Impossible Finance Crypto Regulations Update — 2023 Week 9

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Impossible Finance

8 min readMar 3, 2023

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Asia is bidding!

There are speculations that the next wave of crypto retailers will be from the Chinese market due to liquidity injections by the Chinese Central Bank into the economy.

Other reasons for this?

Hong Kong Securities and Futures Commission (SFC) has come up with a newly proposed licensing regime for centralized crypto exchanges taking effect in June 2023. A consideration for public consultation is whether or not these services should be offered to retail investors in the country and what measures should be implemented to protect investors. Under the proposed measures, it will be up to operators to do due diligence on tokens, and monitor them. That includes assessing the regulatory status of the asset in each jurisdiction in which the operator provides trading services. It also proposes checks on the operator’s liquidity and whether its holdings are concentrated or controlled by a small number of individuals or entities. Smart contract audits must also be done and operators should ensure that they are not offering assets which would fall within the definition of “securities”.

Crypto within 1 Country, 2 Systems?

So-called “China Coins” have been listed in “Hong Kong Lists” on various crypto exchanges. What’s with that? Hong Kong is a Special Administrative Region of China, allowing it to have its own laws and governance following the “one country, two systems” principle which allows Hong Kong to have their own economic and political systems without interference from Beijing. Hong Kong’s newly proposed regulatory regime is a huge contrast from China’s widespread ban over crypto. However, the Chinese officials are surprisingly open to allow Hong Kong to open up as a crypto hub in the region.

A breakdown of the new set of regulations

TLDR;

New regime applies to anyone 1) Offering services in HK or 2) Advertising to users in HK.
New regime applies to all types of tokens
Outlines rules on the custody of assets
Comply with the KTC/AML regime
Prohibits conflicts of interests (trade desks, market making, OTCs)
Retail users must pass knowledge tests and validate financial circumstances
Exchange will have guidelines on the maximum amount that users can engage in trading
Token must meet requirements before listing (doxxed team, no marketing on yield, asset is legal in issuers’ jurisdictions)
No futures or derivatives, not even to other countries

Why does these regulations matter?

Exploiter Exploited

Background

Back in 2022, the Wormhole bridge was exploited and suffered a staggering loss of 120,000Eth and was regarded as one of the largest crypto loss events of 2022. In response to this, Jump Crypto, who was involved in the development of the bridge stepped in and replaced all that lost Eth. However, Jump was not ready to write off the 120k Eth just like that…

Fast forward to today

And Jump finally did it. After a year, Jump managed to retrieve the funds with the help of Oasis and the English High Court. On 21 February, Jump received an order from the High Court of England and Wales to take all necessary steps to retrieve the stolen funds. Jump did exactly that together with Oasis and orchestrated a counter exploit.

How?

Detailed analysis of the “Counter Exploit” by BlockSec

BlockSec’s Perspective on the Jump “Counter Exploit”: Does the Vulnerability Really Exist?

By BlockSec

blocksecteam.medium.com

TLDR

Automated vaults on Oasis uses upgradable proxy contracts
Exploiter added trigger to the vault
Jump wallet added as multisig for Oasis proxy contracts
Because Exploiter gave the automation contract access of the vault, the Oasis and Jump multisig wallet was able to disable and change the contract to set the AUTOMATION_EXECUTOR role as itself (the multisig wallet)
Changes to the contract are instant due to the multisig wallet disabling the delayed execution mechanism
Oasis and Jump retieves the funds and Exploiter rekt

What does this mean?

The DeFi world was shocked to discover that the counter exploit was able to be pulled off. It made everyone realize that even protocols such as MakerDAO, an OG “blue chip” protocol in this space has some level of centralization. However in the tweet, MakerDAO assured its users that their smart contracts are not in control of any Oasis frontend smart contracts.

Stablecoins play a big part in DeFi and users have always been worried about centralized stablecoins. There’s starting to be a shift where decentralized stablecoins are also starting to be more centralized. Apart form this Oasis incident, the Frax Finance community has voted to make the FRX stablecoin fully collateralized rather than to use the current hybrid model where it is 80% backed and is stabilized algorithmically to keep its USD peg.

What are the DeFi pepes saying?

Catrabbit lawyer’s thoughts on how the UK High Court approached this order

Are NFTs Securities?

On 22 February, Federal Judge Victor Marreo ruled that the NBA Top Shot NFTs offered by Dapper Labs qualifies as an “investment contract” under the Howey Test which may qualify them as a security.

The judge ruled:

Ultimately, the Court’s conclusion that what Dapper Labs offered was an investment contract under Howey is narrow. Not all NFTs offered or sold by any company will constitute security, and each scheme must be assessed on a case-by-case basis. … Rather, it is the particular scheme by which Dapper Labs offers Moments that creates the sufficient legal relationship between investors and promoter to establish an investment contract, and this is a security, under Howey.

The judge was satisfied that all 4 prongs of the Howey Test is adequately plead and the motion by Dapper Labs to dismiss the suit was denied.

Thoughts of lawyooorss

Although this decision is not law, there is a general consensus among lawyers that the judge’s ruling and thought process behind the ruling will be influential for other judges, especially his insinuation that it was Dapper Labs’ creation and control of the Flow blockchain and the marketplace that brought the Top Shots NFTs under the Howey Test’s prongs. However, this would encourage NFT projects to take a more decentralized approach when building.

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