Will Lightning Network be the answer to Bitcoin’s problems?

Bitcoin may have been in existence since 2009, but the search for a solution to its scaling problems continues. If Bitcoin is to become a reliable payment option, then it needs to enable faster payments option without sacrificing security, privacy and availability. The answer, many believe, is the Lightning Network.

When Bitcoin arrived, it was introduced as a “purely peer-to-peer version of electronic cash” that “would allow online payments to be sent directly from one party to another without going through a financial institution.” But that idea is largely dead, unless there is a means to scale Bitcoin and thus resurrect it.

The Lightning Network is an overlay network powered by Bitcoin smart contracts that enable instantaneous Bitcoin payments. It was launched in 2018 and has been growing steadily since, with the node count and network capacity steadily increasing. Without a tool like Lightning, Bitcoin is too slow and expensive to be used for everyday spending, which is exactly what it is supposed to be used for. Furthermore, as more users join the Bitcoin ecosystem, the more expensive using Bitcoin becomes. This is a scalability problem that needs to be overcome.

What a Coindesk Research Study says

A recently published Coindesk Research Study provides an in-depth view of the Lightning Network and its capabilities. It looks at the Lightning technology, the node capacity, and especially its weaknesses, including the different forms of attack it may be vulnerable to, as explained by developers interviewed for the report. It also asked developers about their prime concerns for the network and what needs to happen in order for Lightning to be adopted going forward. Although many had different answers, there were some common themes, such as methodical and careful development of the network, the need for more users to test the network and a need to consider the fact that in the end, Lightning may not end up working at very large scale, because in its present form, it may not scale to billions of users.

Media outlets fall for Litecoin scam

On Monday 13th September, the GlobeNewswire service posted a press release purporting to be from Walmart Inc. It claimed that the famous retailer would be accepting payments in Litecoin. It was picked up by the other major wire agencies, including Reuters. It was taken as being true.

As a result, the price of Litecoin soared by 30%, from $175 to a peak of $233.44, in 15 minutes. Litecoin holders were no doubt ecstatic, and many people on hearing the news started buying Litecoin.

The buzz didn’t last long though: somewhere around 45 minutes, according to Coindesk, and then Litecoin plummeted back to $180. Why? A few eagle-eyed readers spotted discrepancies in the press release. And then Walmart released a very brief statement confirming the news was fake.

It was a clever ruse by the scammer. It is likely that as Litecoin’s price surged, the individual behind the false press release sold off a substantial amount of Litecoin as it reached its top price. Meanwhile traders who saw it as an opportunity to buy, lost a lot of their investment in what was basically a pump-and-dump scam.

According to Coindesk’s investigation into how this happened, there were “ at least two key failures.” The first was made by GlobeNewswire, which published the fake release. Should questions not have been asked about whether it really was from Walmart, which must have a massive PR machine at its disposal? The fact is that GlobeNewswire is such a highly trusted service that not even the Associated Press would query what it sends out.

The second mistake was made, rather alarmingly, by the Litecoin Foundation, which retweeted the news, even though it contained what we now know were fake quotes from Litecoin Foundation leadership. Even Coindesk admits that there was “a breakdown in our internal processes, and we are adding further safeguards against getting taken in again.”

It’s so easy to share, or retweet, anything based on a headline, when we should all read the content of the news we are helping to spread. And our junk mail boxes show us on a daily basis how many scammers attempt to impersonate big brands. Innocent people who don’t understand this are regularly tricked into losing significant sums. This was a different kind of scam, but it still ended up with those who bought the news being the losers.

Why is the SEC investigating DeFi?

Always looking for something to do, the SEC has now turned its attention to decentralized finance (DeFi) platforms and the people behind them. This is a massive surprise, but it does represent the start of a new era in crypto’s regulatory environment. It’s hard to know what might come out of it, but Nik De writing for Cointelegraph believes there are precedents we can base some assumptions on.

The story started last week with the SEC’s announcement that it was conducting an investigation into Uniswap Labs and a few other DeFi platforms. What the SEC didn’t make explicit is whether it is simply on an information gathering exercise, or if it is looking with a view to bringing in new regulations. De says, “Regardless, this is a pivotal, if expected, development in the regulator’s oversight of the crypto market.” Furthermore, it may be critical in determining the future of DeFi platforms.

