FBI Warning reinforces concerns regarding DeFi participation

Yesterday we wrote about critical issues associated with participating in any DeFi project. As it turns out this mirrored a warning issued by the FBI on the same day in a public announcement. The FBI has also identified smart contracts as a common vulnerability which was just one of several key findings in the publication Smart Contracts: New Contract Creation Tools Required to Ensure Contract Transparency and Trust. Other findings included the lack of transparency to contract terms, the inability to modify contracts, inability to identify who holds liability for any number of problems that may arise such as errors, blockchain failures, or criminal activity, and the dependence on unregulated Oracles which the FBI also identified as a vector used by criminals. Tread carefully into the world of DeFi and avoid all of those that support and defend anonymity, it isn’t likely to be a dog running the show but a criminal or a terrorist:

SUMMARY

The FBI is warning investors cyber criminals are increasingly exploiting vulnerabilities in decentralized finance (DeFi) platforms to steal cryptocurrency, causing investors to lose money. The FBI has observed cyber criminals exploiting vulnerabilities in the smart contracts governing DeFi platforms to steal investors’ cryptocurrency. The FBI encourages investors who suspect cyber criminals have stolen their DeFi investments to contact the FBI via the Internet Crime Complaint Center or their local FBI field office.

THREAT

Cyber criminals are increasingly exploiting vulnerabilities in the smart contracts governing DeFi platforms to steal cryptocurrency, causing investors to lose money. A smart contract is a self-executing contract with the terms of the agreement between the buyer and seller written directly into lines of code that exist across a distributed, decentralized blockchain network. Cyber criminals seek to take advantage of investors’ increased interest in cryptocurrencies, as well as the complexity of cross-chain functionality and open source nature of DeFi platforms.

Between January and March 2022, cyber criminals stole $1.3 billion in cryptocurrencies, almost 97 percent of which was stolen from DeFi platforms, according to the US blockchain analysis firm Chainalysis. This is an increase from 72 percent in 2021 and 30 percent in 2020, respectively. Separately, the FBI has observed cyber criminals defraud DeFi platforms by:

RECOMMENDATIONS

Investment involves risk. Investors should make their own investment decisions based on their financial objectives and financial resources and, if in any doubt, should seek advice from a licensed financial adviser. In addition, the FBI recommends investors take the following precautions:

The FBI recommends DeFi platforms take the following precautions:

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group.

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