Recently, the Arbitrum community has posted warnings to investors about the possibility of scammers generating fake Arbitrum airdrops. This tactic is popularly known as phishing, where attackers devise a deceptive means to manipulate users into giving out their wallet private keys.

The Web3 space offers improved blockchain security features. However, the flow of digital currencies into the system now makes it attractive for scammers and hackers. 

Arbitrum Community Urges Users To Beware Of Fake ARB Airdrops

The Arbitrum upcoming token, ARB, is a layer-2 scaling solution on the Ethereum blockchain network. At the moment, the anticipated token has become an attraction for several scammers, given its profitability.

According to the post, the airdrop program aims to distribute 10 billion ARB governance tokens. The airdrop slated for March 23 will allow holders to vote on code changes. But scammers are already doing enough to rid victims of their funds by introducing fake tokens before the scheduled date.

A post from Redefine, a blockchain security company, shared this information. According to the post, the firm identified a website impersonating one of the Arbitrum official airdrop websites. On the fake website, users get a prompt to permit access to their holdings. The idea is to drain users’ wallets once they grant such access.

Aside from the above case, CertiK also revealed an account impersonating the Arbitrum Twitter account, with @arbitrum_launch as its username. Primarily, this account advertises the Arbitrum token airdrop to deceive holders. However, the company warned users to be aware of this account and avoid it.

Firm Detects Additional Fake Accounts

In a thread, CryptoMaximalist, a Reddit user, stated that scammers know the complexity of digital assets and the excitement users get when anticipating free funds. This is what initiates and drives their schemes.

The Reddit user noted that Arbitrum Twitter profiles were created to redirect users to fake websites of the company. So, to stay safe from and avoid the possibility of losing funds, users must assess their history and profiles for any spamming links.

Furthermore, there were over 273 phishing sites discovered last week. A Web3 anti-scam tool, Scam Sniffer, shared it in a tweet. The user noted that these sites were connected to Arbitrum following the airdrop announcement. This figure is expected to increase before the date slated for the airdrop.

The warning from the Arbitrum community is a reminder of the risky nature of the digital asset industry. Investors and other users must be cautious while using the system.

Featured image from Pexels and chart from Tradingview.com

USD Coin (USDC), the world’s second-largest stablecoin, may simply have been in the wrong place at the wrong time. 

The place was Silicon Valley Bank (SVB), a commercial bank with $209 billion in assets, where USDC issuer Circle had deposited $3.3 billion of its cash reserves for safekeeping.

The time was the present: one of rapidly rising interest rates in which institutions like SVB, which had long been gathering short-term deposits to buy long-term assets, got whipsawed.

For several harrowing days, USDC lost its peg to the U.S. dollar, sinking to as low as $0.85 (depending on the exchange) before recovering to $1.00 on Monday, March 13. This was the coin that many considered to be the poster child for fiat-based stablecoins, i.e., the most transparent, compliant and frequently audited.

An unpredictable turn of events?

“It’s ironic that what was supposed to be the safest place to put stablecoin reserves caused a depegging,” Timothy Massad, a research fellow at the Kennedy School of Government at Harvard University and former chairman of the United States Commodity Futures Trading Commission (CFTC), told Cointelegraph. “But it was a temporary problem, not an indication of fundamental design weakness,” he added.

Still, a depegging remains a serious affair. “When a stablecoin loses its peg, it defeats the purpose of its existence — to provide stability of value between the crypto and fiat worlds,” Buvaneshwaran Venugopal, assistant professor in the department of finance at the University of Central Florida, told Cointelegraph. A depegging unnerves existing and would-be investors, and it isn’t considered good for crypto adoption.

Some viewed this as an outlier event. After all, the last time a Federal Deposit Insurance Corporation (FDIC)-insured bank as large as SVB collapsed was Washington Mutual back in 2008.

“For a bank run like this to have happened would have been far-fetched to many — until the bank run happened,” Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph. “Part of the problem is that the banking partners for the crypto space tend to be some of the riskiest banks. Circle may not have had options at some of the bigger banks with safer profiles.”

Long-term consequences

The depegging raises a slew of questions about USDC and stablecoins — and the broader cryptocurrency and blockchain industry.

Will the U.S.-based stablecoin now lose ground to industry leader Tether (USDT), an offshore coin that kept its dollar peg during the crisis?

Was USDC’s depegging a “one-off” circumstance, or did it reveal basic flaws in the stablecoin model?

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Did Bitcoin (BTC), Ether (ETH) and some other cryptocurrencies demonstrate resilience during the bank crisis while some banks and stablecoins faltered? And, what more can be done to ensure that other depeggings don’t occur in the future?

“Some people will point to this as a reason to not encourage the development of stablecoins, while others will say that the vulnerabilities of large banks are exactly why we need stablecoins,” added Massad. Neither is really accurate in his view. What is needed is comprehensive banking and stablecoin regulation.

Investors could lose confidence in both USDC and the entire stablecoin sector in the short term, said Abraham, “but in the long term, I don’t think this will have a significant impact.” Still, the situation highlighted poor “treasury management” on the part of Circle, suggested Abraham, adding:

“Keeping almost 10% of total reserves in one bank that is not viewed as ‘too-big-to-fail’ is a risky move for any business, let alone one that purports to maintain a stable peg to the dollar.”

That said, Abraham expects Circle to learn from this experience and eventually emerge stronger than ever. “This scare will likely cause Circle to take a step back and think about better controls to institute, so it is not subject to extreme counterparty risk again. It will make USDC, already a great product, even safer.”

USDC was never really in any existential danger, in Abraham’s view. Even if the U.S. government had not stepped in to “back-stop” depositors, “USDC would have been fine as its deposits were already in the process of being transferred out prior to the FDIC receivership being initiated.” The billions in reserves held by SVB would have settled in another bank by March 13 in any event, Abraham said.

