizens about the risks of crypto trading.

Despite the crypto ban, the country has actively been exploring blockchain solutions. Earlier this autumn, the PBoC announced that its blockchain trading and finance platform is launching in Shenzhen. The ecosystem is also being tested in Guangdong, Hong Kong, and the Macau Bay Area and is being developed for cross-border trading. Later, the country’s official blockchain pilot zone was established in the Hainan province within a dedicated tech park.

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Chinese Government May Wield Power to Destroy Bitcoin

Chinese Government May Wield Power to Destroy Bitcoin

China has played a critical role in the crypto markets for several years now. A new paper written by academics from Princeton University and Florida International University suggests that China’s growing influence over Bitcoin’s key infrastructure has given the Chinese government the ability to heavily shape, or even destroy, Bitcoin. Bitcoin (BTC) was designed to be impervious to any form of centralized control. Bitcoin’s core infrastructure was built to give all participants in the system a

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Government Tracking of Crypto Is Growing, But There Are Ways to Avoid It

More governments are tracking crypto, but ways to stay anonymous remain.

Much noise has been made about the untraceable qualities of Bitcoin and other cryptocurrencies. Bitcoin “can be used to buy merchandise anonymously” said early primers on crypto, it offers users the kind of financial privacy that was previously available only from a “Swiss bank account,” say more recent commentators. And given its ability to provide people with a layer of anonymity and privacy, it has been smeared by politicians, experts and mainstream journalists alike as a hiding place for almost any hacker, drug dealer, gang member, terrorist or despot you could possibly name (even if cash is still the preferred financial medium of such personae non gratae).

It’s therefore no wonder that, for several years, governments have been feverishly trying to trace Bitcoin’s circulation, as well as that of other digital currencies. And despite the popular reputation of most cryptocurrencies as anonymous, they’ve been aided in this pursuit by the fact that most cryptos are not anonymous, but rather pseudonymous. In other words, by linking transactions to fixed wallet addresses, and by keeping a public record of every single transaction ever made on their chains, most popular cryptocurrencies provide national governments with an almost perfect means of keeping tabs on our financial activity.

However, while many governments have begun capitalizing on this very convenient affordance by building systems that compile transaction data and scraped private info into a single database, most have only just begun moving in this direction. And more importantly, there are a number of privacy coins – Monero being the most prominent  – that don’t offer a public record linking transactions to wallets, while there are also mixing tools for making the transactions of non-privacy coins private. As such, there are still ways to remain anonymous in crypto for those who want to keep a low profile, despite the best efforts of governments in the US, Russia, Japan, and elsewhere.

Japan and Russia

Japan and Russia

As the most recent example of government crypto monitoring, the Japanese National Police Agency (NPA) announced plans to implement a system that can reportedly “track” cryptocurrency transactions within Japan. While specific technical details are scarce, the software is being developed by an unnamed private company and will cost the NPA around $315,000 next year to run. In particular, its main function will be to trace transactions reported to it as ‘suspicious’, linking them together into a visualization that will, in theory, enable it to pinpoint the sources and destinations of illicit money.

For the most part, it will receive its reports of suspicious activity from Japanese crypto-exchanges, which ever since the May introduction (by the Financial Services Agency) of anti-money laundering (AML) legislation have been sending it intelligence on potentially illegal transactions and the accounts associated with them. Indeed, this reporting is precisely what makes a ‘transaction-tracking system’ possible, rather than the invention of some novel cryptographic technology capable of breaking through the pseudonymity/anonymity of most cryptocurrencies. Simply, exchanges are being legally required to follow strict know-your-customer (KYC) policies, which enable them to link real-world identities to addresses and to transactions recorded on public blockchains. And given that they’re supplying this info to the NPA, all the NPA will really be doing with their system is feeding such info into a database and creating visualizations of the flow of crypto.

What this means is that such a system isn’t likely to have much direct application to anyone who circumvents (regulated) exchanges when receiving and sending crypto. That said, even if certain users stay away from Japanese exchanges they could still be linked to illicit crypto if said crypto has passed through an exchange and already raised suspicions. Either way, another area to which the system isn’t likely to have much direct application are privacy-enabling coins such as Monero, Zcash and Dash, since rather than attempting to track such coins the Japanese authorities have merely decided to ban exchanges from carrying them.

