The adoption of the concept of “account abstraction” by Visa has the potential to greatly improve the user experience of Ethereum wallets.
One of the drawbacks of cryptocurrency is the high cost of mistakes.
For example, if a user loses their account keys, they may permanently lose access to their funds. This and other potential problems make it easier to lose money in cryptocurrency than in traditional banking. To address this, blockchain developers are working on solutions such as “Account Abstraction” to make it safer and easier to use crypto.
Account Abstraction (AA) uses smart contracts to execute transactions by implementing certain validation rules. With AA, users won’t need to sign each transaction with their private keys. The goal of AA is to make using Ethereum as easy as using a traditional bank account, allowing for easy transactions, automatic bill payments, and more.
It is important to note that AA can change the way people use crypto. That’s why it is important to understand how Ethereum transactions work today.
Types of accounts on Ethereum
On Ethereum, there are two types of accounts. These are the External Owned Accounts (EOA) and Contract Accounts (CA). EOAs, commonly used by Ethereum users, are accessed through wallet providers such as MetaMask and Coinbase Wallet. They have a pair of keys: a public key, through which anyone can send funds, and a private key, used to initiate transactions by the account owner. CAs, also known as “smart contracts,” are code-controlled accounts that live on the Ethereum network. These accounts cannot initiate transactions on their own, they need an EOA to send a transaction to them.
Losing access to an EOA (Externally Owned Account) on the Ethereum blockchain can be a serious problem as it is linked to a private key that has complete control over the account. If the private key is lost, then there is no way to regain access to the funds, as there is no key recovery process or help desk to assist.
This vulnerability is primarily caused by human error, which can be the biggest security flaw in Ethereum account management. According to a report by Chainalysis, it is estimated that up to 23% of all bitcoins in circulation (around 3.79 million BTC), could be lost forever due to forgotten keys.
Additionally, if a private key falls into the hands of hackers, they would have complete control over the corresponding funds.
How does Account Abstraction work?
Account Abstraction (AA) considers the limitations of Externally Owned Accounts (EOAs) by combining them with Contract Accounts (CAs). This allows for the creation of user accounts with built-in fail-safe mechanisms. Accounts could also have some other special features for verifying transactions. Ethereum co-founder Vitalik Buterin explains in a 2021 blog post that under AA, smart contract code would not only be used to implement the logic of applications but also the verification logic (nonces or signatures) of individual user wallets.
By utilizing AA, user accounts could be programmed to include social recovery systems where multiple individuals with their own keys have the ability to return an account to its owner if the owner loses access to the private key. It also allows for the creation of “multisig wallets” that transfer account ownership to a group. These wallets require multiple different parties to sign off on transactions as an additional security measure.
Moreover, accounts under AA could avoid hard-coded limitations of EOAs, such as gas fee payment in a single cryptocurrency like Ether (ETH). They could choose to use a different cryptocurrency (like DOGE) or assign someone else (like a friend) to pay gas fees.
Currently, it is possible to implement these systems using CAs, but it would require a significant degree of complexity and high gas costs as all transactions need to be initiated by an EOA.
Can Account Abstraction be implemented on Ethereum?
There are several proposals for adding Account Abstraction (AA) to Ethereum, with the most notable being EIP-4337. According to Gazso, the co-author of the EIP, this proposal is the first one that can achieve AA without requiring a hard fork.
The main advantage of EIP-4337 is that it does not necessitate any modifications to Ethereum’s core protocol. Instead, it would introduce a new account abstraction layer on top of the core protocol, allowing wallet providers to create user-owned accounts that utilize smart contracts to establish the rules for initiating transactions.
Despite the availability of these tools, AA is not yet widely adopted. The main reason is the lack of momentum in creating and distributing new wallets. Convincing users to try new technology and wallets is a difficult task, said Gazso.
As a result, many users opt for more established and well-tested options such as MetaMask. However, it seems that this trend is changing, and there is an increasing interest in implementing these new technologies.
Is Account Abstraction happening already?
Some layer-2 solutions on Ethereum are exploring the integration of Account Abstraction (AA) as a feature. StarkWare, the company behind the StarkNet blockchain, has already implemented AA.
The Co-founder and president of StarkWare, Eli Ben-Sasson, has stated that AA could be used in the future to authorize payments using facial recognition or biometrics, similar to how FaceID is used to authorize credit card payments for iPhone users. He also said that infrastructure for this is already present on StarkNet.
In recent times, Visa also announced its proposal to utilize Account Abstraction to deploy automatic payments using StarkNet infrastructure, which would be similar to automatic payments in a bank account, but on the blockchain.
