Macauley Peterson

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<hr class="wp-block-separator has-alpha-channel-opacity"/>



Succinct’s SP1 ZKVM has come under scrutiny after <a href="https://lambdaclass.com/">LambdaClass</a> disclosed a critical <a href="https://blog.lambdaclass.com/responsible-disclosure-of-an-exploit-in-succincts-sp1-zkvm-found-in-partnership-with-3mi-labs-and-aligned-which-arises-from-the-interaction-of-two-distinct-security-vulnerabilities/">security vulnerability</a> in its proof generation. The exploit in version 3 of SP1, discovered in collaboration with 3Mi Labs and Aligned, stemmed from the interaction of two separate security flaws.



Succinct previously disclosed the potential exploit to its customers <a href="https://github.com/succinctlabs/sp1/security/advisories/GHSA-c873-wfhp-wx5m">via Github</a> and Telegram.



Here’s what happened in simple terms:



<ol class="wp-block-list">
<li>Missing Verification Step — The system relied on a list to track key proof components but didn’t properly verify that the list was accurate. Consequently, a malicious prover could potentially manipulate it to produce invalid proofs. New checks were added to fix the oversight.</li>



<li>Incomplete Proof Flag — A key part of SP1’s proof-checking system included a flag meant to confirm that a proof was fully executed. However, this flag wasn’t always properly enforced, leading to a potential loophole. Succinct tightened up the checks.</li>



<li>Polynomial Evaluation Issue — An issue found in Plonky3 (a dependency of SP1), meant that it didn’t fully verify all calculations before confirming a proof was valid. Post-patch, all proof components are properly verified.</li>
</ol>



While the vulnerability was quickly addressed prior to the disclosure, the process has raised concerns about transparency in security practices for zero-knowledge virtual machines (ZKVMs). SP1’s technology is currently underpinning high profile upgrades in rollup infrastructure under development.



<ul class="wp-block-list">
<li>Mantle Network has integrated SP1 to transition into a zero-knowledge (ZK) validity rollup, aiming to enhance transaction finality times and support institutional-grade asset settlements.</li>



<li>The AggLayer employs SP1 to generate pessimistic proofs, ensuring the security of its cross-chain interoperability solutions.</li>



<li>Taiko has adopted SP1 as a ZK prover to secure its layer-2 execution, which uses a multi-prover system</li>



<li>Soon, a relatively new project, is building an SVM rollup framework that settles to Ethereum with ZK fault proofs powered by SP1, similar to Eclipse, although the latter uses RISC Zero instead.</li>
</ul>



<h2 class="wp-block-heading">Transparency and implications</h2>



LambdaClass cautioned that the full implications of the flaw required further assessment. Notably, the exploit depended on the interplay between the two issues, meaning that fixing one might not be sufficient to prevent exploitation.



LambdaClass developer known as Fede, <a href="https://x.com/fede_intern/status/1883688063936692355">highlighted</a> on social media that his team felt compelled to make the disclosure public after perceiving a lack of urgency in Succinct’s communication about the issue.



Succinct’s leadership acted responsibly in fixing the issue, according to Avail’s Anurag Arjun, but he agreed&nbsp; better public disclosure practices are needed.



“ZKVM systems are very new and are constantly being updated, so you’d expect vulnerabilities,” Arjun told Blockworks. “In an open-source setting, anyone can run the prover, and if vulnerabilities aren’t disclosed properly, that’s definitely a risk.”



The Avail team, which uses SP1 for proof generation in its consensus mechanism, was informed about the issue privately ahead of public disclosure, Arjun confirmed.



Avail’s implementation was not exposed to risk, Arjun said, because they rely on Succinct’s proprietary prover, which remains permissioned. Avail’s rollup clients have also not yet begun using its SP1-powered bridge contract, so there was no practical impact.



Meanwhile, defenders of Succinct point out that responsible disclosure typically involves private reporting before public statements to avoid unnecessary panic and potential exploitation.



