New Investments and Capital Markets Products, New Crimes and Enforcement Actions

In this issue:

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

Cryptocurrency Cybercrimes and Enforcement Actions Continue

Blockchain Investment Continues as Businesses Expand Operations 

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

By: Jaime B. Petenko

According to an Aug. 10, 2018, press release, the World Bank and an Australian multinational bank are partnering to issue what is reported to be the first bond globally created, allocated, transferred and managed over blockchain. The “Blockchain Offered New Debt Instrument,” or “bond-i,” will be issued over a private blockchain built on top of the Ethereum network that has been reviewed by a major global technology company for its architecture, security and resilience. The blockchain platform will be co-hosted by the World Bank in Washington, D.C., and the Australian multinational bank in Sydney, Australia.

In another first, a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system recently launched a Reg D 506(c) offering of security tokens issued by a popular Colorado resort. Accredited investors can purchase “Aspen coins,” which represent, indirectly, one share of common stock in the Colorado resort, including voting rights and rights to distributions. The Aspen coins are backed by the resort’s assets. Purchases of Aspen coins can be made with U.S. dollars, bitcoin or Ethereum. In Canada, a Canadian multinational bank and the Ontario Teachers’ Pension Plan announced the successful issuance of a fixed income transaction on blockchain. The Canadian bank sold CA$250 million of one-year floating rate deposit notes to the pension fund and mirrored the transaction on a blockchain platform.

According to reports, this week an exchange-traded note that has been trading on the Nasdaq Stockholm Exchange since 2015 is now being quoted in U.S. dollars. Trading the note will be similar to buying American depositary receipts, where investors will see a foreign-listed asset in U.S. dollars. Trades will be executed in U.S. dollars but will be settled, cleared and held in custody in Sweden.

Two foreign stock exchanges also made announcements about trading digital assets this week. The Stuttgart Stock Exchange (Gruppe Börse Stuttgart), the second-largest stock exchange in Germany, announced it is creating an end-to-end infrastructure for digital assets, to include cryptocurrency trading, initial coin offerings and a cryptocurrency custody service. And the Jamaica Stock Exchange (JSE) signed a memorandum of understanding with a Toronto-based fintech company to create a digital assets trading platform that meets regulatory compliance standards. The JSE plans to include regulatory tools on the platform, including a tool to track market manipulation. Also this week, the prominent industry organization Coin Center released a report setting forth a proposed framework for securities regulation of cryptographic assets, cryptocurrencies and tokens.

To read more about blockchain developments in capital markets, see the following:

Cryptocurrency Cybercrimes and Enforcement Actions Continue

By: Brian P. Bartish

New statistics from Kaspersky Labs show that phishing schemes exploiting ICOs to target potential investors have generated more than $2.3 million in the second quarter of 2018 alone. According to a recent survey of UK organizations, one in three respondents had been impacted by cryptojacking malware in the past month. In a recently filed lawsuit, fraudsters allegedly impersonated a victim in communications to a multinational telecommunications company to access the victim’s crypto wallets and steal $24 million in cryptocurrencies. According to another recent report, a wealthy investor was flown to Macau by a Thai group in a scheme that resulted in the theft of more than 5,500 bitcoins.

On Aug. 11, alleged stablecoin provider Tether issued new Tether tokens worth $50 million after losing roughly $300 million in market capitalization over the past 30 days. Tether has been the source of criticism for its failure to submit to a public audit to prove its claims of Tether being backed by the dollar on a one-to-one basis.

In a speech last week, FinCEN director Kenneth A. Blanco delivered a clear, stern message to crypto exchanges on their AML and CFT obligations, stating that compliance programs must be implemented long before they receive notice of an examination. Mr. Blanco stated that FinCEN’s goal is to ensure that all virtual currency money transmitters undergo such compliance examinations regularly. And in an Aug. 14 press release, the SEC announced that it had obtained permanent officer-and-director and penny stock bars against the founder of a company who perpetrated a fraudulent ICO.

For further reading:

Blockchain Investment Continues as Businesses Expand Operations

By: Simone O. Otenaike

Earlier this week, a U.S. Securities and Exchange Commission filing revealed that a leading blockchain investment company has raised more than $71 million from approximately 90 investors for its third crypto fund. The same blockchain investment company raised $13 million for its crypto fund in 2016 and $25 million for its initial coin offering fund in 2017. In related news, two portfolio companies from a major online retailer’s crypto fund made key announcements. The first portfolio company, which raised $134 million in a security token offering, revealed that a Hong Kong-based equity firm agreed to invest an additional $400 million in the company in exchange for equity. The other portfolio company, a Barbados-based blockchain startup, announced plans to partner with a Caribbean-based bank to issue a central bank-backed digital currency and test know-your-customer/anti-money laundering technology.

In Singapore, a venture capital firm announced plans to launch a $10 million crypto fund. According to The New York Times, this fund will invest in early-stage companies globally such as cryptocurrency exchanges and security providers. Meanwhile, a New York-based blockchain company recently completed a $32 million Series B funding round and announced plans to expand its user base and further develop its auditable distributed ledger-based network, data synchronization technology and Ethereum-compatible smart contracting language.

This week Coinbase announced its acquisition of a decentralized identity solution startup company. The company will join Coinbase’s identity team and intends to use blockchain technology to develop new and innovative ways of verifying and validating identity. Also this week, a leading mobile payment platform announced the expansion of its service to allow customers to buy and sell bitcoins in all 50 U.S. states.

To read more about the topics covered in this week’s post, see the following:

Buying Coffee with Bitcoin, Tracking Ships with Blockchain, Fighting Financial Crimes and Litigating ICOs

In this issue:

New Solutions Seek to Bring Cryptocurrencies Closer to Mainstream

Blockchain Developments for Shipping, Food, Pharmaceuticals and Diamonds

Cryprocurrency Scams and Enforcement Actions Perpetuate Uncertainty

Analysis: Tezos Securities Class Action Survives Motion to Dismiss

New Solutions Seek to Bring Cryptocurrencies Closer to Mainstream

By: Jaime B. Petenko

This past week, a leading operator of global exchanges, clearing houses, data and listing services announced that it has partnered with a multinational technology company, one of the world’s largest and most well-known coffeehouse chains, and a major global management consulting firm to launch a new cryptocurrency platform. The new platform will develop open technology to enable consumers and institutions to more easily buy, sell, store and spend cryptocurrencies. The ecosystem created by the new platform is expected to include federally regulated markets as well as merchant and consumer applications. Subject to U.S. Commodity Futures Trading Commission review and approval, the new platform plans to launch in November with a one-day bitcoin futures contract that will be physically delivered, meaning owners will receive bitcoin, not cash, upon expiration of the contract. The coffeehouse chain, as the flagship retailer, will leverage the platform to give consumers the ability to convert cryptocurrencies into U.S. dollars to pay for coffee and other items at its retail locations.