A similar story is currently emerging in Russia, where the Federal Financial Monitoring Service (Rosfinmonitoring) has contracted for a system that will collate various sources of information regarding suspects in finance-related crimes. As reported by the BBC Russia service, the system will be used to create profiles for suspects, to which the authorities then add whatever relevant info they can gleam about him or her: phone numbers, bank card details, physical addresses, and crypto wallet addresses. Once again, the system hasn’t been designed specifically to compromise the cryptography of Bitcoin or any other crypto, but rather seeks to simply add wallet information – where available – to any other data Rosfinmonitoring has on a suspect.

By doing this, the Russian authorities clearly hope to prevent suspects from laundering any illicitly gained money via crypto, while they also assert that they intend to stop crypto being used directly for illegal purposes. “Because of their anonymity and the inability to trace them,” German Klimenko – an ex-advisor to Vladimir Putin on internet development (and head of the cryptocurrency group at the Russian Chamber of Commerce and Industry) – told the BBC. “Cryptocurrency is used in grey areas, in the dark web, for buying weapons, drugs, or violent videos. Lawmakers of many countries are wary of this phenomenon: this was confirmed by the analysis that we conducted under orders from the president [Putin].”

While Russia hasn’t introduced regulations requiring exchanges to uphold strict AML and KYC policies, the State Duma is in the process of negotiating a digital assets bill that would do just that. And once this bill has passed, Russian authorities will – like their Japanese counterparts – have access to info on the identities of wallet holders. As a result, the Rosfinmonitoring service will be able to enter this information in the soon-to-be-launched system (coming at the end of 2018), which will enable it to link transactions, wallets, and identities together.

But because this system will be tapping into crypto-exchange records rather than novel ‘crypto-hacking’ technology, it’s likely that it won’t apply to all cryptocurrencies and all cryptocurrency users. Some experts even believe that it will have a largely counterproductive effect, forcing many cryptocurrencies and their users to become more untraceable.

“If you look at the entire volume of laundered funds, the share that is laundered through cryptocurrency is very small,” Anton Merkurov – an advisor with US-based the Free Russia Foundation – said. “Let’s say the turnover of the local exchange is about one billion rubles [around $14.7 million] a week. This, in fact, is not very much. Instead of catching the proverbial Colonel Zakharchenko [a former anti-corruption officer who was caught with around $140 million in bribe money in 2016], authorities are trying to find a microbe under a microscope in a drop of water. This should not be a priority. And most importantly, start pressing there and opposition will begin, you will think up real tools for laundering.”

The United States

The United States

While the systems being rolled out by Japan and Russia largely depend on cooperation from crypto-exchanges and on piecing together disparate sources of information, there are indications that some governments at least have taken a more direct approach to identifying crypto users.

The US, to take the most notable – and disconcerting – example, has developed a covert piece of technology that can actually extract raw internet data from fiber-optic cables in order to identify the IP addresses and IDs of those sending and receiving Bitcoin. According to documents obtained by whistleblower Edward Snowden in 2013 and published by the Intercept in March 2018, the technology in question is a program developed by the National Security Agency (NSA) and known as OAKSTAR. Masquerading as a piece of virtual private network (VPN) and downloaded by some 16,000 users in such nations as China and Iran, the program instead siphons data from an “unspecified ‘foreign’ fiber cable site,” according to the Intercept.

Using this data, the NSA can then extract such information from Bitcoin users as their password information, their internet browsing activity, and their MAC address, while certain whistle-blown docs also discuss extracting users’ internet addresses, timestamps, and network ports. Effectively, OAKSTAR can be used to gather much more than the information necessary to identify someone and link them to specific Bitcoin addresses and transactions, and it can do so without having to rely on crypto-exchanges.

This is a big blow for Bitcoin privacy. As Cornell University professor Emin Gün Sirer told the Intercept:

“People who are privacy conscious will switch to privacy-oriented coins […] when the adversary model involves the NSA, the pseudonymity disappears. You should really lower your expectations of privacy on this network.”

Similarly, Matthew Green – an assistant prof. at Johns Hopkins University Information Security Institute (and a key Zcash developer) – explained to the Intercept that the NSA’s exploits are “bad news for privacy, because it means that in addition to the really hard problem of making [crypto] transactions private […] you also have to make sure all the network connections [are private].”