Succinct’s updated version 4 of SP1 — dubbed Turbo — resolves the identified vulnerability, and downstream projects have begun integrating these fixes.&nbsp;



The case illustrates how even well-audited code can and does contain bugs. As Succinct <a href="https://x.com/SuccinctLabs/status/1884083149136863656">put it</a>, “while auditors provide valuable insights, they are not infallible, and we remain committed to continuously improving and working hard to ensure our systems are safe and secure for everyone.”



The more explicit, if belated transparency from Succinct drew <a href="https://x.com/arik_g/status/1884084728783069206">praise</a>. What remains is the question of how to best balance security, transparency, and user protection. And finding <a href="https://x.com/dimahledba/status/1884199665035280586">the line between</a> due criticism and toxic infighting.



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Succinct’s SP1 bug sparks transparency debate in ZK security

Sebastian Sinclair

A South Korean committee approved a bill on Monday requiring legislators to reveal their crypto assets following a scandal involving a high-ranking lawmaker&#8217;s undisclosed investments earlier this month.



Existing legislation mandates that lawmakers divulge their traditional assets, such as cash, stocks and real estate, within a month following their election.



It’s meant to ensure transparency while deterring high-ranking officials from engaging in any possible conflicts of interest. But the law previously fell short of capturing crypto proceeds.



Under proposed amendments, serving members of the Assembly are obligated to announce their digital assets by the conclusion of the following month, <a href="http://english.chosun.com/m/svc/article.html?contid=2023052301425&amp;Dep0=c.newsnow.co.uk&amp;utm_source=c.newsnow.co.uk&amp;utm_medium=unknown&amp;utm_campaign=english" target="_blank" rel="noreferrer noopener">local media reported</a>.



In South Korea, the passage of a bill involves initial drafting by eligible parties, scrutiny by relevant committees including the Legislation and Judiciary Committee, followed by debate and voting in a plenary session.



The approved bill then proceeds to the President for assent and, if not vetoed, it becomes law after public promulgation. The bill is currently under review by the legislative committee for any possible conflicts with existing laws, where it will then be debated in a plenary session.



In the US, the <a href="https://www.congress.gov/112/plaws/publ105/PLAW-112publ105.htm" target="_blank" rel="noreferrer noopener">2012 STOCK Act</a> mandates Congress members to disclose financial holdings, but it does not explicitly cover crypto. An advisory memo in 2018, however, suggested they report crypto assets similarly. 



In the UK, MPs must disclose financial interests, including shares, under the <a href="https://publications.parliament.uk/pa/cm201719/cmcode/1882/188201.htm" target="_blank" rel="noreferrer noopener">Register of Members&#8217; Financial Interests</a>, although, like the US, there&#8217;s no specific guidance on crypto.



<h2 class="wp-block-heading">Lessons learned from South Korean crypto scandal</h2>



South Korea’s own legislative push follows directly from a reported scandal involving Democratic Party lawmaker Kim Nam-kuk and his millions in undisclosed crypto holdings.



Reports claimed Kim <a href="https://blockworks.co/news/south-korea-token-investigation-politics">owned tokens from game company</a> Wemade in 2021, worth some $4.5 million at the time. That led his own party to conduct an investigation into his conduct before he finally decided to <a href="https://koreajoongangdaily.joins.com/2023/05/14/national/politics/Democratic-Party-Kim-Namkuk-Cryptocurrency-investment/20230514114312797.html" target="_blank" rel="noreferrer noopener">call it quits</a>.



Kim may have liquidated all his crypto holdings before the implementation of South Korea&#8217;s travel rule in March 2022. The rule requires all crypto exchanges within the country to report transactions in excess of 1 million won (roughly $757) and to identify entities behind them.



While the controversy has centered on the fact that Kim <a href="https://koreapro.org/2023/05/lawmaker-kim-nam-kuk-exits-democratic-party-amid-cryptocurrency-controversy/" target="_blank" rel="noreferrer noopener">reportedly</a> emptied his digital wallets just before the rule took effect, he’s also come under fire for a separate but related matter.