In related news, a global investment banking, securities and investment management firm recently announced that it is considering offering custody services for crypto funds to provide protection to clients from risk of loss in the case of a cyberattack. Also, cryptocurrency exchange platform Coinbase recently launched a plug-in for a major e-commerce platform that will allow more web merchants to accept cryptocurrency as a form of payment.

In international news, while Thai banks continue to be prohibited from engaging in cryptocurrency activities, on Aug. 1 the Bank of Thailand published a regulatory announcement allowing bank subsidiaries to issue digital tokens, provide crypto brokerage services, run crypto-related businesses and invest in cryptocurrencies, subject to certain rules.

To read more about the topics covered in this week’s post, see the following:

Blockchain Developments for Shipping, Food, Pharmaceuticals and Diamonds

By: Jonathan D. Blattmachr and Diana J. Stern

This week, a major global technology firm and the world’s largest shipping company announced TradeLens, a blockchain-enabled shipping solution and “joint collaboration” between the two companies. Built on Hyperledger, the system has reportedly captured more than 150 million shipping events worldwide. The companies assert TradeLens will allow shippers to cut middlemen from the supply chain, saving customers up to 40 percent on shipping costs. With 92 firms already signed up (representing some 20 percent of the global supply chain’s market share), TradeLens expects to have a commercially available platform by year end.

In developments related to food supply chain solutions, Wyoming ranchers are working on a blockchain solution to track their beef’s provenance, with the hope that consumers will pay a premium for beef with verified origins. Additionally, Nestlé recently announced that it is testing whether fruits and vegetables used in baby food products can be traced using blockchain technology to improve recalls.

In Austria, a startup named Grapevine World recently announced a blockchain pilot for tracking healthcare data for a Forbes 100 pharmaceutical corporation’s clinical trials. The pilot will be hosted on a major cloud network, leverage existing health care interoperability standards and use Hyperledger Fabric. In China, ZhongAn Technology, an insurance company subsidiary, announced a new blockchain network to provide assurances on the origin and quality of diamonds using existing industry certification standards. The network reportedly has already uploaded data on 760,000 diamonds.

To read more on supply chain, see the following,

Cryptocurrency Scams and Enforcement Actions Perpetuate Uncertainty

By: Brian P. Bartish

Cryptojacking schemes continue to proliferate, with security researchers recently uncovering a massive wave of such attacks specifically targeting unpatched MikroTik routers to spread Monero-mining malware to every web page that a user may visit using the vulnerable router. The campaigns compromised more than 210,000 routers in total, with 183,700 in Brazil alone. Tokyo-based security firm Trend Micro discovered an on-demand malware business on the dark web at a price of $25,000, which allows users to exploit bitcoin ATM vulnerabilities to pilfer the bitcoin equivalents of up to 6,750 in U.S. dollars, euros or pounds.

The Wall Street Journal recently published the results of a study that determined that so-called “pump and dump” groups have generated more than $825 million in trading activity over the past six months by artificially increasing the price of certain cryptocurrencies to sell them at a profit. And researchers studying Twitter bots have uncovered a significant number of bots being used to entice users to give away small amounts of cryptocurrencies based on false promises of a larger payout in the same currency. The research team identified one botnet consisting of more than 15,000 bots that operated on a structure where some bots spoof legitimate cryptocurrency accounts and other bots “like” the fraudulently generated tweets.

A recent Bloomberg article stated that the SEC has begun scrutinizing brokerages that deal in cryptocurrencies, seeking information about fees generated from trading, financing and initial coin offerings. According to another report, FinCEN intends to go after foreign crypto exchanges doing business in the U.S. that do not comply with anti-money laundering rules. An additional report released this week discussed strategies for how cryptocurrency exchanges can avoid regulatory scrutiny by implementing the right policies and procedures, designated compliance roles, board oversight, and other measures. On Aug. 1, a bitcoin trader was forced to forfeit 81 bitcoins and was sentenced to 41 months in prison for money laundering.

For further reading, please see:

Analysis: Tezos Securities Class Action Survives Motion to Dismiss

By: Marc D. Powers

Earlier this week, the federal court in the Tezos consolidated securities class action proceeding addressed several thorny jurisdictional issues prevalent in many initial coin offerings (ICOs) made in 2017 and earlier. Over the past year, the SEC and plaintiffs in class actions have been bringing claims against parties allegedly involved in ICOs, mostly where there are allegations of fraud involved, with the primary claims based upon the sale of unregistered securities. In many of these cases, the ICOs were done in foreign jurisdictions or by foreign defendants or entities. So the interesting question that arises is this: Under what circumstances may these plaintiffs appropriately haul foreign defendants into U.S. courts to defend themselves? Several courts nationwide are now grappling with that issue, and the first decision substantively addressing those points has come down with a fair analysis heavily dependent upon the facts and allegations in the pleading.

In the putative class action involving the July 2017 Tezos ICO, which the defendants had characterized as a fundraiser for the Swiss-based Tezos Foundation, about $232 million was raised by the Foundation, with a portion going to a California husband and wife team, the Breitmans, and their company, Dynamic Ledger Solutions (DLS). The couple’s home was the corporate headquarters of DLS. Other defendants included the well-known venture capitalist Timothy Draper and his firms, which made a minority investment in DLS in May 2017, and Bitcoin Suisse, a foreign firm specializing in the crypto-financial sector, which provided intermediary services for the ICO such as conversion of U.S. dollars to Bitcoin and Ethereum, the transfer of the crypto to Tezos, and the creation of digital wallets.

The defendants moved to dismiss the consolidated complaint, which alleged violations of Sections 12 and 15 of the Securities Exchange Act of 1934, on several grounds, including lack of personal jurisdiction, forum non conveniens, that they were not a “statutory” seller or that there was the improper extraterritoriality application of the courts being used for the Exchange Act claims. Only the Draper defendants and Bitcoin Suisse were successful on their motions to dismiss.

Judge Richard Seeborg had little problem finding that the Breitmans (U.S. citizens living in Northern California) as well as DLS and the Foundation (both effectively controlled by the Breitmans) purposely directed their activities for the offering and met jurisdictional due process requirements. Equally easy was dismissing the Draper defendants, as neither Draper nor his entities solicited the purchase of the tokens, as required to be a “statutory” seller. There were no allegations of face-to-face buyer-seller contact for liability to attach.

Separately, the Foundation, organized in Switzerland, as the only “seller” of the token, argued that it was an extraterritoriality application of the U.S. Supreme Court’s Morrison decision, because the sale occurred in Alderney, a remote British outpost, and thus was not a “domestic transaction” for which U.S. courts should take jurisdiction. The Foundation further argued there was a forum selection clause, which made the U.S. courts forum non conveniens. However, the Court held that despite significant law enforcing such provisions, given it was based upon a “browsewrap” agreement, it would not be enforced, subject to later proof of the plaintiff’s actual knowledge of the provision.

It seems that certain allegations would influence any court deciding these kinds of issues. Here, the plaintiffs alleged that the Foundation engaged in little or no marketing of the ICO anywhere other than in the United States, the Breitmans were U.S.-based, and a significant portion of the 30,000 contributors to the ICO were U.S. citizens. It will be interesting to follow the case law development as more foreign defendants are sued in U.S. courts for foreign ICOs and challenge the fling on both personal and subject matter jurisdictional grounds.