As alarming as OAKSTAR and the activity surrounding it are, no new information has emerged recently to indicate that the NSA has extended its Bitcoin-tracking endeavors to other cryptocurrencies. There’s also the fact that its ability to link certain people with Bitcoin wallets is predicated on these people unwittingly downloading a piece of software that secretly extracts their internet data (while purporting to provide some other service). As a result, if users stick to VPN packages (and other pieces of software) they know and trust, it’s likely they will avoid the NSA’s long claws.

This reassurance aside, there is still the predictable reality that the United States government has been seeking user data from cryptocurrency exchanges, and has been doing so for longer than either the Japanese or Russian governments. In November 2016, for instance, it filed a legal summons that required Coinbase to provide the Inland Revenue Service (IRS) with the identities of an unspecified number of individuals associated with a number of cryptocurrency wallets. As Cointelegraph reported at the time, this summons was significant not so much in itself, but because it indicated that the IRS had been able to track certain wallets to an extent sufficient to determine that they’d been involved in the violation of tax legislation. Similarly, it also indicated that the IRS had been able to determine that the wallets were attached to Coinbase.

While the IRS unsurprisingly hasn’t divulged how it was able to track these wallets, a 2015 document leaked to the Daily Beast in 2017 revealed that it awarded a contract to Chainalysis, a Switzerland-based “blockchain intelligence” provider that monitors cryptocurrencies such as Bitcoin for compliance reasons. As Cointelegraph reported at the time, Chainalysis uses “data scraped from public forums, leaked data sources including dark web, exchange deposits and withdrawals to tag and identify transactions.” It attempts to combine what’s made publicly available on blockchains with personal info unthinkingly/carelessly left by crypto users on the web. It runs, therefore, another system that is less about cryptographically penetrating blockchains and more about simply putting together all the disparate threads of info strewn across the Internet.

And even though the IRS hasn’t explicitly acknowledged its employment of Chainalysis or any other service, it’s also interesting to note that past instances where an agency of the federal US government has succeeded in tracking crypto users have potentially involved input from the NSA. In October 2013, Ross Ulbricht was arrested by FBI agents in San Francisco and then charged (almost a year later) with conspiracy to traffic narcotics, money laundering, and computer hacking. During his trial, he claimed his prosecution violated the fourth amendment (i.e. right to protection against unwarranted searches), since the only way the FBI could have identified him was through the illegal help of the NSA and its data-gathering trickery. Needless to say, this defense didn’t exactly work, yet the Intercept noted that the NSA’s OAKSTAR project got under way six months before Ulbricht was arrested. More interestingly, the website also published classified documents in November 2017 revealing that the NSA had secretly helped the FBI secure other convictions in the past.

Whatever the truth behind Ulbricht’s conviction, it’s clear that the NSA has had the ability to covertly identify Bitcoin users for over five years, while it’s also true that other US agencies have been tracking crypto transactions (using undisclosed means). As such, it’s a safe bet to say that American crypto users should probably think carefully before engaging in anything Uncle Sam wouldn’t condone.

China, India and beyond

China and India

It would appear that few nations can match the US in the reach and power of their crypto-tracking activities. However, this isn’t stopping many from trying. In China, reports emerged in March that the Public Information Network Security Supervision (PINSS) agency has been monitoring foreign crypto-exchanges that serve Chinese customers. Even though the government has banned domestic exchanges and trading on foreign alternatives, this hasn’t stopped every Chinese trader from seeking out crypto abroad. Because of this, PINSS has been ‘monitoring’ foreign exchanges so as to “prevent illegal money laundering, pyramid schemes [and] fraud,” according to Chinese news outlet Yicai.

While Yicai could confirm via sources at PINSS that such monitoring had been underways since September 2017, it couldn’t explain just what kind of monitoring was being pursued, or whether the Chinese government was actively trying to identify individuals trading in crypto. Still, whatever the extent of the surveillance involved, the knowledge that other nations are tracking crypto would indicate that Chinese traders should also add themselves to the growing list of ‘people who ought to be careful.’

So too should Indian traders, who in January may or may not have learned that their government was keeping tabs on them for tax purposes. Actually, chances are they would have learned about this, since the Indian tax department sent notices to “tens of thousands” of investors (according to Reuters), after having conducted national surveys and having obtained user data from nine Indian exchanges. This provided a clear signal that the government was indeed tracking cryptocurrency transactions, something which it had begun contemplating in July 2017, when India’s Supreme Court demanded information from it and the Reserve Bank of India on the steps being taken to ensure that crypto isn’t being used for illicit purposes.