Other companies, such as Gnosis Chain, are also exploring the integration of AA in their infrastructure. Gnosis Chain co-founder Stefan George stated that interest in AA is increasing as more developers and users become aware of its potential. Gazso also stated that 2023 would be the “year of Account Abstraction” and the topic widely discussed s in the crypto and blockchain space.
Policymakers have scrutinized Binance, the largest crypto exchange, amid multilateral sanctions against Russia and U.S. sanctions against Iran. At the same time, the exchange fails to make its balance sheet fully transparent to auditors.
Binance joins the Association of Certified Sanctions Specialists
In an effort to stay compliant with global sanctions, Binance was one of the first cryptocurrency firms to join the Association of Certified Sanctions Specialists (ACSS).
According to a news release on January 6, Binance announced that its sanctions compliance team would receive training as part of the ACSS certification process. The website states that the group offers an exam covering “knowledge and skills common for all sanctions professionals in different employment settings.”
“The blockchain industry is still young, and it’s important to maintain the highest level of compliance in a rapidly-evolving space,” stated Chagri Poyraz, Binance’s global head for sanctions. “At the end, we want the industry standard in security and compliance to continue alongside other industry players.”
In October 2022, Poyraz stated that the exchange had complied with multilateral sanctions against Russia after the country invaded Ukraine. However, he said there was “room for improvement” when it came to clarity in EU guidelines on crypto.
Binance claims that the ACSS training will inform the exchange’s staff about guidelines from the U.S Treasury’s Office of Foreign Assets Control, and help them to avoid potential violations. According to Binance, the exchange is the largest in the entire crypto space and is available in over 100 countries.
Binance US does business in US-sanctioned countries
There have been reports that Binance might have granted Iran-based users certain services, which may be in violation of United States sanctions. This has prompted officials to investigate.
An investigative report by Reuters shows that individuals in Iran continued trading on Binance even after Iran was placed on a blacklist.
Iranians using the exchange also raises questions about capital controls that were increased against Iran in 2018. Binance itself is based in the Cayman Islands and is therefore not subject to U.S. sanctions prohibiting Iranian entities from doing business.
But, Binance US (the version of the exchange that operates in the US) could face secondary sanctions for doing business with a sanctioned country and providing an opportunity for Iranians to circumvent trade embargoes.
Binance aims to build trust with crypto holders but fails to provide transparency
With over 8 billion people on the planet, over 320 million are crypto holders, according to a TripleA estimate. Cryptocurrency use is expanding, but as of the beginning of 2023, only 4% of the world’s population uses it.
Binance, the world’s largest crypto exchange, is trying to boost confidence following a spike in customer withdrawals in December 2022 and a sharp drop in its digital token value. According to the exchange, net outflows totaling $6 billion were managed “without breaking stride” in the first week of December 2022. This is because its finances are strong, and “we take responsibility as custodians seriously.” Binance founder Changpeng Zhao said that his company would lead by example and make a point to prove its transparency, especially after the bankruptcy of the FTX crypto exchange, which collapsed in November 2022. Reuters’ analysis of Binance’s corporate filings reveals that the core business, the Binance.com exchange, which has processed trades in excess of $22 trillion this fiscal year, is mostly hidden from the public.
Binance refuses to disclose the location of Binance.com. It does not disclose basic financial information like revenue, profit, and cash reserves. Although the company has created its own cryptocurrency coin (BNB coin), it doesn’t disclose its role on its balance sheet. It lends money to customers against crypto assets and allows them to trade on margin with borrowed funds. It doesn’t provide details about how large those bets were, how vulnerable Binance is to this risk, nor the extent of its reserves for financing withdrawals.
While Binance has said that it has been audited using the proof-of-reserves mechanism, the auditing firm has deleted the initial report and paused its proof-of-reserves checks due to miscommunication and the way the public perceived the reports. The auditing company, Mazars, did not make any further comments, but Binance’s CEO had already tweeted in Dec 2022 that the audit had been completed.
The Turkish central bank is interested in adopting the CBDC technology. It has recently completed its first payments using digital currency. It will continue to test this technology in 2023.
The first trial of the digital currency of the Central Bank of the Republic of Turkey was completed using the Digital Turkish Lira. They have indicated plans to continue testing through 2023.
According to a press release by the Turkish central bank issued on December 29, 2022, the first payment transaction using the digital lira was successful.