In re Tezos Securities Litigation, 17-cv-06779 (N.D. Cal.) (J. Seeborg).

Blockchain Developments: Food Supply Chain, Bitcoin ETPs, ICOs and Tech Adoption

In this issue:

Multiple Pilots Drive Momentum for Leveraging Blockchain in the Food Supply Chain

SEC Rejects Winklevoss Bitcoin Trust, Commissioner Dissents

New Reports Detail ICO Scrutiny and Seek to Provide Clarity

Blockchain Adoption Continues in Both Institutional and Startup Environments

Multiple Pilots Drive Momentum for Leveraging Blockchain in the Food Supply Chain

By: Jaime B. Petenko

A major global technology company recently shared additional details about the Food Trust, a consortium consisting of 10 of the world’s largest companies that are building a blockchain to improve visibility and accountability in the food supply chain. According to recent reports, the Food Trust has recorded over half a million transactions and includes full end-to-end traceability for approximately 200 stock keeping-units (SKUs). The Food Trust reportedly implements GS1 standards to ensure uniformity among all participants. Also according to recent reports, during the third quarter of 2018, the Food Trust plans to announce general availability of the technology and onboard additional companies.

The same major global technology company has partnered with Brooklyn Roasting Co., a roastery in Brooklyn, New York, to use blockchain to track and confirm the authenticity of 150 bags of Ethiopian Yirgacheffe coffee beans as they move from a co-op in Ethiopia to a Djibouti export warehouse to a port in New Jersey to the Brooklyn roastery. During a recent event, Brooklyn Roastery and its technology partner opened the blockchain ledger to the general public. By scanning the QR code on mugs connected to the blockchain, customers could view their coffee’s journey through the supply chain and view documents verifying the coffee’s authenticity, including fair trade certificates, packing invoices and delivery receipts.

This week, an Australian multinational bank announced the completion of a successful global trade using its new blockchain platform. The bank partnered with five domestic and international supply chain leaders to track the shipment of 17 tons of almonds from a packer in Victoria, Australia, to end delivery in Hamburg, Germany. The platform – underpinned by blockchain, the “internet of things” and smart contracts – digitizes the operations, documentation and finance areas of global trade. It provides partners with greater transparency and efficiency, allowing them to view and track the location of a shipment along the supply chain, as well as the temperature and humidity of the container, and to upload and access documents such as bills of lading, certificates of origin and customs documentation.

The Sustainable Sugar Project, led by the Queensland Cane Growers Organization, recently received an AU$2.25 million (US$1.7 million) grant from the Australian government for its Smart Cane Best Management Practice initiative. The initiative will use blockchain to track the provenance of sugarcane and allow for proof of provenance and sustainability of the farm producing the sugarcane. Blockchain will also enable farmers who are using sustainable practices to attract a premium for their product.

To read more about the use of blockchain in the food supply chain, please see the following:

SEC Rejects Winklevoss Bitcoin Trust, Commissioner Dissents

By: Robert A. Musiala Jr. and Jonathan A. Forman

On July 26, 2018, the U.S. Securities and Exchange Commission (SEC) issued an order disapproving a proposed rule change sought by Bats BZX Exchange Inc. (BZX) that would have allowed BZX to list and trade shares of the Winklevoss Bitcoin Trust (WBT). Had the rule change been approved, the WBT would have held bitcoins as its sole asset, shares of WBT would have been issued and redeemed in exchange for bitcoin, and WBT shares would have been available only to certain “authorized participants.” The WBT would have sought to have its shares track the price of bitcoin by calculating the net value of its bitcoin holdings every 15 seconds based on the price of bitcoin on the Gemini Exchange, a cryptocurrency exchange that is also owned by the Winklevoss twins.

Cameron and Tyler Winklevoss first sought SEC approval for the WBT more than five years ago, in July 2013. The brothers have amended the WBT registration statement nine times, with the recent disapproval order being the latest in a long string of rejections by the SEC. The SEC explained its rationale for this most recent disapproval order in a 92-page document. In brief, the SEC concluded that BZX was unable to show that it could design rules to prevent fraud and manipulation and to protect investors related to the WBT shares.

The SEC rejected the argument that the bitcoin market was inherently resistant to manipulation. In doing so, the SEC cited, among other things, the “51% vulnerability”; the concentration of bitcoin ownership; the prevalence of cyberattacks on bitcoin exchanges; and recent studies finding evidence of bitcoin price manipulation involving Tether, a cryptocurrency claimed to be backed 1:1 by U.S. dollars that is used as a store of value for cryptocurrency market participants. According to the SEC, because the bitcoin market is not resistant to manipulation, BZX would have had to have entered into appropriate surveillance-sharing agreements with “significant” regulated bitcoin markets in order to sufficiently deter fraud and price manipulation and protect investors. The SEC found that adequate surveillance-sharing agreements were not in place.

Notably, SEC Commissioner Hester M. Peirce issued a written dissent from the SEC’s disapproval order. Commissioner Peirce wrote that the SEC erroneously focused on the characteristics of the spot market for bitcoin. According to her dissent, the appropriate focus should have been on the ability of the exchange to prevent manipulative and fraudulent trading pursuant to Section 6(b)(5) of the Securities Exchange Act of 1934. Commissioner Peirce noted that the standards, requirements and controls under which BZX proposed the trading of WBT shares offered sufficient protection. By looking beyond them and weighing the merits of bitcoin itself, Commissioner Peirce wrote that the SEC overstepped what should have been a limited inquiry. Commissioner Peirce also criticized the order because, in her view, it inhibits institutionalization and dampens innovation in the industry, which would mitigate the risks on which the disapproval order was based. According to a July 24, 2018, notice published in the Federal Register, the SEC intends to issue an order approving or disapproving a similarly situated exchange-traded product by Sept. 21, 2018.

For more information on the SEC’s recent order, see the following:

New Reports Detail ICO Scrutiny and Seek to Provide Clarity

By: Njeri S. Chasseau

Earlier this week, Stanford Law School released a report finding that U.S. class action lawsuits related to initial coin offerings (ICOs) are set to double in the next few years. According to the report, there have been 12 class action lawsuits related to ICOs since 2016, alleging abuse due to a lack of accountability and failure to adhere to securities laws. ICOs also appear to be under increasing scrutiny abroad. Switzerland’s Financial Market Supervisory Authority recently launched proceedings against blockchain startup Envion AG, alleging that the company breached financial market laws during a January 2018 ICO that raised almost $100 million through the acceptance of nearly 100 million Swiss francs. The Swiss regulators are investigating whether Envion may be in violation of Swiss banking laws. The risk of fraud in the ICO industry was further highlighted by recent reports of an online ICO white paper writing service that apparently seeks to commoditize white paper writing for startups looking to launch ICOs.