As reported in July by Indian news website LiveMint, the system the government was considering, would involve cooperation between the central bank, the Securities and Exchange Board of India (SEBI), and India’s intelligence agencies. However, as the involvement of India’s crypto-exchanges in January’s tax notices reveals, it’s once again likely that the system currently rests on input from these exchanges, rather than on technology comparable to the NSA’s, for instance.

Other than the prominent examples of Japan, Russian, the US, China and India, there are few other cases of national governments going public with (or being known for) crypto-tracking systems. Nonetheless, even if there’s currently no public record of other governments investigating the potential for tracking systems, it’s highly probable that those governments with a significant interest in crypto have contemplated a tracking system in one form or another.

UK and EU

For example, the UK and EU governments jointly announced in December 2017 that they’re planning a “crackdown” on crypto-enabled money laundering and tax evasion. UK economic secretary to the Treasury Stephen Barclay said in last October:

“The UK government is currently negotiating amendments to the anti-money-laundering directive that will bring virtual currency exchange platforms and custodian wallet providers into anti-money laundering and counter-terrorist financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas.”

While this doesn’t confirm tracking, it would at least imply it, since the ability to enforce AML legislation entails that governmental bodies and departments should have some means of not only detecting when someone is earning crypto that needs to be taxed, but also determining just who that person is. Hence, UK and EU authorities need to have some kind of tracking system in place, otherwise their threats of ‘cracking down’ on money laundering and the like will equate to only so much hot air.

And in the future, it may become increasingly possible for them or any other government, regardless of technological development, to carry through with such threats. In April, a corporate giant none other than Amazon, received a patent for a “streaming data marketplace” that would permit the combining of multiple data sources, thereby enabling the real-time tracking of cryptocurrency transactions and the users involved. As the text of the patent makes clear, this technology could potentially be offered to governments, who would be able to link crypto addresses to official IDs:

“The electronic retailers may combine the shipping address with the bitcoin transaction data to create correlated data and republish the combined data as a combined data stream. A group of telecommunications providers may subscribe downstream to the combined data stream and be able to correlate the IP (Internet Protocol) addresses of the transactions to countries of origin. Government agencies may be able to subscribe downstream and correlate tax transaction data to help identify transaction participants.”

Given the arrival of such technology (and the current existence of such firms as Chainalysis), it’s only a matter of time before transactions involving Bitcoin, Ethereum or any other non-privacy cryptocurrency will be systematically de-anonymized. It will take some time, particularly given that Amazon’s patent requires its users (e.g. retailers and telecoms providers) to combine separate pieces of data in order to create correlations. Still, it’s becoming increasingly apparent that things are moving in only one direction when it comes to the privacy and anonymity of crypto.

Privacy coins

And in light of this direction, anyone wanting to keep their chances of being identified as low as possible is advised to migrate to one of the so-called privacy coins. Monero is the most well-known of these, having entered into 10 most valuable cryptocurrencies by market cap since its initial launch in April 2014. More than anything else, what distinguishes it from the likes of Bitcoin is its CryptoNight proof-of-work algorithm, which uses a mix of ring signatures and stealth addresses to not only bury the sender’s wallet address in those of multiple other users, but also to hide the precise amount being transferred.

It’s because of this that the cryptocurrency has proven popular with those who’ve needed to evade government power (for whatever reason), and such is Monero’s apparent ability in preserving anonymity that its price increased by around 2,883% between Jan. 1 and Dec. 31, 2017 (from $12.3 to $358). By contrast, Bitcoin’s 2017 growth rate was a slightly less impressive 1,357%.

2,883% may be impressive, but it pales in comparison to the 9,000% growth enjoyed in 2017 by Dash, another altcoin with certain privacy-enhancing qualities. The 13th most valuable cryptocurrency by total market cap, its PrivateSend feature mixes addresses so as to obscure the origins and destinations of transactions, in the process making it noticeably harder for any interested authority to put the pieces together.