It stated that it would continue to conduct closed-circuit pilot tests with technology stakeholders in 2023’s first quarter. The program will later expand to include select banks and financial technology companies throughout the year.
The Turkish central bank stated that the results of these tests would be made available to the public via a comprehensive evaluation report. Next, it will reveal more about the next phases of this study, which will increase participation.
This follows the announcement by the Turkish central bank, which was made on September 21, 2022, that it was investigating the benefits of introducing a digital Turkish Lira. The project is called “Central Bank Digital Turkish Lira Research and Development.”
The government did not make any commitment to digitalizing the final currency of the country and stated that it had not made a decision about the issuance of the digital Turkish lira.
The Turkish central bank also stated in its latest statement that it would continue to test distributed ledger technology in payment systems and their integration with an instant payment system.
It will also focus on the legal aspects of the digital Turkish Lira. This includes the economic as well as the legal framework surrounding digital identification. The bank is also revising the technical requirements for the program.
More countries are experimenting with CBDC
Many countries, including the United Kingdom, Kazakhstan, and India, have begun to pilot programs for central bank digital currencies.
The Bank of England (BOE) has allocated nearly $255,000 for the development of a central bank digital currency wallet. This will allow basic functions such as payments and transactions to be executed.
This wallet could be a proof-of-concept that can hold a central bank’s digital currency (CBDC).
The BOE published a request for applications on the United Kingdom government’s Digital Marketplace. This is a place where government agencies can seek work for digital projects.
The proof-of-concept wallet should provide basic functionality. It must be able to show balances, transactions, and notifications. The wallet must also be able to load and unload with a CBDC. It also needs to be able to request peer-to-peer payments via an account ID or QR code. It must also be capable of being used to pay businesses online.
Meanwhile, the central bank of Kazakhstan recommended that an in-house CBDC be introduced as early as 2023 and a gradual implementation over three years. The latest research paper confirmed Kazakhstan’s intention to launch the digital tenge.
Kazakhstan is one of the largest Bitcoin mining countries in the world. After the second phase of the CBDC test was completed, the National Bank of Kazakhstan (NBK), revealed the findings. The primary purpose of conducting research on CBDC was to assess its potential to improve financial inclusion and promote innovation in the payments sector. It also aimed to increase the country’s global competitiveness.
Pilot research was focused on offline payments. It also examined programmability. The report recommended that market participants and infrastructure players be included in different scenarios.
More than 140 proposals have been submitted by the finance sector for a pilot program of central bank digital currency in Australia. The Reserve Bank of Australia (RBA) warns that digital currency could replace the Australian dollar, and people will avoid commercial banks.
The RBA released a speech by Assistant Governor Brad Jones on December 8. This speech was given at a central banking conference that took place from Dec. 8 through Dec. 9. Jones discussed in detail the potential impact of a CBDC on Australia’s economy.
More than 80 financial institutions have proposed use cases in many areas, including e-commerce and government payments. The pilot eAUD team is currently deciding which use cases it will take into the pilot phase. They expect to publish a report about the project in the middle of 2023. Other risks associated with an Australian CBDC could be liquidity problems, and other problems banks might face if the CBDC is chosen as the preferred source for holdings. If people prefer the CBDC, then banks may not have enough capital to lend money to consumers.
After Defrost Finance users complained about the loss of funds, the DEX confirmed that Defrost V2 was the victim of a flash loan attack.
On December 24, 2022, DeFi platform Defrost Finance, built on the Avalanche blockchain, suffered a hack, with an attacker using a flash loan function to withdraw funds.
The announcement was made on the official Twitter account. The team advises everyone to refrain from using the platform until they resolve the issue.
Defrost Finance is sad to announce that our V2 has suffered a hack, with an attacker using a flash loan function to withdraw funds.
The V1 is not affected. We will soon close the V2 UI and investigate further with our tech team.
The first hacking signal was that investors reported that they had lost their stakes in Defrost Finance, as well as Avalanche coins from the MetaMask wallets.
At first, the team announced that Defrost Finance’s V1 was not affected by the hack.
After confirming the attack, PeckShield, a blockchain security company, discovered that the hacker had manipulated the price of LSWUSDC (Lending Switch USD Coin). The profit generated from the hack was approximately of $173,000.
“Our analysis shows a fake collateral token is added, and a malicious price oracle is used to liquidate current users. The loss is estimated to be >$12M,” according to PeckShield.
The community was suspicious of the activities of the DEX, although they had announced the hack as soon as it was noticed.
