Exchanges as the gatekeepers of Web3 – Crypto News

The following is a guest post by Rodolfo José Santos, a crypto tax and lawyer at FS Legal. 

In the fast-paced world of cryptocurrencies, where fortunes are made and lost in the blink of an eye, one investor’s simple mistake last month brought to light a crucial discussion about justice in the burgeoning Web3 ecosystem.

With a single errant click on Google, this crypto enthusiast inadvertently lost a staggering $1 million worth of digital assets. Sadly, such stories have become all too common in the crypto realm. But the story of this particular individual and my background in law spurred me to contemplate the concept of justice within this digital frontier.

In the traditional legal world, justice is a guiding principle that ensures individuals and corporations are held accountable for their actions. What’s right is right, and what’s wrong should be corrected through the justice mechanisms. This principle, they argue, should also extend to the Web3 ecosystem.

The idea of justice in Web3 gains traction when we see headlines like “Binance Creates Smart Contract to Refund Users Affected by $3M Rug Pull from Xirtam Scammers.” It underscores the belief that actions taken by key players in the industry, such as major exchanges like Binance, can restore faith in the market. These actions give hope to all market participants, suggesting we must adopt innovative approaches to achieving justice to create meaningful change in the crypto space.

In the blockchain and Web3 ecosystem, the specter of scammers, rug pulls, fraudulent schemes, and phishing attacks constantly looms. Participants are perpetually cautious of making an innocent mistake that could lead to the loss of their digital assets. It’s a scenario that plays out daily, whether due to ignorance, greed, or a simple lapse in concentration.

One moment, users believe they’re interacting with a legitimate contract; the next, they realize their cryptocurrencies have vanished into the hands of malicious actors.

When such incidents occur, a pivotal aspect of the hacker’s strategy is to convert stolen cryptocurrencies into fiat currency through exchanges. These exchanges serve as the gatekeepers of justice, standing between the hacker and their victims. If the victim can provide proof of ownership, blockchain technology’s public and open nature theoretically allows all transactions to be tracked, thus enabling the establishment of ownership.

Furthermore, exchanges are subject to legal obligations and self-imposed standards, including Anti-Money Laundering (AML) rules and Counter the Financing of Terrorism (CFT) measures. As stated on KuCoin’s website, they strive not only to meet their legal obligations but also to minimize the risk of exploitation by criminals, as per their statement:

“KuCoin does not wish to be manipulated by money launderers or terrorists or to become associated with money laundering or terrorism in general. Its aim is not merely to comply with its legal obligations, but to effectively minimise the risk of exploitation by criminals. Thus, the anti-money laundering, terrorist financing and corruption policies are based on the requisite highest standards.”.

This underscores the industry’s commitment to operating with the highest standards of integrity.

This brings us to the case of the crypto holder who fell victim to a hacker, losing $1 million worth of digital assets, which were subsequently deposited into KuCoin. The hacker employed a common tactic of converting stolen coins to Ethereum and depositing them in blocks of 25 ETH across multiple KuCoin accounts, ultimately liquidating them into fiat currency.

All these wallets, crucially, are under the control of KuCoin.com. The exchange holds complete authority over these funds and their destinations. It’s a fact that’s easy to verify, as the funds ultimately flow into KuCoin’s main wallets, where they aggregate customer assets.

Acting swiftly, the victim reported the incident to KuCoin, requesting the freezing and return of their assets. KuCoin responded by freezing the wallets for a 30-day period but could not guarantee the status of the funds. In the days that followed, KuCoin’s response remained consistent:

“Please kindly advise the local Law Enforcement to send the duly signed/sealed official freezing order to [email protected], then KuCoin will directly assist them to cooperate in the case.”

Even after the victim requested KuCoin to approach the hacker for proof of funds, the exchange reiterated its request for a court order, a process far from simple or swift.

In an industry that aspires to differentiate itself and demonstrate adherence to rules, the responsibility falls on blockchain and Web3 institutions to adopt best practices. Exchanges, in particular, bear a significant responsibility. They must have mechanisms to prevent criminal activities and support victims who can lawfully prove ownership of their assets. They must serve as a filter of justice.

Failure to do so risks perpetuating the perception that the cryptocurrency industry is a playground for illicit activities, including money laundering and facilitation of hacker activities. By prioritizing accountability and transparency, the industry can work towards gaining the trust of regulators and governments, solidifying its position as a legitimate and responsible player in the global financial landscape.

In an era where digital assets and blockchain technology are rapidly reshaping the financial world, justice and accountability must evolve alongside them. It’s a challenge the entire Web3 ecosystem faces, and it cannot be ignored if it hopes to thrive in the years to come.

In conclusion, the story of the crypto holder who lost $1 million in digital assets and the subsequent response from KuCoin shines a spotlight on a critical issue within the Web3 and blockchain ecosystem: the need for justice and accountability. The incident underscores the importance of adhering to principles of fairness and responsibility, even in the decentralized and fast-evolving world of cryptocurrencies.

As blockchain technology continues to reshape the financial landscape and gain wider adoption, it becomes imperative for all participants, especially major exchanges, to play a pivotal role in ensuring the integrity of the ecosystem. Exchanges must act as more than mere intermediaries for trading digital assets; they must also serve as guardians of trust, as the gatekeepers of justice.

While the victim, in this case, faced significant challenges in reclaiming their stolen assets, it highlights the potential for improvement in how exchanges respond to such situations. By adopting innovative approaches and demonstrating a commitment to supporting victims who can prove their lawful ownership, exchanges can contribute to a more secure and trustworthy crypto environment.

Ultimately, for the Web3 and blockchain industry to flourish and gain acceptance on a global scale, it must showcase its dedication to ethical and legal standards. It should aim to eliminate the perception that it is a playground for illicit activities and instead prove itself as a responsible and legitimate participant in the global financial arena.

The case of the $1 million loss serves as a call to action for the entire Web3 ecosystem. It reminds us that as this revolutionary technology continues to evolve, the principles of justice, accountability, and transparency must evolve. Only by doing so can the industry build a foundation of trust and credibility, paving the way for a future where digital assets play a central role in reshaping finance for the better.

In conclusion, as we grapple with the ever-evolving challenges posed by criminal organizations in the Web3 era, it becomes abundantly clear that relying solely on the traditional, sluggish, and intricate legal system to obtain justice is no longer viable. The rapid-paced nature of Web3 demands a new arsenal of tools and strategies to combat these threats effectively.

We must adapt, innovate, and seek alternative means to safeguard the digital frontier from the pervasive influence of illicit actors. In this dynamic landscape, the pursuit of justice must be as agile and responsive as the threats it aims to counter. Things that KuCoin isn’t doing.