This may be a part of the reason why the currency has took off so spectacularly in Venezuela, where the government cracked down on such cryptocurrencies, such as Bitcoin, in a big way last year (before showing favoritism towards its own oil-backed Petro coin). Venezuelans also turned increasingly to Zcash during this period, which has become the 21st biggest cryptocurrency since launching in October 2016. Building upon Bitcoin Core’s architecture and using zero-knowledge proofs, it keeps the sender and receiver’s pseudonyms private, while also doing the same for the quantity being transacted.

Therefore, a choice of privacy coins is available for anyone worried about the growing ability of governments to track crypto transactions. And even if a concerned crypto user holds no Monero, Dash, or Zcash, they can still take advantage of the various mixing services available for non-privacy coins. For example, there are anonymization protocols available that, much like the features available via Monero and Zcash, enables senders and receivers of Bitcoin to mix their transactions with those of other senders and receivers, making it very difficult to disentangle the multiple threads involved. Such protocols include the likes of CoinJoin, Dark Wallet, bestmixer.io, SharedCoin, and CoinSwap, all of which also provide holders of Bitcoin and other cryptos with the ability to anonymize their transactions.

So even though cryptocurrency tracking is increasing, crypto investors and holders needn’t be overly fearful of government surveillance. For one, most of the tracking systems in use or which are being developed rely on input from crypto-exchanges, while others (such as those provided by Chainalysis) depend on scavenging data that users may have left carelessly throughout the web. Meanwhile, more direct and intrusive methods being honed by the NSA also rely on crypto users unknowingly compromising their internet connections, something which couldn’t be counted on for monitoring all cryptocurrency transactions en masse. This is why, in addition to such privacy coins as Monero and Zcash, privacy-conscious crypto holders shouldn’t be too concerned, since there are ways of remaining anonymous for those who want it bad enough.

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Corrupt Governance? What We Know About Recent EOS Scandal

EOS found itself in hot water after allegations against its governance arose.

This week, EOS found itself in hot water after allegations arose that a major part of its blockchain governnance, led by Chinese crypto exchange Huobi may be involved in a corruption scheme. EOS’ parent company and Huobi have issued public statements since these allegations, but refrained from admitting or denying the charges.

What is EOS?

EOS.io is a blockchain-powered smart contracts protocol for the development, hosting, and execution of decentralized applications (dApps). It aims to operate in a way similar to the web-based applications and retains similar structural principles, which makes it comparable to Google’s Play Store or Apple’s App Store.

EOS.io is supported by the native cryptocurrency EOS, currently the fifth largest crypto by total market cap. Those tokens could be staked for using network resources either for personal use or leased out for developers use — as per the project’s whitepaper, dApp developers can build their product on the top of the EOS.io protocol and make use of the servers, bandwidth and computational power of EOS itself, as those resources are distributed equally among EOS cryptocurrency holders. Hence, EOS.io attempts to represent a decentralized alternative to cloud hosting services.

The EOS.io platform was launched in June 2018 as open-source software. Its first test nets and the original whitepaper emerged earlier in 2017. The platform was developed by block.one, a startup registered in the Cayman Islands and lead by Daniel Larimer and Brendan Blumer.

EOS holds the absolute record in terms of funds raised during initial coin offerings (ICOs): it has managed to gather around $4.1 billion worth of investments, or about 7.12 million Ethereum, after fundraising for nearly a year. Its predecessor, messenger Telegram, has raised less than half this much – $1.7 billion.

Who are ‘block producers’?

EOS employs a consensus model called Delegated Proof-of-Stake (DPOS). That means that its investors are rewarded with voting power and decide who gets to mine the EOS blockchain.

Indeed, the EOS network is constantly governed by a total of 21 block producers (BPs). Those are decentralized bodies who, well, produce the blocks of EOS blockchain — just like miners do within the Bitcoin’s (BTC) blockchain. In reward, BPs earn EOS tokens produced by inflation. The total inflation of EOS tokens is reportedly 5 percent, only 1 percent of which goes to BPs.

Whilst BPs have the option to keep the tokens, they are also encouraged to reinvest them “to create better infrastructure growth, better community and financial support, along with better education on the EOS network and EOS dApps”, as blockchain analyst and tool builder Ben Sigman explains in a Medium post.

What does ‘mutual voting’ mean? Nuances of blockchain governance

BPs are elected through the voting system since June 2018, when the mainnet went online. EOS’s total supply is set at 1,000,000,000 (1 billion), and the EOS main platform was fully activated, or handed over to the community, when 15 percent of total circulating supply had voted. That occured on June 14, when 21 EOS block producers primarily from the US, China, and South America came ahead in the voting race. The voting process with EOS is constant — that means that the top 21 is fluid and BP candidates who earn enough votes can replace the BPs in power any minute.