The SEC has been making noises about DeFi for a few weeks, and has now pinpointed Uniswap Labs as a place to start. Uniswap is the leading decentralised exchange (DEX). A DEX could be described as “a robot on the internet routing trades through various pools of funds, no middleman (beyond the software) needed,” which is how De explains it. he adds, “While we don’t yet know what the regulator is specifically looking for, we can find some clues in recent history that point to how the agency might approach DeFi and enforcement actions.”

Looking at some pronouncements by the SEC chair, Gary Gensler, may help to point us in the right direction. He recently told European politicians “a lack of regulated brokers and clear-cut investor protection rules leaves “the investing public … vulnerable,” particularly to scams or other forms of abuse.”

That’s one of his concerns, but he has another: the ‘promoters and sponsors’ who write the DeFi software, because they create the governance mechanisms. It seems he is concerned about centralised players that might help create or power up DeFi projects. Regarding this, and in De’s estimation, “The SEC therefore doesn’t appear to be looking at the decentralized parts of DeFi…If a project isn’t fully decentralized in its earliest development stage, its backers may soon receive an inquiry.” He believes this is what is happening with Uniswap.

Looking further back in time, the SEC may also look at how a DeFi platform actually operates. Does it offer tokens that the SEC considers to be securities, and does it use its own order book? The case of EtherDelta, a decentralised trading platform, illustrates this. In 2018, the SEC brought charges against it based on allegations it acted as a securities trading platform. The SEC also specifically brought charges against Zachary Coburn, who founded the platform!

The upshot is: just because a platform is decentralized doesn’t mean the SEC won’t bring charges against a centralised party with a significant role in setting it up.

This will be a space to watch!

UK financial regulator warns again regulatory overreach

Charles Randall, the Chair of the United Kingdom’s Financial Conduct Authority (FCA) has warned that whilst regulators should increase consumer protection for consumers investing in crypto tokens, they should also be wary of going too far.

Randall made his comments during a speech for the Cambridge International Symposium on Economic Crime, when talking about the risks for consumers who dive into the crypto world without really knowing how to manage these risks.

Tackling crypto promotions a priority

Significantly for those crypto projects that might be considering hiring a high profile influencer to help promote their tokens, Randall tackled this head on. In particular he mentioned Kim Kardashian’s recent Instagram promotion of EthereumMax (EMAX); a brand-new token issued by “unknown developers.” He commented that this “may have been the financial promotion with the single biggest audience reach in history.” 

Whilst Randall didn’t say that EthereumMax was fraudulent, he said that he had used it as an example of the issues around influencers and paid-for advertising, pointing out that using a celebrity like Kim Kardashian meant the campaign had a massive reach and that it had the potential to mislead under-informed consumers. He emphasised that this is the kind of marketing activity that regulators should be taking greater notice of in the interest of consumers, because “many consumers remain blind to the financial risks they are courting by trusting influencer endorsements and savvy online token campaigns.”

Randall went on to tell the audience that 2.3 million UK citizens own crypto and that 14% of them had bought it using a credit card, which in his view was a worrying scenario. Moreover, 12% of the UK’s crypto holders mistakenly believe the FCA, or the Financial Services Compensation Scheme, would protect them should things go wrong, according to the FCA’s research.

Don’t strangle crypto with excessive regulation

However, Randall appeared to be wary of too much regulation in the case of cryptocurrencies. As he said, the British consumer had multiple opportunities to invest in other unregulated speculative activities — from gold and foreign currencies to Pokemon cards — despite there being “no shortage of consumer harm in many of those markets.” He said:

“So why should we regulate purely speculative digital tokens? And if we do regulate these tokens, will this lead people to think that they are bona fide investments? That is, will the involvement of the FCA give them a ’halo effect’ that raises unrealistic expectations of consumer protection?”

Stablecoins and security tokens offer useful ideas

The FCA currently regulates cryptocurrency exchanges in the UK, and has banned the sale of crypto derivatives to retail customers. Going forward, Randall proposed that its measures should focus on stablecoins and security tokens, which would be a limited intervention. He said that both of these forms of digital asset offered, “encouraging useful new ideas” for cross-border payments, financial infrastructures and financial inclusion, and should not be hampered by “overbearing red tape.” Instead, he argued for a moderate approach, in line with existing rules for other FCA-regulated entities, to ensure that token issuers and blockchain firms are solvent and transparent.