Kim&#8217;s co-sponsorship of a bill in July 2021, advocating for postponed taxation on digital assets, has raised eyebrows as it occurred about half a year before he liquidated his Wemade tokens.



The lawmaker has publicly refuted those allegations and said he would take legal action against media companies for false reporting.



In a <a href="https://www.facebook.com/lawmaker2020/posts/pfbid037fyHfhWMA8pg8sanjyp3iARH4gvbjXiL1kEQAf1SsnM6mJpVV95tbA5x8w2sHaawl" target="_blank" rel="noreferrer noopener">Facebook post</a> earlier this month, Kim apologized to his party members, stating he would “fight unfair political attacks to the end and uncover the truth” as an independent member of Congress.



“Over the past week, media reports based on false facts have been pouring out,” Kim said, according to a rough translation of the post. “I&#8217;m leaving our Democratic Party for a while, but I will always support and be with the Democratic Party.”



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South Korean Committee Advances Bill for Crypto Transparency Among Legislators

The recent wave of bank closures across the US has highlighted the vulnerability of the traditional banking system, prompting crypto industry experts to advocate for decentralized financial infrastructure as a more secure and reliable alternative.



Cracks across international banking sectors are being papered over by regulators hellbent on preserving the status quo, Blockworks was told.



Rob Alcorn, CEO and co-founder of DeFi credit marketplace Clearpool, argues that while some of the closed banks had significant connections to digital assets, the primary factors contributing to their failures were monetary and prudential policy decisions that impacted liquidity and market structure.



“In the short term, there will be additional headwinds for some crypto market participants to access USD-based banking services,” he said. “But the knock-on effects will continue to have more of an impact on centralized institutions than on decentralized protocols.”



Silicon Valley Bank’s demise has all but <a href="https://abcnews.go.com/Politics/trump-era-rollback-bank-rules-after-silicon-valley/story?id=97852603">reignited the focus</a> on financial institutional reforms that were wound back during the presidency of Donald Trump in 2018 — namely the Dodd-Frank Act.



The act was passed by Congress in 2010 as a response to the severe economic downturn caused by the bank-induced Great Financial Crisis two years earlier.



Part of the act was to classify banks with more than $50 billion in assets as “too big to fail,” making them subject to heightened prudential standards such as stress tests, capital planning, and liquidity requirements.



This provision, in turn, gave the US Federal Reserve greater regulatory power over banks, even those it did not directly supervise.&nbsp;



However, the Dodd-Frank Act faced resistance from the financial industry, which viewed the regulations as excessive and aimed primarily at the largest banks.&nbsp;



As a result, Congress passed a law under the Trump administration that eased some of the Dodd-Frank rules for smaller and mid-tier banks, after years of political pressure.



<h2 class="wp-block-heading">Blame games and finger pointing</h2>



Abroad, conditions are also beginning to fracture.



Following a recent sell-off of Credit Suisse stock and credit default swaps, regulators have issued a statement affirming the bank meets the higher capital and liquidity requirements for <a href="https://www.afr.com/chanticleer/pure-panic-at-credit-suisse-is-now-everyone-s-problem-20230316-p5csjy">systemically important banks</a>.&nbsp;



They have also pledged to provide liquidity to the bank if necessary, a move that was largely derided during the 2008 financial crises among politically and financially motivated activists.



Proponents are now <a href="https://www.nytimes.com/2023/03/11/technology/silicon-valley-bank-crypto-investing.html">pointing fingers</a> at digital assets as the catalyst for the failure of Signature Silvergate and Silicon Valley Bank, leading to a <a href="https://blockworks.co/news/uks-natwest-paysafe-distance-from-crypto-as-banks-roil">blame game</a> amongst regulators, crypto enthusiasts and market participants.



Alessio Quaglini, the CEO and co-founder of Hex Trust, told Blockworks the hostility towards crypto is less relevant than the failure of the overall banking system.&nbsp;



“Compared to traditional finance, counterparty risk is far more transparent with decentralized finance and it’s events like these that make investors realize there is an alternative,” he said.