Shortly after, it was announced that V1 of the DEX was also affected by the hack, although it was initially announced that it was not affected. Since V1 lacked the flash loan functionality, the team believed that V1 couldn’t have been affected. At this moment, they asked all users to stop using both V1 and V2.
The Defrost team continued their on-chain investigation, on Dec 25. After publicly asking the hacker or hackers to return the funds stolen during the attack, the team also proposed a 20% (negotiable) fee of the total amount of $12.
According to the team, they have been working round the clock, on Christmas day, to try and solve the crisis and return the funds. Eventually, on Dec 26, the team announced that the funds stolen from V1 have been returned. However, no other explanation was given.
Defrost Finance announced it would refund affected users
According to Defrost Finance, the platform managed to recover the funds from the V1 flash loan exploit and plans to return them to their rightful owners.
On Dec 27, Defrost posted on Medium that it would soon refund the stolen assets. The recovered funds are in an ETH wallet, will be converted to a stablecoin, and then transferred to Avalanche. The users will be able to recover their funds through a specific smart contract.
Users are still waiting for further news.
Other DeFi protocols that suffered losses recently are Raydium (Solana blockchain) – $2 million, and Ankr (Ethereum blockchain) – $5 million.
Is Defrost Finance a scam?
On Dec 24, PeckShield, a blockchain analytics company, issued a warning to its community. They described Defrost Finance project as a “rug pull” with losses estimated at around $12 million.
On Dec 26, CertiK, a blockchain security company, posted an alert about Defrost Finance. It stated that they tried to reach the team but did not receive any response. They described the exploit as an “exit-scam,” which implies that the DeFi platform might have stolen user funds.
Sam Bankman-Fried (SBF) could be extradited to the US for a court trial. He might get up to 115 years in jail.
Who is Sam Bankman-Fried?
Sam Bankman-Fried is the former CEO and founder of Alameda Research, a quantitative trading firm that is active in the cryptocurrency markets. He is also the former chief executive of FTX, a cryptocurrency exchange, and derivatives trading platform. Bankman-Fried is known for his contributions to the development of the cryptocurrency industry and for his philanthropic efforts through the Bankman-Fried Foundation, which focuses on supporting research and development in science and technology.
And more recently, Sam became even more famous when FTX declared bankruptcy in Nov 2022.
FTX’s collapse roiled crypto markets and revealed many accounting scandals within the company. FTX was once one of the most prominent and respected players in this space. The exchange had no accounting department and mixed customer funds with Alameda Research. It also reportedly spent $100 million on luxury vacation homes for its employees.
Sam Bankman-Fried was arrested in The Bahamas
After filing for bankruptcy in November 2022, Sam ran to the Bahamas, hoping to find a way and bring the price of the FTT token (the native token of FTX exchange) back up and give investors their money back. But things haven’t worked up quite that way.
After U.S. prosecutors brought criminal charges, Sam Bankman-Fried was taken into custody in the Bahamas.
The Bahamas government released the following statement:
“S.B.F.’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against S.B.F. and is likely to request his extradition.”
This arrest was the latest dramatic development in one of the most shocking corporate falls from grace in recent history. On Dec 6, Mr. Bankman Fried was to testify before Congress about the collapse of FTX. This was the largest firm in the emerging crypto sector, and it was virtually destroyed in only a few days in Nov 2022 when its accounts were missing $8 billion.
Prosecutors from the Southern District of New York confirmed that Mr. Bankman Fried was charged and stated that an indictment would not be filed on Dec 13. Separately, the SEC (Securities and Exchange Commission) stated in a statement that they had authorized charges “relating to Mr. Bankman Fried’s violation of our securities laws.”
Some unverified sources say that Mr. Bankman-Fried was charged with wire fraud, wire conspiracy, securities fraud conspiracy, money laundering, and securities fraud conspiracy.
Mr. Bankman Fried, who was the only one charged in the indictment, was taken into custody. According to a statement by the Bahamian police, he was taken into custody at his apartment in Albany resort in the Bahamas shortly after 6 pm. It was unclear when Mr. Bankman Fried might be transferred to the United States. The Bahamas has an extradition agreement with the United States. However, it can take several weeks and sometimes even longer if there is a criminal defendant who contests it.
According to someone familiar with the matter, Mr. Bankman Fried cooperated during his arrest.
SBF’s reply to the arrest
Sam Bankman-Fried is reportedly reconsidering his decision to appeal extradition. According to Reuters, he will appear in court in the Bahamas on December 19 to seek a reversal of that decision.
On Dec 13, SBF was denied bail, and the reason was “risk of flight.”