Two recently released publications seek to provide guidance on the legal status of ICOs. The Chamber of Digital Commerce, along with the Token Alliance, released a report titled “UNDERSTANDING DIGITAL TOKENS: Market Overviews and Proposed Guidelines for Policymakers and Practitioners.” Additionally, the Stanford Journal of Blockchain Law & Policy published an article that discusses the top 25 ICO jurisdictions and evaluates the related regulatory activity taking place in those jurisdictions.

For more information on blockchain and ICO lawsuits and regulation, see the following:

Blockchain Adoption Continues in Both Institutional and Startup Environments

By: Robert A. Musiala Jr.

Institutional financial services firms continue to integrate blockchain into their business models. Earlier this week, Forbes reported that a 129-year-old global asset management firm based in Chicago recently began offering fund administration services to three “mainstream hedge funds” that are “diversifying their portfolios with cryptocurrency investments.” The same firm has also begun implementing a blockchain solution based on Hyperledger Fabric to settle private equities transactions, and recently filed two blockchain patents. According to Cointelegraph, the same firm is exploring launching a cryptocurrency custody service.

In related news, a recent transaction took place in which, for the first time, two institutional traders swapped a position in the CME bitcoin futures market for an equivalent amount of the “physical asset” of bitcoin. This type of transaction is common in commodities trading, but now appears to be possible with bitcoin as the underlying commodity. And in international news, the Bank of Canada recently published a working paper analyzing the potential benefits of a “central bank digital currency” (CBDC). According to the paper, “[t]he welfare gains of introducing a CBDC are estimated at up to 0.64% for Canada.”

Fintech startups also continue to see increased adoption of blockchain. The cryptocurrency exchange Coinbase recently announced that it is now offering deposits and withdrawals denominated in the British pound. Square, the mobile payments firm, recently announced that its revenue from bitcoin sales reached $37 million in the second quarter of 2018. According to a recent article in Fortune, Bitmain – the world’s largest cryptocurrency mining company – earned approximately $1 billion in net profits in the first quarter of 2018. And in Switzerland, the online bank Swissquote reportedly experienced a 44 percent increase in profits in the first half of 2018, as a result of its new service offering bitcoin trading accounts for its clients.

For more information on recent trends in blockchain adoption, see the following:

Investments, Pilots and Patents: Recent Blockchain Developments

In this issue:

Investment Continues Across Private and Public Sectors

Initiatives Announced in Healthcare, Emissions, Airlines and Public Sectors

Continue to Seek IP Rights Amid Evolving Patent Landscape

Blockchain Investment Continues Across Private and Public Sectors

By: Melonia A. Bennett

The International Data Corporation (IDC) has published its update to the Worldwide Semiannual Blockchain Spending Guide, which estimates that worldwide spending on blockchain solutions in 2018 will be $1.5 billion, twice as much as in 2017. The Guide also estimates that worldwide spending on blockchain solutions will reach $11.7 billion in 2022. The Guide predicts that the largest growth in the U.S. will be in the distribution and services sector, and in Europe, Middle East, Africa and China, in the financial services sector.

The United Nations has noticed the explosive growth of blockchain investment—growing at an “unprecedented scale” and “warp speed,” according to Secretary-General António Guterres. The UN announced the creation of a “High-Level Panel on Digital Cooperation,” to put blockchain technology on its agenda. The panel will include industry, academic and political members, and will focus on confronting the impact of digital technologies on the global economy and society.

In the private sector, a New York-based global consulting and financial solutions firm, and a FINRA-registered broker-dealer, recently announced a new strategic collaboration to facilitate investment in SEC-compliant token offerings. In a July 24 announcement, Coinbase stated that it is partnering with London-based WeGift to launch crypto gift cards, which will allow customers to purchase retail goods and services using cryptocurrencies. Also on July 24, Galaxy Digital, the crypto-focused merchant bank founded by Mike Novogratz, announced that it led a $52.5 million fundraising round for crypto-lending start-up BlockFi, whose current model allows investors to take out a loan as high as $10 million using either bitcoin or ether as collateral.

In the public sector, on July 20, the Chinese district government of the Nanjing Jiangbei New Area announced its plans for a 10 billion-yuan (around $1.4 billion) blockchain project, funded through a public-private partnership. Thirty percent of the funds will come from the local government and 70 percent from the private sector, including a Chinese academic-backed fund and publicly listed venture capital firm based in the city of Nanjing.

For more information on recent blockchain investments, see the following:

New Initiatives Announced in Healthcare, Emissions, Airlines and Public Sectors

By: Simone O. Otenaike

This week, the Linux Foundation announced a new blockchain framework for the healthcare sector that hosts a number of benefits. The framework allows participants to draft smart contracts in any language (e.g., Python and Javascript) and then use those smart contracts to vote on the blockchain network’s configuration settings. The framework also supports Ethereum and allows participants to upgrade the blockchain consensus protocol and incorporate new scalable algorithms.

In the emissions industry, a multinational technology company announced an initiative to enhance the market for carbon credits through blockchain technology. The billion-dollar market for carbon credits suffers from inefficiencies and expensive accounting procedures, resulting in carbon credits that are often underutilized by corporations. The new initiative would turn these carbon credits into crypto tokens backed by various carbon assets verified by third parties according to international standards. The underlying token protocol seeks to instantly calculate the number of carbon credits needed to offset a corporation’s carbon footprint and facilitate the purchase and sale of carbon credits, ultimately leading to a more efficient marketplace.

Internationally, a major airline announced plans to roll out an airline loyalty digital wallet that would use blockchain technology to convert frequent flyer miles into digitized units that could be used to purchase goods from select retailers via the airline’s mobile app. The airline is currently partnering with 18 merchants, including restaurants, beauty parlors, gas stations and select retailers.

In the public sector, Delaware plans to launch a proof of concept for a blockchain-based business filing system. The system will allow corporations to track stocks and collateral assets in real time through smart contract technology and ultimately provide lenders and borrowers with more efficient and accurate records to meet state and federal regulations. In Tennessee, a global shipping corporation announced its plans to team up with a nonprofit pharmacy and launch a blockchain application that aims to reduce pharmaceutical waste. The application will rely on a secure and immediate, time-stamped distribution of information to facilitate the retrieval of unused medications and eliminate potential chain-of-custody issues. The goal of the nonprofit pharmacy is to distribute the unused medication to cancer patients who are otherwise unable to access it.

A new blockchain solution for supply chain also debuted this week with a global technology company’s launch of its proprietary blockchain-as-a-service application. The service reportedly has a few early adopters that were able to launch successful proofs of concept to address product tracking and traceability issues. A 30-day free trial of the service is available now, and customers can also sign up for a monthly, yearly or multiyear deal.

To read more about the topics covered in this week’s post, see the following:

Firms Continue to Seek IP Rights Amid Evolving Patent Landscape

By: Robert A. Musiala Jr.