Bitcoin was designed for this exact moment and has performed as intended during times of fiat instability via its decentralized nature, the co-founder added.



Decentralization is a fundamental aspect of crypto finance that provides several key benefits, according to industry experts.



It’s supposed to mean there exists no central authority or single point of control that can manipulate or censor transactions.



In the ideal, decentralization is meant to create a more resilient defense against attacks while making it less vulnerable to corruption. It is often harder to implement in practice, as hacks and exploits targeting multi-sig wallets and price oracles across various protocols in recent years can attest.



Another important aspect of decentralization is its allowance for greater privacy and security.&nbsp;



Since there is no central database of user information or transaction history, it becomes more difficult for malicious actors to gain access to sensitive information, or so the argument goes.



Decentralization also promotes innovation and competition by allowing for a level playing field where anyone can participate and contribute to the development of the system.&nbsp;



<h2 class="wp-block-heading">Building the necessary rails</h2>



In order to fully realize the benefits of decentralization, appropriate infrastructure is essential. This includes secure and reliable networks, decentralized storage and computing resources, and user-friendly interfaces that enable people to interact with the system easily and safely.&nbsp;



Setting up appropriate infrastructure is useful because it helps to ensure that the system is secure, efficient, and accessible to everyone, the industry experts said.



It also helps to foster trust and confidence in the system, which is crucial for widespread adoption and acceptance.&nbsp;



Ultimately, building the right infrastructure is key to realizing the full potential of crypto finance and creating a more decentralized, universal and equitable financial system, they said.



Hamilton Keats, CEO, and co-founder of Krayon, also sees the recent banking crisis as a sign that the traditional financial system is weakening.&nbsp;



Keats points to the Federal Reserve&#8217;s decision to raise rates too quickly in an attempt to combat inflation as a key factor contributing to the crisis.



“Yes, SVB’s failure to hedge its duration risk was a catastrophic failure in risk management, but they’re not the only bank at risk, and we’re now seeing rumblings throughout the sector,” he said.



Conversely, blockchain-based payment infrastructure and decentralized monetary systems have been working effectively to build investor confidence, abstracting away from the manual interventions of the existing banking systems and providing risk visibility, Keats added.



“Whilst the effects of this recent crisis are likely to be short-term, we’ll likely see a move towards the crypto asset ecosystem over the longer term, where on-chain transparency brings trust.”



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Banking Sector Stumbles Are Boon For DeFi

Bessie Liu

Decentralized exchanges Drift Protocol, GMX and Perpetual Protocol are partnering with Nansen to design a new analytics dashboard, hoping to restore user faith after the FTX fallout.



The latest dashboard will allow its users to visualize the health of the protocols in real time. They will also be able to access information on proof of deposits, insurance funds, borrowing levels and outstanding profits and losses. 



FTX’s downfall set the industry back drastically, and these decentralized exchanges — or DEXes — want to ensure greater levels of transparency in the space moving forward as a “critical first step to increase awareness of information which already exists for decentralized exchanges.”



Following FTX bankruptcy filings, many tokens saw their values plummet. Among them was <a href="https://blockworks.co/price/sol" target="_blank" rel="noreferrer noopener">Solana’s native token, SOL</a>, whose <a href="https://blockworks.co/news/solana-tvl-defi-decline" target="_blank" rel="noreferrer noopener">value dipped by</a> 34% since the beginning of November.



However, there have been exceptions.