Sam’s lawyer declared that his client is suffering from insomnia and depression, and a second bail application was reportedly filed at the Bahamas Supreme Court on Dec 15.
Bankman-Fried could be sentenced to 115 years imprisonment if he is convicted. However, it could take years before the court reaches a final verdict in this case.
SBF has hired Mark Cohen as his defense lawyer. Cohen is the co-founder of Cohen & Gresser, and was a member of the defense team for Ghislaine Maxwell in her high-profile case involving child trafficking.
Bankman-Fried is currently being held at Fox Hill Prison. This is the only prison in The Bahamas. A U.S. State Department report from 2021 stated that Fox Hill conditions were “harsh,” overcrowded, and had poor nutrition. Correctional officers were accused of physically abusing detainees.
Caroline Ellison, the former CEO of Alameda Research (a sister company to FTX), has also created a defense team. In an ongoing federal investigation, Ellison will be represented by Stephanie Avakian (a former top crypto regulator at the United States SEC). Avakian is currently the chair of WilmerHale’s Securities and Financial Services department. She expanded the oversight of cryptocurrency at the Enforcement Division in her role at SEC.
In Hong Kong, virtual asset service providers will have a new licensing system, which will require them to adhere to strict anti-money laundering (AML) guidelines.
Hong Kong’s legislative body has approved a new amendment to the anti-money laundering and terrorist financing system. The legislation now includes virtual asset service providers.
On June 1, 2023, this new legislation will go into effect, and it will establish a licensing system for virtual asset service providers. Crypto exchange service providers will be subject to the same legislation that currently applies to traditional financial institutions.
Virtual exchanges that want to open a Hong Kong business must follow strict AML(Anti-Money Laundering) guidelines and comply with investor protection laws before being granted a license to operate. Hong Kong, unlike other regulators around the globe, has used the FTX crash to reduce regulatory risks associated with centralized exchanges.
Regulators around the globe have been criticized for failing to protect retail investors after the FTX crypto exchange collapse. A growing demand has emerged to bring crypto exchanges under the law and to require strict AML and investor protection.
Hong Kong Monetary Authority to impose regulations
Hong Kong has actively worked toward the establishment of a well-thought regulatory framework for its nascent cryptocurrency market. The Hong Kong government published a policy in October entitled “Policy Declaration on the Development of Virtual Assets.” It included a regulatory framework as well as risk-based regulatory guidance. To evaluate and improve the technology underlying virtual assets, the government suggested several pilot projects.
Investors may also benefit from some protection regulations. This nation has become the leader in the urgent issue of investor protection because of the recent legislation amendment.
At a recent conference, Eddie Yue, chief executive of the Hong Kong Monetary Authority, suggested that there might soon be investor protection regulations in the country.
Banks are discussing the future of FinTech
Central bank governors from all over the world have attended a conference in Thailand to discuss the role and future of central banks in the face of evolving financial technology. The conference was hosted by both the Bank of Thailand and the Bank for International Settlements.
Panel discussion on digitalized monetary systems featured Eddie Yue (chief executive of Hong Kong Monetary Authority), Changyong Rhee (governor of the Bank of Korea), Adrian Orr (governor of the Reserve Bank of New Zealand), Cecilia Skingsley (Bank for International Settlements) discussing the rise of digital assets, central banks digital currencies, and the potential risks associated with this new technology.
The chief of the Hong Kong Monetary Authority discussed the benefits and innovations of blockchain technology, as well as its potential impact on central banks. Yue stated that stablecoins and CBDCs would offer more efficient and economical ways to transact in the long term. He noted, however, that any new technology comes with certain risks. These risks could be operational.
Yue pointed out that blockchain is decentralized by its very nature. It is, therefore, much more difficult to mitigate on-chain risk. Regulators should therefore focus on activities off-chain. He explained:
“We can start with regulating off-chain activities like regulating virtual asset exchanges. Hong Kong will soon introduce not just AML (anti-money laundering) aspect but also investor protection.”
This was before the Hong Kong government issued the regulations for crypto exchanges, which align with the international consensus on regulating stablecoins.
Changyong Rhee (the Bank of Korea governor) was less optimistic about blockchain technology’s future, particularly in the monetary sector, in light of recent crypto contagions. He stated that he wasn’t sure if “we are actually seeing the benefits of this technological advancement recently.”
“I was more positive before, but after seeing the Luna, Terra, and now the FTX issues. I don’t know [if] we will see the real benefit of this new technology, at least for monetary policy,” said Rhee.