Late last week, the U.S. Patent Office published the latest in what has been a steady stream of blockchain-based patent applications filed by institutional banks. Two patent applications by one of the largest U.K.-based banks were published: one dealing with a blockchain-based system for hosting cryptocurrency transactions, and another that seeks to streamline “know your customer” processes. Both patent applications appear aimed at leveraging blockchain to enhance security and compliance in banking systems.

A recent Cointelegraph article provided some statistics on the companies and countries with the most blockchain-related patent filings. Notably, the applications from China significantly outnumber those from other countries. The article also notes that so-called patent trolls appear to be taking an interest in blockchain patent applications.

As the patent landscape continues to evolve, blockchain is also being discussed as a solution for IP protection. A recent Forbes article highlighted a start-up that is seeking to leverage blockchain to assist in managing the protection of various types of intellectual property, including code, text, photos, music, 3D work, designs, trade secrets and confidential information. Vaultitude seeks to place nondisclosure agreements on a blockchain and to create a blockchain-based marketplace for selling and licensing IP. Among other uses, Vaultitude believes its solution could be used by patent offices in their prior art searches.

For more information on recent blockchain patent developments, see the following:

Blockchain Continues to Disrupt Banking, Capital Markets, Enterprise … and Crime

In this issue:

New Blockchain Solutions Emerge in Banking, Trade Finance and Payment Processing

More Blockchain Enterprise Solutions Announced

Blockchain Continues Heavy Influence on Capital Markets

Update on Cryptocurrency Cybercrimes and Enforcement Actions

New Blockchain Solutions Emerge in Banking, Trade Finance and Payment Processing

By: Robert A. Musiala Jr.

Blockchain continues to disrupt the financial services industry by enabling new products that promise to transform banking and payments. Binance, one of the world’s largest cryptocurrency exchanges, has announced plans to invest in a venture that seeks to become the world’s first “decentralized bank,” an emerging concept that would involve an ownership structure based on blockchain-based tokenized equity products. The bank will seek to establish itself in Malta, a jurisdiction that has become increasingly friendly to the blockchain industry.

The Hong Kong Monetary Authority recently announced plans to launch a blockchain-based trade finance solution in partnership with a Chinese fintech firm and a group of 21 banks, with the goal of improving access to banking services for new businesses. In Singapore, a technology firm issued a press release this week launching a permissioned blockchain network “built for the trade communities to boost overall efficiency, security and transparency for global trade” by enhancing security and efficiency in the management of trade-related documents, to include applications for trade finance.

In the U.S., a major technology firm has announced a partnership with a blockchain startup, Stronghold, and a state-chartered trust company, to build a new cryptocurrency that would be backed by U.S. dollars held in bank accounts insured by an institutional provider of deposit insurance. The new cryptocurrency would be hosted on the Stellar blockchain protocol and would be the latest development in the competition to create a so-called “stablecoin” that is able to avoid the price volatility issues experienced by most cryptocurrencies.

In the payments space, two major U.S. credit card companies recently had patent applications published that seek patent protection for blockchain-based solutions to improve payment processing systems. Also this week, BitPay, one of the world’s largest providers of merchant cryptocurrency payment processing services, became the eighth company to receive a virtual currency license from the New York Department of Financial Services. This will allow New York-based businesses to use BitPay to receive payments in bitcoin.

To read more about recent blockchain developments in the financial services industry, see the following:

More Blockchain Enterprise Solutions Announced

By: Simone O. Otenaike

This week the U.S. Department of Energy announced that it will award a grant of nearly $1 million to a blockchain startup in connection with efforts to advance the development of a decentralized energy grid. The startup’s project employs blockchain in the development of a decentralized solar power system that can share energy data from multiple sources (e.g., homes, buildings and electric grids) in a way that promotes energy efficiency and reduces the threat of cyberattacks.

In the aerospace and defense industry, there has been continued interest in blockchain-based solutions for reducing maintenance costs, minimizing errors in tracking parts and preventing falsified data. Earlier this week, a global consulting firm revealed a project that leverages blockchain to track, trace and authenticate aircraft parts and materials for suppliers, manufacturers and operators. Also this week, a multinational aerospace and defense company announced plans to use blockchain technology in the development of a traffic management solution for unmanned aircraft systems.

In the insurance industry, a new blockchain proof-of-concept (PoC) was announced that aims to reduce the costs in reinsurance contracts by eliminating inefficiencies related to excessive paperwork, lack of standardization and extensive signoffs. The PoC leverages a smart contract and creates a single and immutable version of the reinsurance contract that is accessible to all the key parties: insurer, broker and reinsurer. All negotiations occur through real-time messaging on the blockchain platform. Upon execution, the smart contract automatically calculates the premiums due and triggers payments upon the occurrence of a valid event. The PoC reportedly could become a commercially viable product as early as January 2019. Another notable blockchain solution in the news this week comes from a Boston-based startup that is building a blockchain platform to synthesize inter-country real estate protocols, lists of reputable industry personnel, real estate information, and real estate developments, so that individuals on the buy and sell side of real estate transactions can work more efficiently and make better decisions.

More blockchain solutions for supply chain also debuted this week, including an announcement from a data technology company of plans to launch a blockchain platform that will verify data, like packaging claims, and address compliance concerns with data regulations. The platform is currently backed by a major consumer packaged goods company. And in the metals and mining industry, a new cloud-based blockchain platform has emerged that seeks to reduce the inefficiencies of paper tracking and offer pricing transparency. The platform reportedly has 100 registered members and has plans to expand.

Finally, this week the R3 consortium launched Corda Enterprise, a commercial blockchain platform that hosts trade-specific blockchain applications. For example, one application processes mineral interest royalty contracts, and another tracks the trade of precious metals. The platform uses a proprietary firewall to improve data security and is currently available on a licensed basis.

To read more about the topics covered in this week’s post, see the following:

Blockchain Continues Heavy Influence on Capital Markets

By: Njeri S. Chasseau

Amid continued scrutiny of ICOs, several firms are racing to build regulated platforms for the issuance of so-called “securitized token offerings,” or STOs, that would seek to launch blockchain-based digital assets that are registered as securities under applicable laws. The Gibraltar Stock Exchange (GSX) recently announced that it will be engaging in efforts to obtain regulatory approval for listing and trading such security tokens. If granted, approval will permit the GSX to trade both security tokens and traditional securities. Similarly, the Malta Stock Exchange (MSE) recently announced its intentions to work with the digital asset exchange OKEx to develop a security-tokens trading platform. The MSE and OKEx hope to combine their capabilities in security expertise and client due diligence in order to develop “the world’s first regulated decentralized global stock exchange.”

This week, U.S. cryptocurrency platform Coinbase announced that it had received approval from the U.S. Securities and Exchange Commission (SEC) for its proposed acquisition of three entities that would move Coinbase closer to being able to operate as a broker-dealer. This announcement, however, was later rescinded, as the SEC was not involved in the approval process and any discussions between Coinbase and the SEC regarding the acquisitions took place on an “informal basis.”

