Last week decentrailzed finance (DeFi) researcher Michael Nadeau highlighted a strange transaction in which someone swapping two stablecoins, USDC for Tether, started with $221,000 but only received $5,000. Was it a fat fingered trader who was fleeced, or money laundering?

If one were executing a similar transaction via online banking, they usually ask you to approve the FX rate. If you don’t agree quickly enough, the rate changes.

DeFI automated market makers (AMMs) take a slightly different approach so that all the questions are asked in advance. Instead of requesting rate approval, they ask how much slippage you are willing to tolerate when swapping two cryptocurrencies.

So if you say you are willing to bear 1% slippage that means you might only get 99 cents in Tether for every $1 in USDC. If you are only willing to tolerate 0.01% slippage, there’s a reasonable chance your transaction won’t complete and you will have to try again.

Uniswap’s user interface makes 1% the maximum slippage, to protect traders. But if someone wants to execute transactions in code using the API, they have more flexibility. This particular trader failed to set the minimum acceptable amount they expected to receive.

On its own, that would not have been enough to get fleeced to this extent. AMMs work with liquidity pools and use an algorithm to determine the exchange rate. The rate is influenced by the balance of funds between the two currencies in the trading pair. If there isn’t enough of one of the currencies, then the rate can get lopsided.

MEV and front running

Here’s where it gets messier. The Ethereum block builder executed a front running transaction. Even though the Uniswap liquidity pool for USDC to Tether had around $35 million, the builder made the pool completely lopsided, draining the USDC out of the pool, resulting in a silly exchange rate so that the trader apparently got fleeced. That front running transaction was quite a complex one that involved interacting with a pool on Curve as well as Aave.

After executing the transaction that appeared to lose $216,000, the next transaction (more-or-less) reversed the front running transaction. However, that reversal transaction also paid the block builder, bob-the-builder, more than $200k in ETH.

We took a look at bob-the-builder’s transactions, and 12 March seemed to be an exceptionally profitable day compared to the previous month. Apart from the $200k transaction, there were five other big ones yielding around $440k. During the previous month it mostly earned small amounts with the occasional $4k transaction and a handful of transactions earning around $25k.

Is it money laundering?

Several commentators on X reckoned these transactions might be money laundering, including a co-founder of DeFi Llama. That’s because the source of the funds came from mixer-like addresses and some of the wallets were single use. If the trader is sufficiently sophisticated, the likelihood of making such a major mistake is slim.

Uniswap’s API documentation has specific notes on how to protect against this. Instead of using a slippage percentage, the trader should set the minimum amount they expect to receive, to say $219,000 in this case.

“amountOutMinimum: we are setting to zero, but this is a significant risk in production. For a real deployment, this value should be calculated using our SDK or an onchain price oracle – this helps protect against getting an unusually bad price for a trade due to a front running sandwich or another type of price manipulation.”

The argument against the transaction being money laundering is the fact it’s so public.

Even if it is money laundering, this does not provide a good for reason for institutions to avoid using permissionless blockchains. If one used that rationale, nobody could use banks.

In related news, this morning regulated crypto exchange OKX suspended its DEX aggregator service. OKX provides conventional centralized trading as well as aggregating decentralized exchanges (DEXs) across various blockchains into a single user interface, which allows non-custodial trading. It suspended the DEX aggregator after detecting activities by North Korea’s Lazarus group, and plans to institute additional upgrades, following the recent addition of hacker tracking features. While the suspension was voluntary, it consulted with regulators. OKX is registered in Malta under EU’s MiCA regulations.

Meanwhile, the New York Federal Reserve explored block building, concluding that most builders comply with sanctions. It observed that non-compliant builders often earned low fees, implying it was a conviction issue.

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Crypto market capitalization has tanked to its lowest point since early November with $240 billion getting wiped out over the past day.

This has resulted in a 6% fall to $2.6 trillion as all post-US election gains have now been wiped out.