The supposedly democratic voting system soon showed its flaws: for instance, cryptocurrency exchange Bitfinex secured its position as a block producer allegedly due to the votes of just few EOS holders, one of which accounted for 27 percent of all votes for Bitfinex, as community members pointed out on Reddit.

‘Mutual voting’, in turn, would imply a process when block producers are voting for each other in order to remain in power and keep their passive income – according to some estimations, top three EOS BPs earn around 1000 EOS per day. That process violates Article IV of the current EOS Constitution titled “No Vote Buying”, which states the following:

“No Member shall offer nor accept anything of value in exchange for a vote of any type, nor shall any Member unduly influence the vote of another.”

Moreover, the EOS voting system seems to be designed for casual users who vote with their private wallets, whilst investors who have their EOS tokens on exchanges’ wallets appear to be stripped off of their voting rights — instead, they are passed over to the exchanges who hold their tokens. While Bitfinex has attempted to introduce a scheme that would allow its customers holding EOS to participate in the voting, other exchanges have remained inactive on the matter.

This problem was recently discussed by members of Chinese EOS Community, who argued whether exchanges should be allowed to vote with customer funds. As per the meeting notes posted in English, “general consensus was mixed between yes and no, but favored yes with the caveat that all voter participation must be increased [… and] exchanges should be expected to provide greater transparency to their voting selection process”.

The allegations: geopolitical conspiracy

The allegations were originally raised by Eosone, a non-profit supervisor of BPs and builder of EOS ecosystem who regularly reports on BPs’ activities. On September 26, Eosone posted what it claims was an Excel spreadsheet of the large Chinese cryptocurrency exchange Huobi, currently the fifth largest exchange by reported volume globally per Coinmarketcap, that was allegedly leaked by its former employee Shi Feifei.

The supposedly leaked document includes four tables with titles “node mutual voting table” and “node income statement” among them. Eosone implied that chief EOS BPs, including Huobi, which is bthe fourth largest BP in current producer ranking, according to EOS Titan data, were involved in mutual voting along with pay-offs.

According to the explanation of Twitter user and EOS investor Maple Leaf Capital, who summarized the document’s findings in English, Huobi voted for 20 other BPs, and 16 of them voted back for Huobi. Moreover, Huobi allegedly voted for three other BPs in exchange for significant paybacks:

“Huobi votes for eosiosg11111, cochainworld, and eospaceioeos in exchange for 170, 150, and 50 percent of the returns respectively…”

Maple Leaf Capital also argued that such agreements could “increasingly compromise the integrity of the network,” noting that at least 12 of 21 major BPs were controlled by Chinese entities:

“This file documents the collusion, mutual voting, and pay-offs that occur amongst the Chinese BP community.”

Thus, Maple Leaf Capital essentially accused a number of Chinese companies of forming a cartel to collude together, adding:

“I view such action with utter disgust, and there is a reason why our Mapleleafcap proxy only votes for a very selective [sic] group of Chinese BPs.”

Furthermore, the Twitter user linked the alleged mutual voting with the recent promotion of Huobi Pool Token (HPT,) which shared tokens with users in exchange for locking their EOS on Huobi. The Chinese crypto exchange might then capitalize those votes, Maple Leaf concluded.

EOS response: neither confirmed nor denied

On October 1, Block.one’s CEO Brendan Blumer published a statement addressing EOS public blockchain governance problem. In it, he neither confirmed nor denied the allegations, stating his company is “aware of some unverified claims regarding irregular block producer voting, and the subsequent denials of those claims”.

Without specifying which “denials” of allegations he referred to, Blumer stated that EOS will continue to “ensure a free and democratic election process and […] vote with other holders to reinforce the integrity of this process”:

“We continue working on our potential involvement with the goal of empowering the intent of the greater community through a transparent process that incorporates community feedback.”

Huobi response: investigation is required

On October 2, Huobi responded to the accusations. In a brief statement, the exchange said an investigation into the allegations was “still ongoing”:

“Based on the initial investigation, there were no financial contracts involved between Huobi and any third party… The investigation is still on-going [sic] and therefore, we seek your patience and co-operation [sic] in this matter.”

