Ethereum Was Stolen - My Response

What's up, Grandma's guys! Here, so it's official: Bitcoin and the entire cryptocurrency market just lost the battle to Congress, who recently passed a bill containing a slew of regulations that would be impossible to comply with, thereby stalling the entire innovation of the market. Once this goes into effect, and if you think I'm exaggerating—it's a big deal. This new amendment became the headline story across almost every major news outlet. Cryptocurrency experts warned about the potential impact this would have on the entire market.

So, what does this new language, just having passed through the Senate, mean? It's really important to understand exactly what's going on, why this is happening, the impact this current regulation has on the entire market, and what you could do moving forward to make sure you're not in violation of any of these new requirements. Plus, even more alarmingly, 600 million dollars worth of Ethereum was just hacked and stolen from the Poly Network, making it the largest ever hack in cryptocurrency history. That’s worth diving into further to discuss exactly how this happened because all of this points back to the intention of further regulation, which could have a severe impact on the entire market.

But before we go into that, I did my best to break this down and simplify the situation as much as possible so that more people could understand the issues behind what's going on. I think the more attention we draw to this, the better. If you want to help push this video to an even bigger audience, just do me a favor and hit the like button for the YouTube algorithm so it pushes the video as far as possible, or just go ahead and comment your thoughts down below. That's it, right?

So, all of this begins with what's called the Infrastructure Investment and Jobs Act, which is a one trillion dollar spending bill that's been negotiated back and forth through Congress since March of this year. This bill aims to revitalize transportation, water systems, and manufacturing. The expectation is that spending money now would create more jobs, boost economic activity, and, long term, this would be for the benefit of everybody and eventually pay for itself as our entire economy grows and improves.

But of course, speaking of cost, coming up with one trillion dollars is not exactly free. In order to pay for this, a corporate tax hike was initially proposed to increase from the 21% where it currently is to 28%, along with a minimum tax of 21% for any multinational corporations, to make sure they don't just set up headquarters in Ireland and then pay nothing. But during negotiations, the corporate tax hike was avoided, and it was determined that a new infrastructure package could be paid for using untapped COVID relief funds, leftover federal unemployment dollars, and more stringent tax collection, among other measures.

And one of those measures, as you guessed it, includes cryptocurrency. Well, by now, you're probably thinking to yourself, "But Graham, what does cryptocurrency have to do with the infrastructure package?" Well, this is what's known as a "pay-for," which is a provision within the bill to help generate enough revenue to offset the cost of spending in other categories and gain the support of both sides. In this case, cryptocurrency was the pay-for with what seems like, on the surface, an innocent enough request that you would expect to generate 28 billion dollars in tax revenue: just make sure that cryptocurrency brokers properly keep track of all of their records and issue 1099s when people make a profit. That way, customers could pay their fair share of taxes, just like they would on anything else.

But the way it's currently written within the infrastructure package makes it take on an entirely different meaning, and that's where the problem begins. See, when most people think "broker," you think, "Oh, it's a brokerage where I place an order to buy and sell my cryptocurrency." That's not that big of a deal; I'm cool paying my fair share of taxes on these bountiful profits. But the term "broker," as Congress wants it, encompasses a whole lot more than just that.

In this new bill, a broker is defined as any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. And it doesn't take an expert to see that under this verbiage, a broker could be pretty much anybody. Bitcoin miners could fall under this category because they help facilitate the transfer of digital assets on behalf of another person. Validating transactions for the blockchain could also fall under this definition, as with developing a currency, staking a currency, providing software, or becoming any other sort of intermediary between the person who buys and sells cryptocurrency.

This new language would require their services to gather their customers' Social Security numbers, addresses, and other information to be able to issue them a 1099 and report exactly who obtained the currency you provided, which we all know is pretty much flat-out impossible. Like, if you're mining Ethereum, you have no idea who the recipient is on the other end. If you're developing a new project, an NFT, or a smart contract, you can't control the buyer to give you their information for tax reporting purposes.