According to news reports this week, the asset management company BlackRock has begun investigating a potential foray into the world of cryptocurrency by setting up a working group to study cryptocurrencies and gain a better understanding of the capabilities of blockchain more generally. Also of note, the CFA Institute, the entity responsible for training financial professionals, recently announced that it will be adding topics covering cryptocurrencies and blockchain to its Level I and II curriculums, and adding related questions to its 2019 exams.

For more information on cryptocurrency and blockchain developments in the capital markets industry, see the following:

Update on Cryptocurrency Cybercrimes and Enforcement Actions

By: Brian P. Bartish

In international news, local police in the Guandong province of China recently seized more than $1.5 million worth of cryptocurrencies, including bitcoin, ether and litecoin, as part of a raid against an illegal online gambling platform that utilized the currencies to hide the proceeds of its activities. In Greece late last week, a Greek court ruled to extradite Alexander Vinnik to France, where he stands accused of defrauding French citizens through the cryptocurrency exchange BTC-e. Mr. Vinnik also faces charges in his native Russia, and many speculate that his extradition to France may be only a layover en route to the U.S., where he has been indicted on 21 charges including identity theft, facilitating drug smuggling and over $4 billion in money laundering through bitcoin.

Domestically, the IRS has announced a new campaign to improve reporting compliance for cryptocurrency-related gains and losses. The two-pronged campaign consists of heightened review of previous filings coupled with public outreach to increase awareness of filing rules for cryptocurrency gains. The campaign begins with a “carrot” approach by offering safe harbor to individuals to correct erroneous filings without repercussion as the IRS publicly signals its intent to move to a less lenient enforcement scheme over time.

In a recently released report, cybersecurity firm Kaspersky Labs stated that over $10 million worth of ether has been stolen this past year via social engineering tactics, with investors interested in ICOs becoming the most popular targets. According to the report, scammers use phishing emails, fake websites and even Twitter to trick investors into sending funds to wallets that the scammers control. The report found that since the beginning of 2018, cybercriminals have triggered more than a hundred thousand security alerts from cryptocurrency-related schemes, including an increasing trend of “cryptojacking,” in which attackers infect servers or computers with malware that surreptitiously siphons the machine’s processing power for crypto mining.

For more information on recent cryptocurrency crimes and enforcement actions, please see:

Risk and Regulation in AML/Tax, ICO Scrutiny, Provenance POCs

In this issue:

Cryptocurrency Global Regulations Tighten as Financial Crime Risks Intensify

Global Tax Regimes Evolve With Varied Perspectives as Market Seeks Clarity

Latest Trends for ICOs: Success Rate and Government Scrutiny of ICO Scams

Blockchain Piloted to Trace Food, Art and Diamonds to Their Origins

Cryptocurrency Global Regulations Tighten as Financial Crime Risks Intensify

By: Melonia A. Bennett

The European Union, through the European Parliament and Council, recently adopted and formally published its Fifth Anti-Money Laundering Directive (5AMLD). Under 5AMLD, cryptocurrency exchange platforms and wallet providers are brought within the EU anti-money laundering (AML) rules, including know-your-customer (KYC) requirements and reporting obligations for suspicious transactions. 5AMLD entered into force on July 9, 2018, and all EU-member states must implement its provisions in their national law by Jan. 10, 2020.

On July 3, 2018, a U.S.-based blockchain security firm released a report stating that cryptocurrency exchange theft in the first half of 2018 was three times the level for all of 2017, with a total of $1.5 billion in cryptocurrencies predicted to be lost to cyber-hacks by the end of 2018. According to the report, this increase in theft tripled the amount of cryptocurrency money laundering. The report was released on the heels of yet another major exchange hack, the $31 million theft from South Korea’s Bithumb, and right before the recent hack of $13.5 million from Switzerland’s Bancor.

Financial institutions are working with regulators to develop AML compliance tools to combat cryptocurrency-related crimes. For example, enterprise blockchain software firm R3 recently launched a KYC application on its Corda blockchain platform. Thirty-nine banks, financial service providers and central banking institutions participated in the test, completing 300 transactions over the four-day trial at the end of June. The application seeks to implement a unique self-sovereign model that allows customers to create and manage their own identities, including relevant documentation, and then grant permission to multiple participants to access this data, thereby eliminating the need for each financial institution to individually manage KYC records.

Concerns over the use of cryptocurrency in sanctions evasion also continue to plague regulators. A new U.S. executive order issued in March 2018 prohibited the circumvention of U.S. sanctions against Venezuela by using cryptocurrency, in part as a reaction targeted at Venezuela’s Petro token. A recent report by a firm specializing in Bitcoin investigations software raised similar concerns with regard to Iran, citing its analysis that “confirms that a portion of transactions originating from Iranian cryptocurrency services pass through western exchanges and financial institutions – a signal that Iranian cryptocurrency services do not face the same isolation felt by the country’s banks.”

To read more about cryptocurrency crime and global regulatory initiatives, see the following:

Global Tax Regimes Evolve With Varied Perspectives as Market Seeks Clarity

By: Robert A. Musiala Jr.

Issues involving cryptocurrency taxation continue to gain press as regulation evolves inconsistently across global jurisdictions and market actors express a desire for clarity. A recent Cointelegraph article discussed the differences in tax policy across 10 jurisdictions: U.K., U.S., Japan, South Korea, Russia, South Africa, Canada, Brazil, Germany and Switzerland. Notable differences highlighted by the report include de minimis exemptions from tax on gains of £11,850 or less in the U.K., and BRL 35,000 or less in Brazil; discussion in Japan about implementing a flat tax in lieu of the current progressive tax on gains from cryptocurrency transactions; the absence of a gains tax in South Korea; and Germany’s full exemption from tax on gains when cryptocurrency is sold after being held for more than one year. A Bloomberg article provided more detail on tax policy in Germany, where the government recently clarified that Germany’s value added tax does not apply to peer-to-peer sales of cryptocurrency, the exchange of cryptocurrencies for goods or services, and cryptocurrency earned by mining.

A more comprehensive analysis of the tax treatment of cryptocurrencies across the globe can be found in a report issued in late June by the Law Library of Congress. One example from this report shows how cryptocurrencies are categorized differently in the following jurisdictions:

  • Israel: taxed as asset
  • Bulgaria: taxed as financial asset
  • Switzerland: taxed as foreign currency
  • Argentina and Spain: subject to income tax
  • Denmark: subject to income tax with losses deductible
  • United Kingdom: corporations pay corporate tax, unincorporated businesses pay income tax, individuals pay capital gains tax

In the U.S., there have been calls for more clarity on the rules governing cryptocurrency taxation from various groups, including the American Institute of CPAs. Meanwhile, a recent news article reported that the IRS has licensed software used to trace and identify the owners behind public keys on the Bitcoin blockchain.