The latest <a href="https://marketing.kaiko.com/markets-dips-lower-as-ftx-contagion-spreads?ecid=AOKeC1aLBY5YHiL4wH8LZIiaO_sU43Yc9Ouhg1uEafN79sx1CkMK1QFH9wYUMwGk_kCuVWVtSmWJ&amp;utm_campaign=Research%20newsletter&amp;utm_medium=email&amp;_hsmi=66078975&amp;_hsenc=p2ANqtz-_nVQhReSJOhKVC7IR8gwWNV9WiODsuVSZxvRhVshs_OUNR3DqepHBsnmr02QgWoBa2fi3fE1o5r9G1hDxw-M63oOs4gJdFSnRwCXhBASD05pJG0pE&amp;utm_content=66078975&amp;utm_source=hs_email" target="_blank" rel="noreferrer noopener">report</a> by Kaiko, a cryptocurrency market data provider, revealed the token of decentralized derivatives exchange dYdX surged by 18%, implying that competition is bubbling in decentralized derivative markets.&nbsp;



“The difference between centralized finance (CeFi) and DeFi is becoming increasingly clear, and regulation needs to reflect the distinction between the two systems,” the companies said in a joint statement.



“A regulatory system which makes no distinction between the two will mean that the benefits of DeFi will not be realized and is not fit for purpose,” the statement added.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Let this past week be a painful reminder that there’s no alternative to a fully transparent, non-custodial, provably decentralized future As an industry we should accept nothing less — remember why we came here in the first place&mdash; cindy v2 👾 (@cindyleowtt) <a href="https://twitter.com/cindyleowtt/status/1591064198335074306?ref_src=twsrc%5Etfw">November 11, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



‘DeFi or Nothing’



Regardless of the distinction between CeFi and DeFi, OKX Global Chief Marketing Officer Haider Rafique told Blockworks that all crypto regulation may become more strict moving forward now that “the face of crypto compliance has fallen.”



“I could see the SEC or the regulators in the United States or globally taking a very harsh stance towards crypto regulation,” Rafique said. “It&#8217;s not good for our growth and our economy here, and my worry is that after this incident, we&#8217;re going to see some regulations that perhaps are not considered common sense regulation.”



This sentiment is shared by Sommelier Finance founder Zaki Manian who told Blockworks that the collapse of FTX — which was heavily engaged with institutional counterparties in the US and traditional finance — signals a greater problem for the cryptocurrency space.&nbsp;



“Regulation — in a sense that we should have [CeFi] but it should be better regulated is not the answer,” Manian said. “Frankly, a perpetuals exchange that exists in a centralized setting shouldn’t exist, CeFi lending institutions shouldn’t exist — it’s DeFi or nothing.”



Much of the pain caused in the crypto industry has been tied to CeFi institutions, Manian said.



“BlockFi, Celsius, Voyager and FTX — every single one of them created a centralized version of what exists in DeFi — but with weak [know-your-customer rules] and poor jurisdiction,” he said.



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Derivative DEXes Are Banding Together To Restore User Trust

John Gilbert

John Lee Quigley

What Is Proof of Reserves and Can It Build Back Trust?

<div id="highlights-block_62ff5190fdb38" class="highlights">
 <ul>
 <li>The independent examiner will attempt to peer into the lender’s business practices, as well as the value and type of crypto it holds</li>
 <li>A committee representing Celsius users has publicly objected to the appointment</li>
 </ul>
 
</div>



The US Trustee’s office is seeking the appointment of an independent examiner to investigate crypto lender Celsius’ bankruptcy proceedings.



According to a <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174908182280000000104.pdf" target="_blank" rel="noreferrer noopener">court filing</a> on Wednesday, the Office of the United States Trustee is attempting to address “a lack of transparency” surrounding the lender’s bankruptcy case.



“The addition of social media, in this case, has amplified [Celsius’] transparency issues because there is a lot of information on the internet, but it is not vetted or explained,” the filing reads. “The result has been confusion and anxiety. An examiner can fix this.”



The agency, part of the Department of Justice, is responsible for overseeing the administration of bankruptcy cases and private trustees in the US.&nbsp;



The Celsius Official Committee of Unsecured Creditors&#8217; Twitter account <a href="https://twitter.com/CelsiusUcc/status/1560384563326595073?s=20&amp;t=P9tRz-f413T2X8avIz0-_Q" target="_blank" rel="noreferrer noopener">voiced its concerns</a> Thursday, claiming the appointment of an examiner would “run up millions in costs” for the lender.