Previously, on September 26, Danny Wu, Senior Manager at Huobi Pool, defended against the allegations on Telegram, claiming that the document in question was faked by their former employee.

Community backlash and Vitalik’s “I told you so” 

Expectedly, the alleged Huobi spreadsheet provoked a major backlash in the EOS community and beyond.

EOS Alliance, an non-profit organization formed by EOS community members and block producers with the role to “facilitate the dialogue within community”, has released a statement on the situation:

“Dan Larimer’s Delegated Proof of Stake (DPOS) was designed with the requirement that 15 of 21 independent votes are required to operate the network securely. If, as some alleged recently, some current Block Producers are coordinating together, this might call into question the transactional reliability of the EOS blockchain data for all users and the attractiveness of EOS as a platform for dApps.”

Additionally, EOS Alliance stressed that “there are geopolitical considerations, given that Chinese corporations and investors are potentially being demonized, and the consequences in China might be more dire for the individuals involved than they would be in other countries”.

The community’s reaction on EOS’s official Reddit channel seems mixed. “I don’t find that surprising giving the governance model of EOS.”, wrote user bhiitc. “If you optimize your system under the assumption that most players aren’t malicious and thus reduce the number of nodes for more transactions per seconds, such an outcome like this was likely”.

Ethereum co-founder Vitalik Buterin commented on the aforementioned thread started by Maple Leaf Capital, arguing the vote-trading was “completely predictable”:

“Interesting! I mean, it was completely predictable and I did predict it,  but I did not expect it to happen so thoroughly and so soon!”

Buterin also criticized the very system of EOS nodes:

“As a followup, *this* is why I do not believe in coinholder-voted on-chain treasuries. Any chain where coinholder-voted on-chain issuance is used to supposedly fund public goods can easily collapse into this kind of ‘I vote for your crappy project, you vote for mine’ equilibrium.”

Interestingly, the Ethereum co-founder has criticized the EOS voting system before. In August 2017, Buterin clashed with EOS’ Daniel Larimer after he responded to an Ethereum Reddit thread post claiming that EOS was superior to Ethereum in terms of number of transactions and flexibility.

In his comment, Buterin mentioned that EOS’s reliance on voting, among other features, is problematic, and the scenarios where “exchanges would vote on users’ behalf, with users not really caring how exchanges vote with their money” were “likely to happen”.

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Venture Capital Investment in Blockchain and Crypto Up 280% in 2018, Report Shows

A new report from Diar reveals that “traditional” venture capital investment in blockchain and crypto firms has almost tripled in the first three quarters of 2018.

“Traditional” venture capital (VC) investment in blockchain and crypto firms has almost tripled in the first three quarters of 2018, according to a new Diar report published September 30.

Diar cites data from Pitchbook that indicates that blockchain and crypto-related firms have raised almost $3.9 billion in VC capital in so far this year — a 280 percent rise as compared with last year. The rise comes not just in terms of an increasing number of deals, but also in the burgeoning median value of each, which has grown by over $1 million this year.

VC investment and deal count in blockchain and crypto-related firms, 2013-18

VC investment and deal count in blockchain and crypto-related firms, 2013-18. Source: Diar

VC median blockchain investment, 2013-18

VC median blockchain investment, 2013-18. Source: Diar

The combined total of the ten largest deals in 2018 came to $1.3 billion, with nine of these representing traditional equity investments, rather than purchases of utility crypto tokens. The outlier was the DFINITY token, which raised a combined $163 million from VC investors Andreessen Horowitz, Hashed, and Polychain Capital.

Pitchbook’s figures revealed that Barry Silbert’s Digital Currency Group (DCG) was “by far” the most prolific investor from the VC sector, closing over 110 deals in the crypto and blockchain space this year. DCG outflanked both Blockchain Capital and Pantera Capital, whose combined deals clocked in at 100.

Other strong investors included VC firms Andreessen Horowitz, Danhua Capital, and Future Perfect Ventures, alongside “active angels” Tim Draper, Naval Ravikant, Roger Ver, and Barry Silbert.

Beyond these major players, Diar reports that close to 2,000 investors have closed deals with at least one blockchain firm this year — the fifty most active of these have invested in “at least” eight. In terms of investor profiles, 52 percent of investors were not exclusively focused on the crypto and blockchain sector, but sealed their deals as part of a more diverse portfolio.

