Cryptocurrency Fraud , Fraud Management & Cybercrime

Cryptohack Roundup: JPEX Case Update

Every week, ISMG rounds up cybersecurity incidents in digital assets. This week's stories include singer Nine Chen’s potential prosecution in the JPEX case, SEC's lawsuit Silvergate, a suspected Bittensor exploit, and Q2 crypto scam stats.

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Taiwan's Investigation Bureau sent popular singer Nine Chen to the Taipei prosecutors' office over alleged aggravated fraud and banking law violations linked to Hong Kong's JPEX exchange, according to local media reports. Authorities determined that Chen, who reportedly received U.S $320,000 to act as JPEX's brand ambassador, is suspected of carrying out fraudulent activity in the company's Taiwan unit. No charges are filed yet. Chen was initially summoned as a witness in October, but later became a defendant. He claims his investments through JPEX exceeded his endorsement earnings, resulting in a 15% asset loss. This investigation follows a bust by Hong Kong authorities of JPEX's operations, which implicated suspects in a U.S. $204.9 million fraud case. Many Taiwanese investors were also affected. Taiwan mandates that virtual asset services comply with anti-money laundering laws, but JPEX has not registered for AML compliance with the Financial Supervisory Commission since the rules were introduced in July 2021.

The U.S. Securities and Exchange Commission sued Silvergate Capital Corporation, alleging the crypto-friendly bank made false public statements about its anti-money laundering procedures and mishandled transfers with FTX. The lawsuit also names CEO Alan Lane, former COO Kathleen Fraher and former CFO Antonio Martino.

The SEC said Silvergate's Bank Secrecy Act and AML compliance programs were inadequate, failing to properly monitor the Silvergate Exchange Network, which facilitated U.S. $1 trillion in banking transactions. The bank allegedly did not detect nearly $9 billion in suspicious transfers by FTX and related entities.

Silvergate, Lane and Fraher agreed to settle with the SEC without admitting or denying the allegations, with Silvergate paying $50 million in fines, Lane $1 million, and Fraher $250,000. Both Lane and Fraher also agreed to permanent injunctions. Martino did not agree to settle. The Federal Reserve Board and the California Department of Financial Protection and Innovation have also settled charges with Silvergate.

Gurbir Grewal, the SEC's Director of Enforcement, criticized Silvergate for misleading investors about the deficiencies in its compliance programs following the collapse of FTX, one of its largest customers. Silvergate's downfall began in late 2022 when FTX's bankruptcy led to a run on deposits. Silvergate later revealed in a regulatory filing that it might be "less than well-capitalized," causing its shares to plummet and leading companies Coinbase, Circle, Paxos, and Gemini to sever ties with the bank.

Developers of the decentralized artificial intelligence project Bittensor have temporarily suspended its blockchain network following a suspected security exploit involving user wallets. Reports of unusual activity led to a deliberate network halt by the core developers.

On-chain crypto analyst ZachXBT said that potential thefts might be linked to leaked private keys. He said the network halt was due to additional thefts potentially caused by private key leakage. A Bittensor community Discord administrator announced that all transactions have been paused to prevent further unauthorized access while the team investigates the attack on several Bittensor wallets.

ZachXBT report that U.S. $8 million worth of TAO, approximately 32,000 Bittensor tokens, were stolen, likely prompting the network's suspension. The TAO Foundation has not yet released a statement on the potential theft.

The crypto industry lost U.S. $572.7 million to hacks and scams in the second quarter of this year, spread across 72 incidents, said Web3 security platform Immunefi. This marks a 70.3% increase from the previous quarter and a 112% rise from the same time last year. Year-to-date, hackers have stolen over $900 million.

Decentralized finance accounted for all exploits in Q1, but in Q2, centralized finance became the primary target, responsible for 70% of losses. Two major exploits - $305 million from DMM Bitcoin and $55 million from BtcTurk - constituted 62.8% of the total losses.

May saw the highest monthly losses in Q2 at $358.5 million. Of the stolen funds, $28.7 million were recovered from four exploits: Bloom, ALEX Lab, Gala Games and YOLO Games. Ethereum and BNB Chain were the most targeted networks, with Ethereum facing 34 incidents comprising 46.6% of the total losses and BNB Chain with 18 incidents making up 24.7%.