Now, in light of this, it became apparent that this was an issue, and several amendments were put in place to more clearly define who exactly a broker is and to exclude those that are not actually the company you're buying and selling from. But unfortunately, it was not that easy. Senator Ted Cruz attempted to strike out the entire cryptocurrency provision altogether but failed. Senator Cynthia Loomis expanded on the definition of a broker, but that fell flat.

Pat Toomey then drafted a revision correcting the cryptocurrency language with hopes of it passing through with unanimous consent, but one person objected with the request to add on an additional 50 billion dollars onto the amendment for defense spending. Although after some back and forth, that was even said to pass through, at the last minute another person objected to the 50 billion spending provision, and after all was said and done, these revisions went nowhere.

As a result, throughout the last week, there’s been a large uproar against these terms by Elon Musk, Jack Dorsey, and Ted Cruz, with even the CEO of Coinbase saying it makes absolutely no sense. And as it stands right now, here’s the potential impact: now ultimately, the big cryptocurrency brokerages out there are not going to see a major change because they already keep close records on customer activity anyway, but creators of NFTs, miners, validators, manufacturers of hardware wallets, and developers are going to be challenged with a unique problem: collect customer data and then issue them a 1099 for all cryptocurrency transactions, which is impossible, or they’ll be forced to work outside the U.S., stop their activity, or operate illegally, which none of those solutions are good.

The harsh reality is Congress has a very limited understanding of the nuances within cryptocurrency, and in an attempt for more stringent oversight and regulation, they will wound up harming the very intention of cryptocurrency to begin with, which would be decentralized innovation. Now part of me doesn't blame them for a lack of understanding because, even for me, cryptocurrency is a very complicated topic, and I'm doing my best to immerse myself in as many details as I can. But understanding how it works on a deep level is likely not a task that Congress can do on their own.

Thankfully, these changes are not likely to go into effect until 2023, which gives it another chance at being changed before any long-term damage is done. But really defining so many participants of cryptocurrency as a financial institution is a gross misrepresentation of the word, and until it's corrected, it’s really up to us to bring about more financial awareness for cryptocurrency, how it works, and how it's become a really powerful part of our economy.

However, some of that regulation was due in part to stories like this, where 600 million dollars of Ethereum was just stolen from Poly Network, which was the largest amount ever reported in cryptocurrency history. Shortly after the incident, Poly Network tweeted that they're sorry to announce that Poly Network was attacked on Binance Chain, Ethereum, and Polygon; assets have been transferred to the hackers' following addresses. They stated, "We will take legal action, and we urge the hackers to return the assets." They also included a public letter addressed to the hacker asking that they get in touch to resolve the issue.

I'll leave the letter right here for a moment for anyone who wants to read the entire message. Now it's important to mention that this is not a usual hack where someone gains access to a computer and steals all of the money, but instead, this attack was caused by a vulnerability between contract calls, which is another way of saying they found a vulnerability in the smart contract that allowed them to withdraw the money into their own account and then disappear.

In this case, a smart contract is essentially a line of code that says if certain conditions are met, the recipient will receive compensation. In a recent blog post by BlockSec, they analyzed the blockchain sequence from the transfer and estimated that the fault could lie from a leakage of the private key used to sign the cross-chain messages, or there was a bug in the signing process that had been abused, or basically, in more simple terms, they may have found a loophole and then exploited it to take a lot of money.

But they also made it clear that without further information from Poly Network, they cannot confirm this is actually what happened. Either way, Tether stepped in and froze 33 million dollars worth of assets that were taken, and the CEO of Binance tweeted his support that they would be doing as much as they could to look into the matters further.

But we do have one message from the hacker, who said that it would have been a billion dollar hack if he had moved the remaining coins. He’s not so interested in money now, considering returning some of the tokens or just leaving them here.