“Let <a href="https://twitter.com/CelsiusUcc" target="_blank" rel="noreferrer noopener">@CelsiusUcc</a> do its job for account holders,” the account tweeted, tagging the Department of Justice’s Twitter handle in the process.&nbsp;



Celsius did not immediately return a request for comment.



The committee, formed in late July, represents Celsius users and consists of five individuals and two entities. It submitted its first <a href="https://cms.blockworks.co/celsius-creditor-committee-takes-aim-at-ceo-mashinsky-other-insiders/" target="_blank" rel="noreferrer noopener">official mission statement</a> earlier this month, pledging to put the interests of Celsius’ account holders and unsecured creditors first.



<h3 class="wp-block-heading">Trust issues and transparency</h3>



There is no understanding among customers, interested parties and the public relating to the value or type of crypto held by the lender, the office argues. An independent examiner is “necessary” to investigate and report clearly on Celsius’ operations as well as its lending transactions, it said.



“The divergent interests of the various estates, the extreme financial irregularities that have taken place and the extensive mistrust of [Celsius’] customers, all make the appointment of an independent and disinterested examiner in the best interests of creditors, equity security holders, and the bankruptcy estates,” staff at the Trustee’s office wrote in their filing.



The appointment — mandatory for cases exceeding $5 million dollars under US law — would restore public confidence in the integrity of the bankruptcy system by addressing the “inherent distrust” creditors and associate parties have, the court document says.



“Numerous questions” in the New Jersey-based lender’s case also remain unanswered, the office said, including Celsius’ failure to “adequately collateralize” their loans as well as allegations relating to the offering of unregistered securities.



Celsius <a href="https://cms.blockworks.co/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">filed for Chapter 11 bankruptcy</a> protection in mid-July in a bid to “stabilize” its business following a halt to withdrawals in the month prior where it cited “extreme market conditions” as its reason following a steep decline in cryptocurrency prices, partly fueled by the collapse of Terra.



The lender had resisted calls from its previous lawyers at Akin Gump Strauss Hauer &amp; Feld LLP to file for bankruptcy before conceding on advice from its new counsel, Kirkland &amp; Ellis LLP.



<h3 class="wp-block-heading">Prospects for customers to recover funds</h3>



On Sunday, the New Jersey-based firm released its budget over a three-month horizon, reporting that it anticipates its net cash flow would reach more than $137 million in negative territory by the end of October.



Last month, Celsius reported a deficit of <a href="https://cms.blockworks.co/celsius-net-liabilities-surpass-2-8-billion-new-bankruptcy-filing/" target="_blank" rel="noreferrer noopener">$2.84 billion</a> owing to a total of $6.7 billion in token liabilities with roughly $3.8 billion in token assets, including $761 million of its native token CEL.



At its height, Celsius managed around $8 billion in crypto loans with around $11.8 billion in assets for around <a href="https://celsius.network/" target="_blank" rel="noreferrer noopener">1.7 million users</a>.



“The numbers will move around based on what happens in the court, but right now first day declaration looks like something like 50-60 cents on the dollar for a general Earn account,” bankruptcy specialist Thomas Braziel said on <a href="https://youtu.be/pkuLYz1PHKM" target="_blank" rel="noreferrer noopener">a livestream</a> Wednesday.



“I don’t see how they’re ever going to get back to a crypto 100% repay, but I think it’s possible they could do a fiat 100% repay if the market picks up, mining goes well, they get some good bids for parts of the business or the whole business — and you could see some good outcomes,” he said.



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Celsius Bankruptcy Investigated by Independent Examiner

Michael Bodley

<div id="highlights-block_62bb7f7f4762b" class="highlights">
 <ul>
 <li>The firm has carried out more than 30 reviews of asset managers to date at the behest of institutional investors, with more in the pipeline</li>
 <li>It’s a departure from the thick rounds of layoffs that have permeated crypto companies of late caught off guard from the market’s steep nose dive</li>
 </ul>
 
</div>



A digital assets-focused due diligence startup run by two traditional finance veterans is one of a handful of companies in the space building out its business through a deep-rooted market downturn.&nbsp;



Quentin Thom and James Newman’s London-based perfORM has started conducting deep dives on crypto exchanges and other service providers, in addition to the platform’s bread and butter of conducting due diligence on blockchain venture capital and hedge fund firms at the bequest of deep-pocketed institutional investors considering backing such entities.