Lastly, Diar also analyzed the geographic distribution of the VC capital that flows into blockchain, with U.S.-based investors representing the lion’s share at 79 percent, followed by 12 percent from China, and 2 percent from South Korea and Singapore respectively.

Diar’s new report also includes a section on the phenomenon of new banking operations that aim to facilitate the blockchain industry, whether blockchain-exclusive banks built “from the ground up,” banks that integrate fiat and crypto services, or the rising number of crypto-related firms that are securing banking licenses.

As reported earlier today, South Korea’s largest VC firm, Korea Investment Partners (KIP), has invested in its first blockchain startup — one that specializes in harnessing the technology for supply chain management solutions. KIP is known for its investments in high-ranking firms that include Naver — Korea’s largest search engine, as well as owner of the popular Japanese messaging app LINE — and Korean messaging giant Kakao, among others.

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EOS Developer Acknowledges Claims of ‘Collusion’ and ‘Mutual Voting’ Between Nodes

EOS acknowledges accusations of voting manipulation and pay-offs after claims that main EOS nodes are participating in “mutual voting.”

Block.one, the developer of blockchain protocol EOS, has published a statement on EOS public blockchain governance in an official Medium post October 1, signed by Block.one’s CEO, Brendan Blumer.

In the statement, Blumer states that the company is “aware of some unverified claims regarding irregular block producer voting, and the subsequent denials of those claims.”

Without providing any details on the “denials” of allegations, Blumer stated that EOS will continue to “ensure a free and democratic election process and […] vote with other holders to reinforce the integrity of this process.”

The statement follows recent allegations that accuse the platform’s major Block Producers (BPs) — the equivalent of miners on the Bitcoin (BTC) blockchain — including Chinese crypto exchange Huobi, of “mutual voting” and “collusion.”

The accusations began to surface last week, when Eosone, which had already published a report on controversial EOS BPs this September, posted what it claims was a leaked Huobi spreadsheet in its blog on WeChat. The spreadsheet contained four tables with “node mutual voting table” and “node income statement” among them.

As per Eosone, this could mean that main EOS nodes, including Chinese crypto exchange Huobi (the fourth BP in current producer ranking, according to EOS Titan), were involved in mutual voting along with pay-offs.

The top 21 BPs in current EOS ranking, according to EOS Titan. Source: EOS Titan

The top 21 BPs in current EOS ranking, according to EOS Titan. Source: EOS Titan

Twitter user Maple Leaf Capital provided a detailed explanation of the internal document in English. Per the tweet, Huobi voted for 20 other BPs, and 16 of them voted back for Huobi.

A list of EOS BPs allegedly involved in mutual voting. Source: @MapleLeafCap

A list of EOS BPs allegedly involved in mutual voting. Source: @MapleLeafCap

Per the above table, Huobi voted for three other BPs in exchange for significant pay-offs. Maple Leaf further explains the data from the spreadsheet:

“Huobi votes for eosiosg11111, cochainworld, and eospaceioeos in exchange for 170, 150, and 50% of the returns respectively…”

Maple Leaf further wrote that such trade-offs could “increasingly compromise the integrity of the network,” particularly given that at least 12 of 21 major BPs were controlled by Chinese entities.

The Twitter user further linked the alleged mutual voting with the recent promotion of Huobi Pool Token (HPT,) which shared tokens with users in exchange for locking their EOS on Huobi. The Chinese crypto exchange might then use those votes at their discretion, Maple Leaf concluded.

All listed allegations, if confirmed, could conflict with Article IV of the current EOS Constitution called “No Vote Buying”, which states the following:

“No Member shall offer nor accept anything of value in exchange for a vote of any type, nor shall any Member unduly influence the vote of another.”

Ethereum co-founder Vitalik Buterin commented about the thread started by Maple Leaf Capital, saying the vote-trading was “completely predictable”:

“Interesting! I mean, it was completely predictable and I did predict it,  but I did not expect it to happen so thoroughly and so soon!”

Buterin also criticized the very system of EOS nodes:

“As a followup, *this* is why I do not believe in coinholder-voted on-chain treasuries. Any chain where coinholder-voted on-chain issuance is used to supposedly fund public goods can easily collapse into this kind of ‘I vote for your crappy project, you vote for mine’ equilibrium.”

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