For more information on issues related to the taxation of cryptocurrencies, see the following:

Latest Trends for ICOs: Success Rate and Government Scrutiny of ICO Scams

By: Panida A. Pollawit

Approximately 56 percent of crypto startups were no longer in business after just four months, according to a study from Boston College. The study tracked over 4,000 ICOs in the first half of 2018 by monitoring their Twitter accounts, and found that over half of these accounts were inactive within 120 days from the time their ICO was announced. The study also revealed that although the highest return on investment for ICOs has been for investors who purchase and sell the token on the first day of its listing, there has been a decline in these returns as more investors have taken advantage of this strategy.

Another survey of tokens with over $50 million in market cap found that over 80 percent of these tokens are scams, and over 10 percent more were abandoned and never made it onto an exchange. Thus, only 8 percent of tokens actually get traded on an exchange. These numbers are consistent with reporting by websites such as Dead Coins and Coinopsy, which list over 800 inactive crypto companies. Despite these risks, some investors have not shied away from the opportunity. For example, a venture capital firm in Hong Kong recently announced that they have invested $160 million in a company’s tokens in exchange for dividends.

Aware of the high volume of crypto scams, governments are continuing to regulate ICOs. SEC Chairman Jay Clayton has highlighted the SEC’s actions against fraudulent ICOs and called cyber threats “some of the greatest risks confronting today’s financial markets.” China, having already banned ICOs in 2017, is now working with instant messaging platforms to spot crypto trades by companies that have moved overseas but are still accessing the Chinese market through these apps. In the U.S., President Trump has also turned his attention to digital currency fraud and money laundering, establishing a Task Force on Market Integrity and Consumer Fraud, through an Executive Order, to provide guidance for the prosecution of these fraud cases and policy recommendations. FINRA also recently released a Regulatory Notice encouraging firms regulated by FINRA to report their activities related to digital assets.

To read more about this week’s news on blockchains, please see the following:

Blockchain Piloted to Trace Food, Art and Diamonds to Their Origins

By: John C. McIlwee

From gut to glut, supply chain uses for blockchain technology continue to expand. The Food Standards Agency (FSA), a U.K. regulator, recently completed a blockchain pilot program with a collaborating slaughterhouse to improve regulatory compliance in the meat processing industry. Where compliance was previously tracked through the collection and communication of disparate inspection data, the FSA pilot demonstrated that unified data, a single reporting ledger and permissioned visibility improved transparency for regulators and industry actors alike. This month the FSA promises to push further down the supply chain to give farmers access to data about their cattle. Towards a similar objective, the retail co-op S-Group will soon launch their Pike-perch radar solution to provide customers information about where their fish was caught and how it got to the local grocer. Using modules of IBM Food Trust (an IBM and Hyperledger collaboration) and a QR code on the packaged fish, S-Group believes that its blockchain pilot will evolve into a program that will connect the consumer with the person who reeled in the fish.

Meanwhile, ArtChain is putting blockchain technology to work in an industry beset by forgery and counterfeit. ArtChain, founded by a former Citibank executive and Australian property development director, has already gotten the support of many independent galleries, art dealers and collectors. All involved believe that blockchain technology will restore credibility to the art supply chain and strengthen artwork as an asset class. Similarly, Cartier’s parent, Richemont, has announced that it intends to utilize blockchain to trace the origin of diamonds, rocks and gold back to the mines and recycling factories from which they came. Richemont intends to pass that information onto the purchasers of Cartier goods as a statement on source and authenticity.

To read more about recent articles on blockchain for supply chain, see the following:

Blockchain Investments and Pilots Continue, Enforcement Actions Persist

In this issue:

• Public and Private Sectors Continue to Invest in Blockchain

• Businesses Continue Investment in Blockchain Enterprise Solutions

• Financial Services Sector Continues to Integrate Blockchain Amid Promise and Challenges

• Enforcement Update: DOJ and Other Agencies Seize $20 Million in Cryptocurrencies

Public and Private Sectors Continue to Invest in Blockchain

By Simone O. Otenaike

Earlier this week, Andreessen Horowitz unveiled plans to launch a $300 million fund that will invest exclusively in crypto startups and buy and hold unaffiliated crypto assets. The dedicated crypto fund will be co-led by former federal prosecutor Kathryn Haun, the firm’s first-ever female general partner. The VC firm is not new to investments in crypto assets – the firm’s general fund has invested in such “non-qualifying investments” for the past five years. But the introduction of a dedicated crypto fund allows the firm to invest in crypto startups via equity, convertible notes or tokens without limitations.

The aerospace and defense (A&D) industry is also investing in blockchain technology. According to recent reports, A&D firms are looking to blockchain as a mechanism to reduce maintenance costs, increase aircraft availability, minimize errors in tracking parts and eliminate falsified data. In a recent A&D report, 86 percent of respondents from A&D companies plan to integrate blockchain into their business models by 2021.

The government of South Korea recently announced plans to pilot blockchain technology in the areas of livestock supply chain management, customs clearance, online voting, real estate transactions, cross-border e-document distribution and shipping logistics. According to Coindesk, the South Korean government will invest $9 million in the development and application of blockchain technology to the government systems that regulate these six areas.

Last week, two university systems announced their respective blockchain educational initiatives. Stanford University will serve as the headquarters for a new blockchain research center that will develop a curriculum and best practices for blockchain technology. And for the first time ever, UC Berkeley will open its blockchain education program to the public. UC Berkeley’s online professional certificate program starts next month and is designed to equip students for careers in developing blockchain technology for the enterprise. More than 7,000 students have signed up for this inaugural program.

To read more about the initiatives covered in this week’s post, see the following:

Businesses Continue Investment in Blockchain Enterprise Solutions

By Njeri S. Chasseau

Last week, Microsoft, in conjunction with consulting giant Ernst & Young (EY), announced the launch of a copyright royalty payment system that leverages the Quorum blockchain. The system would “streamline the process of tracking and collecting copyright payments” in an effort to deliver greater monetary value to creators. The solution is designed to manage and protect confidential business arrangements and aims to assist with tracking which parties’ rights are part of a project and which parties are entitled to payment – a process that can often be convoluted and inefficient.

Walmart is currently in the process of developing two enterprise systems – one for streamlining the food supply chain and another for storing medical records. Walmart is working with a number of other companies through the so-called Food Trust to bring clarity and integrity to the food product supply chain, with a focus on ensuring that “farm to table” items are from quality sources. In addition, last week Walmart was awarded a patent for a storage system that will maintain medical records on a blockchain, which can then be accessed from a wearable device that could also be accessed by medical personnel if a person is unresponsive. This system would be greatly enhanced by the amount of patient data Walmart would have access to should it decide to complete a contemplated purchase of the health insurance provider Humana.

Other recent blockchain initiatives include a patent application published June 21 by pharmaceutical company Merck & Co. that seeks to leverage blockchain to combat drug counterfeiting and allow better control over pharmaceutical product supply chains. In Belgium, the Antwerp Port Authority is partnering with Antwerp blockchain startup T-Mining to develop a blockchain-based system that will automate and digitize certificates of origin and phytosanitary certificates, which could streamline the inspection process for cargo loads of fruits and vegetables that are shipped to and from Belgium ports. According to a recent report in The New York Times, the business benefits of blockchain are projected to reach more than $21 billion by 2021.