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="200" height="300" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png" alt="perfORM's Quentin Thom" class="wp-image-23619" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=200 200w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=172 172w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=174 174w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=146 146w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=53 53w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=33 33w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/Quentin-Thom-Profile-200x300.png?w=552 552w" sizes="auto, (max-width: 200px) 100vw, 200px" /><figcaption>perfORM&#8217;s Quentin Thom | Source: perfORM</figcaption></figure></div>


“It’s shining a light on an area that is, rightly or wrongly, perceived to be opaque,” Newman told Blockworks.



The startup is a contrary brightspot in an industry <a href="https://cms.blockworks.co/crypto-com-parts-ways-with-nft-head-following-layoffs/" target="_blank" rel="noreferrer noopener">beleaguered</a> by <a href="https://cms.blockworks.co/blockfi-parts-ways-with-head-of-us-trading/" target="_blank" rel="noreferrer noopener">layoffs</a>, compensation cuts and rescinded job offers as executives jockey to buffer their balance sheets in the wake of the implosion of the stablecoin UST and the shockwaves that crypto lender Celsius’ demise has sent spiraling through trading desks this month.&nbsp;



Thom — formerly an executive at Deutsche Bank’s European prime brokerage department servicing traditional hedge funds — and Newman — who most recently spent about a decade in due diligence for Barclays — have now conducted upwards of 30 reviews on asset managers, not counting the growing number on the sell-side, the co-founders told Blockworks. And they’re looking to hire, perhaps in prime position to snap up talent cut loose from other companies making cutbacks.&nbsp;



“It feels like a perfect storm,” Thom said of the market’s crash. “Now is such a good time, when criticism is as high as it is now, to sell assurance and reassurance to what ought to be really an excellent and interesting and dynamic industry to those institutions who are probably tiptoeing back a little bit.”


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="200" height="300" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png" alt="" class="wp-image-23622" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=200 200w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=172 172w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=174 174w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=146 146w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=53 53w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=33 33w, https://blockworks-co.imgix.net/wp-content/uploads/2022/06/James-Newman-Profile-200x300.png?w=552 552w" sizes="auto, (max-width: 200px) 100vw, 200px" /><figcaption>perfORM&#8217;s James Newman | Source: perfORM</figcaption></figure></div>


A number of recent reviews for large limited partners have resulted in those backers writing checks to cryptoasset managers, even though recent events had made them reluctant to do so, Thom said, declining to name the entities involved.&nbsp;



The growth comes on the heels of Celsius and Voyager, the crypto lender facing steep losses after its margin calls of hundreds of millions of dollars to one-time industry standout — and now beleaguered — digital assets-focused hedge fund firm Three Arrows Capital were not met.&nbsp;



Unlike most of the industry, their woes are a potential boon to perfORM: The company can offer clients a review of how to protect their assets in the event of a bankruptcy or broad-based restructuring, where they would likely be far down the line of those looking to recoup funds as unsecured creditors.&nbsp;



There’s also a long list of crypto’s skeletons in the closet — money laundering, mismatched incentives, shady liquidity provision and governance — that Thom and Newman are looking to capitalize on by preventing their clients from falling prey to such pitfalls.&nbsp;



And that’s especially true with traditional financiers who know the ins and outs of due diligence on stock pickers, but are lost when it comes to the crypto arena. From custody to leverage to counterparty risk, it’s an entirely different set of questions.