Bitcoin and Ether show robustness

The good news is that Circle survived, and crypto pillars like Bitcoin and Ether held up surprisingly well while the banking contagion spread to other institutions like Signature Bank, First Republic Bank and Credit Suisse.

“Is anyone else surprised that a top Stablecoin [USDC] could just depeg by ~10% instantly, with virtually no ripple effects across other coin prices? Especially since this is pretty core to a lot of DeFi trading,” tweeted Joe Weisenthal. ARK Invest’s Cathie Wood even celebrated cryptocurrencies as a safe haven during the banking crisis.

Others, though, were more measured. BTC and ETH began to fall on March 10 and the early part of that weekend, noted Abraham. “If the U.S. government had not stepped in to backstop depositors in the U.S., and HSBC had not bought the U.K. bank, there would likely have been significant pain across the crypto sector when the markets opened again on Monday [March 13].”

Others suggested that USDC basically did everything right; it was just unlucky. “USDC reserves are pretty much made up of cash and short-dated securities, with 80% held in the latter, probably the safest asset out there,” Vijay Ayyar, vice president of corporate development and global expansion at Luno, told Cointelegraph. “Hence, USDC in itself has no real issues if one takes a deeper look at what transpired.”

In Ayyar’s view, the more urgent need is “to have a full reserve dollar digital system that helps us move away from the systemic risks in the current fractional system.”

What does this mean for stablecoins?

What does this decoupling signify for stablecoins in general? Does it prove that they’re not really stable, or was this a one-off event where USDC happened to find itself in the wrong Federal Reserve-member bank? One lesson arguably learned is that stablecoin survivability isn’t entirely about reserves. Counterparty risk also has to be considered.

“Fiat-backed stablecoins have a number of intersecting risk factors,” Ryan Clements, assistant professor at the University of Calgary Faculty of Law, told Cointelegraph, further explaining:

“Much of the discussion to date on the risks of fiat-backed coins like USDC has focused on the issue of reserve composition, quality and liquidity. This is a material concern. Yet it is not the only concern.”

During the current crisis, many people were surprised “at the extent of the duration mismatch and lack of interest rate hedges at SVB, as well as the extent of Circle’s exposure to this bank,” said Clements.

Other factors that can unhinge a stablecoin are issuer insolvency and reserve custodian insolvency, said Clements. Investor perceptions also have to be considered — especially in the age of social media. Recent events demonstrated “how investor fears of reserve custodian insolvency can catalyze a depegging event due to a redemption run against the stablecoin issuer and a sell-off of the stablecoin on secondary crypto-asset trading platforms,” he added.

As the University of Central Florida’s Venugopal earlier said, depeggings erode the confidence of new investors and potential investors sitting on the fence. “This further delays the widespread adoption of decentralized financial applications,” said Venugopal, adding:

“The one good thing is that such mishaps bring in more scrutiny from the investor community — and regulators if the ripple effects are large enough.”

Wherefore Tether?

What about USDT, with its peg holding steady throughout the crisis? Has Tether put some distance between itself and USDC in the quest for stablecoin primacy? If so, isn’t that ironic, given Tether has been accused of a lack of transparency compared with USDC?

“Tether has also had its share of questions raised previously with regard to providing audits on its holdings, which has resulted in a depeg previously,” said Luno’s Ayyar. “Hence, I don’t think this incident proves that one is stronger than the other in any way.”

“The crypto markets have always been rich in irony,” Kelvin Low, a law professor at the National University of Singapore, told Cointelegraph. “For an ecosystem that is touted to be decentralized by design, much of the market is centralized and highly intermediated. Tether only appears to be stronger than USDC because all of its flaws are hidden from view.” But flaws can only be hidden for so long, Low added, “as the FTX saga demonstrates.”

Still, after dodging a bullet last week, USDC may want to do things differently. “I suspect that USDC will seek to strengthen its operations by diversifying its reserve custodian base, holding its reserves at a larger bank with stronger duration risk management measures and interest rate hedges, and/or ensuring that all reserves are adequately covered by FDIC insurance,” said the University of Calgary’s Clements.

Lessons learned

Are there any more general insights that can be drawn from recent events? “There’s no such thing as a completely stable stablecoin, and SVB perfectly illustrates that,” answered Abraham, who, like some others, still views USDC as the most stable of stablecoins. Still, he added:

“For it [USDC] to go through a 10% depegging event shows the limitations of the stablecoin asset class as a whole.”

Moving forward, “It will also be very important for stablecoin investor transparency to continually know what proportion of reserves are held at which banks,” said Clements.

Low, a crypto skeptic, said that recent events demonstrated that no matter what their design, “all stablecoins are susceptible to risks, with algorithmic stablecoins perhaps the most problematic. But even fiat-backed stablecoins are also susceptible to risk — in this case, counterparty risk.”

Also, stablecoins “are still subject to the risk of loss of confidence.” This applies to cryptocurrencies like Bitcoin, too; even though BTC has no counterparty risk or depegging issues, continued Low. “Bitcoin prices are [still] susceptible to downside pressures when there is a loss of confidence in the same.”

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Ayyar stated that USDC already had diverse banking partners, with only 8% of its assets at SVB. “Hence, that in itself is not the solution.” One needs to think more long-term, he suggested, including implementing comprehensive consumer protections “as opposed to relying on the current patchwork approach.”

As for former CFTC chief Massad, he cited the need for reforming both stablecoins and banking, telling Cointelegraph:

“We need a regulatory framework for stablecoins, as well as an improvement in the regulation of mid-size banks — which may require a strengthening of the regulations, better supervision, or both.”