Ethereum has taken the brunt of the fall, losing a whopping 16% over 12 hours as it fell from around $2,140 to just below $1,800. Moreover, ETH is struggling to recover and was trading at $1,860 at the time of writing.

ETH Death?

The last time Ethereum traded below $1,800 was in October 2023, when it was slowly emerging from the two-year-long bear market.

There is solid support at current levels, which must be held to prevent the asset from tanking back to bear market lows following the formation of what appears to be a double-top chart pattern.

Analysts have warned that if support here is lost, ETH could fall as low as $1,200.

Ethereum is currently down a painful 62% from its all-time high in 2021, and the ETH/BTC ratio – which is a measure of the price of ETH in terms of Satoshis – is at its lowest level since December 2020, having fallen to 0.023 today, according to Tradingview.

Only Dogecoin (DOGE) had heavier losses than Ethereum in the crypto top twenty today, with the memecoin melting by 11%.

It does beg the question of who would be selling ETH at $2,000 and the answer appears to be whales that are trying to avoid being liquidated, according to Lookonchain.

Needless to say, the Ethereum derision and FUD had escalated to new heights on Crypto Twitter as traders and investors licked their wounds.

Ethereum Testnet Attacked

The ETH angst has been exacerbated by problems with Pectra testing and an unknown attacker sending zero-token transfers, causing empty blocks.

On March 9, Ethereum developer Marius van der Wijden said the issue had been fixed:

“We suspected that the attacker was reading some of our chats, so we decided not to publicize the fix, but only update a few nodes that we controlled in order to get more full blocks on the network,”

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Last week Japan’s Financial Services Agency disclosed that a new Bill has been submitted to the National Diet to update the Payment Services Act, the legislation that governs stablecoins and cryptocurrencies.

The key changes relating to stablecoins and crypto include:

• More diversity in stablecoin reserves for trust-style stablecoins
• The ability to order exchanges to provide onshore custody of all spot crypto and stablecoins for the purposes of bankruptcy protections
• Creating a new kind of intermediary that acts as a broker, introducing clients to crypto exchanges.

Stablecoin reserves can include government bonds

The existing version of the Payment Services Act supports the issuance of stablecoins by three types of institutions: banks, money transfer businesses and trust companies. While stablecoins are still extremely nascent in Japan, it’s expected that trust companies are likely to be the most prolific as they support issuance on behalf of third parties and are similar to structures used elsewhere. For example, Mitsubishi UFJ Trust had discussions about working with Binance for stablecoin issuance.

Current legislation requires trust company stablecoins to keep all reserves in demand deposits at banks. The Bill allows up to 50% of reserves to be held in term deposits and/or government bonds, provided the one-to-one backing is maintained.

Crypto custody in Japan

Japan was the host of the first big cryptocurrency exchange collapse – Mount Gox in 2024. Hence, when FTX went bankrupt in 2022, users of FTX Japan were not impacted by the foreign bankruptcy proceedings. However, the reason was because FTX provided derivatives trading and regulators had issued an order requiring it to hold all client assets in Japan. If a cryptocurrency exchange only deals in spot transactions, the regulator could not make such an order. Hence, regulators want the law changed, so domestic custody orders can be made for spot (only) crypto exchanges.

New type of crypto broker intermediary

Currently in Japan, if a broker introduces clients to a cryptocurrency exchange, the broker is expected to register as an exchange themselves. The Bill aims to create a new class of intermediary for introducers that do not operate an exchange. Like exchanges, they will be responsible for asset and risk disclosures to clients. Crypto advertising restrictions will also apply.

However, they will not hold client funds, so will not be subject to capital requirements. Given the exchanges have to conduct anti money laundering compliance on all clients, the intermediary won’t need to. This new intermediary role also applies if some is an introducer for stablecoins.

As a sign of how nascent stablecoins are in Japan, crypto exchange SBI VC Trade recently landed the first license in Japan as an “Electronic Payment Instruments Exchange Service Provider”. This is required to deal with foreign stablecoins, allowing SBI VC Trade to support USDC.

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