Crypto Warning: SEC – DOJ battles heating up

Against a backdrop of high inflation, diminishing market liquidity, and rising interest rates, crypto promoters are salivating over the various legal battle outcomes, certain of victory. The sheer volume of Tiktok crypto “gurus” promising to steer you into a virtual fortune is reminiscent of the bad old penny stock days before regulators.

This despite the fact that a study by Trail of Bits on behalf of DARPA (the Pentagon) has now deemed both Ethereum and Bitcoin “centralized”, undermining the number one most important claim made by the architects of these blockchain applications.

With the loss of upwards of 60% in value since the beginning of the year, and following the collapse of Luna/Terra, AND the insolvency/bankruptcy of Voyager, Celsius, Three Arrows, etc, the perfect stew of public despair and outrage, rampant fraud, and the absence of containment regulation has the industry and regulators barreling toward open warfare in the full glare of public scrutiny.

When government organizations like the Pentagon are recruited by the government behind the US Government to generate credible technical analysis of the leading cryptographic virtual securities, you know – or you should know – that the lifespan of the Saitoshi Nakamoto set is under imminent existential threat.

But this is not the message being conveyed by the crypto community. They are broadcasting opinion and what could only be perceived as endorsement for the inevitability of Bitcoin and Ethereum’s acceptance as actual currency systems to be regulated as such by government authorities.

But any interpretation of the moves by the SEC and the DOJ rooted in the historical context of those agencies could only arrive at a different outcome; namely, the one whereby all cryptos are deemed securities and thereby subject to the same rules governing compliance with securities laws that make potential for use as a unit of trade possible solely within those limitations.

It is wholly inadvisable to wade into the crypto trap now being set by such crowdfunded naïveté out of the rampant FOMO that has become the fundamental force motivating retail investors today.

The technical deficiencies described the Trail of Bits report – which is written in very accessible language – were a real eye opener for me, who, despite harbouring a distrust of all things crypto after interviewing everyone from self-proclaimed Bitcoin guru Andreas M. Antonopoulos to Ethereum co-founder Amthony Di Iorio to unabashed crypto promoter Kevin O’Leary.

The vulnerabilities detailed in the report strike me as the naked reality of how crypto systems are so far from ready for primetime that it is no wonder hacked wallets and criminal transactions remain so common as to be unnewsworthy except for the most egregious examples.


The Trail of Bits report concludes:

In this report, we identified several scenarios in which blockchain immutability is called into question not by exploiting cryptographic vulnerabilities but instead by subverting the properties of a blockchain’s implementation, networking, or consensus protocol. A subset of a blockchain’s participants can garner excessive, centralized control over the entire system. The majority of Bitcoin nodes have significant incentives to behave dishonestly, and in fact, there is no known way to create any permissionless blockchain that is impervious to malicious nodes without having a TTP. We provided updated data on the Nakamoto coefficient for numerous blockchains and proposed a new metric for blockchain centrality based on nodes’ topological influence on consensus. A minority of network service providers—including Tor—are responsible for routing the majority of blockchain traffic. This is particularly concerning for Bitcoin because all protocol traffic is unencrypted and, therefore, susceptible to attacker-in-the-middle attacks. Finally, software diversity in blockchains is a difficult problem in terms of both upstream dependencies and patching.

If that’s not sufficient evidence that the whole value proposition of cryptos has been grossly overstated, then your belief in crypto is more aligned with religious irrationality than with sound investment logic.



James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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