The firm is also closing on a review for a top-tier European sports league, as well as tapping an outside firm to do “hardcore deep dives” on potential hires for crypto companies. The team could also assist with tokenomics for firms issuing their own digital assets for the first time.&nbsp;



Due diligence examinations now are largely conducted on a one-off basis in the space, leading to a “huge internal effort to manage multiple due diligence enquiries,” the firm wrote in marketing materials. In most cases, service providers don’t get to see the reports perfORM assembles in an effort to prevent them influencing the content.&nbsp;



But the firm is working on what they dub an “industry first”: perform an operational examination on service providers that the firms in question can then send free of additional charge to clients. And there are slated updates every six months in a bid to prevent out-of-date information.



One potential perfORM client, who was granted anonymity because they’re not permitted to speak to the press, said many startups get a “lot of hype for being unique,” adding that this operation is doing something truly different — at least when it comes to digital assets.



“In TradFi, due diligence is cookie cutter; it’s taken for a given,” the source said. “Crypto doesn’t have that, and this is a big step toward transparency.”



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Crypto Due Diligence Startup Vying To Bring Transparency to ‘Opaque’ Industry

Casey Wagner

<div id="highlights-block_6171c71d8965e" class="highlights">
 <ul>
 <li>Federal Reserve senior staff and policymakers have new strict requirements around personal investments, the central bank announced Thursday</li>
 <li>The rules come shortly after the scandalous departures of Fed governors Robert Kaplan and Eric Rosengren</li>
 </ul>
 
</div>



Less than a month after the early departures of Federal Reserve governors Robert Kaplan and Eric Rosengren over controversial personal trading patterns, the Fed has issued stricter rules.&nbsp;&nbsp;



Fed policymakers and senior staff on both the Reserve Bank and the Board may no longer purchase individual securities, and active trading will be restricted, the central bank <a href="https://www.federalreserve.gov/newsevents/pressreleases/other20211021b.htm" target="_blank" rel="noreferrer noopener">announced Thursday</a>. Fed officials may also no longer enter into derivatives or invest directly or indirectly in agency securities.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,&#8221; said Fed Chair Jerome H. Powell in a statement.</blockquote>



Officials are still allowed to purchase some securities, but they must provide a 45-day advance notice of any buying or selling. Additionally, all securities must be held for a minimum of one year and no trading will be permitted during “heightened financial market stress,” the release said.&nbsp;



Regional presidents, like <a href="https://cms.blockworks.co/dallas-boston-fed-governors-resign-within-24-hour-period-in-wake-of-trading-controversy/" target="_blank" rel="noreferrer noopener">former governors Kaplan and Rosengren</a>, will have to disclose transactions within 30 days, a rule that Federal Open Market Committee members and senior staff already must follow.&nbsp;



A financial disclosure form, which officials are required to submit, revealed that Kaplan made multiple stock trades exceeding a million dollars in 2020. Fed officials are required to have dates listed on disclosure forms, but Kaplan’s form only referred to “multiple” dates. Kaplan announced his resignation in late September.&nbsp;



It was also revealed that Rosengren participated in trades and investments related to the real estate market.&nbsp;



Rosengren, who would have been required to retire in 2022, announced in a <a href="https://www.bostonfed.org/news-and-events/news/2021/09/rosengren-retirement.aspx" target="_blank" rel="noreferrer noopener">statement</a> that he will be leaving his position as Boston Fed President and CEO due to health reasons. Rosengren was set to become a voting member of the Federal Open Market Committee, which sets rates.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“No one on the [FOMC] is happy to be—to be in this situation, to be having these questions raised. It’s something we take very, very seriously,” said Fed Chairman Jerome Powell following the most recent FOMC meeting in response to the situation.&nbsp;</blockquote>



The change comes as Chair Powell’s term nears its close. The head of the central bank’s term is up for renewal by President Joe Biden in 2022. Powell, a President Donald Trump pick, will be up for reappointment alongside Vice President for Supervision Randal Quarles and Board member Richard Clarida, who also had trades called into question earlier this month.&nbsp;



Quarles will join the Board of Governors if he is not chosen for another term in his current position. There is also an additional vacant seat up for grabs on the Board as President Trump’s nominees, Stephen Moore and Judy Shelton, were not approved by the Senate.