Hey guys! So, I'm actually editing the video right now, and the hacker just did a Q&A, believe it or not. So, I'll put that up on the screen right here if you want to pause it and read through these responses. They are actually pretty interesting, and so far, he did return about four million dollars. So, again, I'll put everything on the screen right here for you to see, just pause it, and then we'll get back to the video.

Eventually, this is going to call into question the entire security of the DeFi space and serve further proof that more regulation is required to prevent this from happening again. It just gives more room for regulators to go and say, "Look at what happened here: 600 million dollars was stolen. This is why we need to track things closely," and ultimately, it hurts consumer confidence who believes that smart contracts are going to be the way of the future.

However, to be fair, even though this is not exactly good news for cryptocurrency, not everything happening right now is doom and gloom. To balance things off, we gotta talk about the upside. Throughout the last two weeks, the entire cryptocurrency market rebounded, with Bitcoin hitting a recent high of forty-seven thousand dollars and adding roughly 300 billion dollars to the total market cap.

Some of this was due to an Ethereum upgrade, which makes it more affordable to transfer and more efficient to scale. Plus, analysis shows that coins held for 12 months and longer are not being moved despite the strong rally, indicating a holding behavior that could theoretically imply that the foundation is growing stronger. On top of that, it's also showing a bullish trading pattern known as the Golden Cross, where the 50-day moving average crosses above the 200-day moving average, that some traders say could indicate a new breakout price.

Because of that, some Bitcoin analysts say that we could hit a high of a hundred and twenty thousand dollars in the fourth quarter, fueled by the potential adoption of larger companies like Amazon or Google, before then dropping back down and resuming normal growth. As far as my own strategy on this, I have been consistently buying into both Bitcoin and Ethereum since January of this year, and especially as it dropped below thirty thousand dollars, I was buying more and sticking to the plan I had set in place at the beginning of the year.

My current goal is a five percent allocation to Bitcoin and Ethereum by the end of the year, and then after that, I'll consider whether or not I want to raise that just a little bit higher. As far as my other thoughts about what's going on when it comes to Congress, it's not surprising. Unfortunately, when most people hear cryptocurrency, they think of a lack of regulation, underground markets, and shady behavior, but that really couldn't be further from the truth.

Even though I think cryptocurrency is going to see more regulation, and that's probably what's required before we get a Bitcoin ETF, right now the majority of Congress is not able to understand the nuance of how this should be treated, and that's to be expected.

On the bright side, other members of Congress have said that they've worked with the Treasury Department to clarify the underlying text and ensure that those who are not acting as brokers will not be subject to the bill's reporting requirements. So, the chances of you actually getting in trouble because you minted an NFT and now they're calling you a brokerage is pretty slim. Plus, there's still some time to make changes before this actually goes into effect, so to me, it's a minor hiccup, and eventually, things should be corrected, hopefully.

So, as for the Ethereum hack, unfortunately, it's a lose-lose situation for everybody involved. Such a large amount is likely to draw intense scrutiny to find out exactly how this was able to happen, and also reinforce the narrative that cryptocurrency needs more oversight than regulation. It's also not a good look for the overall image of cryptocurrency either, as something that is prone to an attack. But it does appear that this has enough attention on it so they can figure out exactly what happened and fix it so that it does not happen again. It's still such a new story that I'm sure we’re going to get more details as more information is revealed.

Alright, so I'm still editing the video and guess what? Another update: the hackers returned about 260 million dollars so far! So, every few minutes there seems to be another update, but that’s the latest so far. Until then, the best that you could do is take the proper precautions to make sure your cryptocurrency is safe, be careful when you invest, and most importantly, out of everything, smash the like button for the YouTube algorithm.

So, with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to subscribe and hit the notification bell. Also, feel free to add me on Instagram; I post pretty much daily. If you want to be a part of it there, feel free to add me there as my second channel, The Graham Stephan Show. I post there every single day; I don't post here. So if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time!