To read more about the continued investment in blockchain enterprise solutions, see the following:

Financial Services Sector Continues to Integrate Blockchain Amid Promise and Challenges

By Emily R. Fedeles

The financial services industry continues to explore ways to harness the power of blockchain. A new remittance service recently launched by AlipayHK and GCash uses blockchain technology to allow customers to transfer funds between Hong Kong and the Philippines within seconds without having to use intermediaries. Meanwhile, RippleNet, a decentralized network of payment providers and banks connected via Ripple technology, has added Kotak Mahindra Bank – a leading bank in India with more than 1,300 branches – to its network of banks, which will allow consumers to settle cross-border payments to and from India in minutes rather than days, with end-to-end tracking.

According to Coindesk, an open source community named Cordite is building on the R3 Corda blockchain to design digital tokens that would allow the digital representation of numerous assets traditionally held and traded by highly regulated financial institutions. These digital assets would be similar to Ethereum-based ERC-20 tokens, but they would be specifically designed for the banking industry. Notably, the main contributor to the project is the Royal Bank of Scotland.

As the financial sector continues to integrate blockchain solutions, blockchain businesses around the globe are having difficulty obtaining bank accounts. According to a recent report in the Irish Times, Irish bank AIB indicated that blockchain businesses present difficulties in complying with anti-money laundering (AML) and know your customer (KYC) requirements. Similarly, amendments to AML rules applicable to cryptocurrency exchanges in South Korea have resulted in domestic banks having to tighten up monitoring of related bank accounts. In Switzerland, the financial director of Zug recently called for a working group to be established by the Swiss Bankers Association to assist blockchain companies in opening bank accounts.

For more information on blockchain developments in the financial services sector, see the following:

Enforcement Update: DOJ and Other Agencies Seize $20 Million in Cryptocurrencies

By Joanna F. Wasick

On Tuesday, the Department of Justice (DOJ) issued a press release detailing the seizure of over $20 million worth of bitcoin and other cryptocurrencies used to launder proceeds of illegal transactions over the darknet. In a first-of-its-kind sting, personnel from various government agencies posed online as money launderers and vendors of illicit products on darknet market sites. Deputy Attorney General Rod J. Rosenstein sent a strong message that the internet is no haven for illegal activity. “Criminals who think that they are safe on the Darknet are wrong,” he said. “We can expose their networks, and we are determined to bring them to justice.” In addition to bitcoin, the DOJ seized U.S. currency bills, gold bars, cryptocurrency mining devices, weapons and narcotics. Thirty-five individuals were arrested and await prosecution. According to Bloomberg, an agent from the FBI recently said the FBI currently has 130 cases tied to cryptocurrencies.

The government’s increasing capacity for law enforcement in the digital space goes hand in hand with increased regulatory efforts to stem misuse of cryptocurrencies at the onset. Japan’s Financial Services Agency recently ordered six licensed cryptocurrency exchanges to enhance their internal-auditing and user-protection systems in an effort to stem money laundering and to protect the public from fraud. At a June 25 event, Andrew Smith, director of the U.S. Federal Trade Commission’s Bureau of Consumer Protection, advocated for increased cryptocurrency regulation, stating that consumers lost $532 million to cryptocurrency-related scams in the first two months of 2018 alone. A Bloomberg article released earlier this week reported on “cryptocurrency ‘bounty campaigns,’ where social media influencers get paid to promote ICOs by the entrepreneurs (and in some cases scammers) behind the offerings.”

Cryptocurrencies with enhanced privacy and anonymity features are receiving specific scrutiny. On June 20, the deputy assistant director of the U.S. Secret Service’s Office of Investigations called for regulation of such coins, which, the director said, serve primarily to subvert legitimate law enforcement. In response, Zcash, a cryptocurrency offering enhanced anonymity, stated that the American public was best served by a government that protects, not penalizes, organizations that advocate for privacy rights.

For more information on enforcement activities, see the following:

Blockchain Developments: U.S. Government, Criminal Actors, Advertising, Financial Services

In this issue:

U.S. Government Seeks to Leverage Blockchain, Issues Reporting Guidance

Cyberhacks and Enforcement Actions Continue Relentlessly

Consumer Products Firms Announce Blockchain Advertising Pilots

Financial Firms Continue to Pursue Cryptocurrency Initiatives

U.S. Government Seeks to Leverage Blockchain, Issues Reporting Guidance

By: Simone O. Otenaike

Government agencies in the U.S. and abroad continue to announce initiatives that explore use cases for blockchain technology. According to a June 15 press release, the U.S. Department of Homeland Security recently awarded a $192,380 contract to Factom, Inc., a blockchain startup based in Austin, Texas. Under the contract, Factom will integrate blockchain technology with existing Internet of Things (IoT) sensor and camera devices to protect the integrity and authenticity of IoT data. Factom will test this capability in the challenging conditions under which U.S. Border Patrol agents operate to prove the potential for application in homeland security use cases. Separately, the U.S. Department of Veterans Affairs (VA) is evaluating the use of blockchain technology to track each step in its contracting process and verify completion. When combined with the VA’s routine and repetitive government contract procedures, blockchain technology has the potential to reduce the time and resources spent during its contract closing process. According to Bloomberg Government, since fiscal 2015, federal agencies have funded $8.4 million in blockchain contracts, more than half of which were awarded after July 2017.

This week also saw the release of new guidance for reporting virtual currency on financial disclosure reports. The U.S. Office of Government Ethics (OGE) released a legal advisory that clarified the government’s stance on virtual currencies − virtual currency qualifies as property under the Ethics in Government Act, and consequently is subject to the public disclosures required by law. The OGE further explained that virtual currency only qualifies as property and does not constitute real currency, but the agency reserved its right to issue further guidance on this issue as virtual currencies and their surrounding applications continue to evolve.

Outside of the United States, Brazil and the South Indian state of Kerala recently announced plans to implement blockchain solutions for their respective government systems. Brazil’s central bank developed a blockchain platform to manage the authorization and discipline of financial institutions regulated by the central bank. The new project in Kerala will integrate blockchain technology with IoT technology to improve the efficacy of the state’s supply network for dairy products, vegetables and fish. This system will reduce food waste and facilitate the state’s crop insurance scheme.

To read more about this week’s articles on blockchain solutions in government systems, and the government’s stance on virtual currencies, see the following:

Cyberhacks and Enforcement Actions Continue Relentlessly

By: Diana Stern

On Wednesday, South Korea-based exchange Bithumb, which ranks as the sixth-largest trading venue in the world, lost 35 billion Korean won (approximately $31.6 million) to malicious hackers. CoinDesk Korea reported that Bithumb spends about $9 million annually on security measures. The exchange has promised to cover customers’ losses. In contrast, when Italian cryptocurrency exchange BitGrail suffered a cyberattack resulting in approximately $187 million of stolen assets this February, it did not refund its users. Pursuant to an order by the Tribunal of Florence and pending further court decisions in pre-bankruptcy proceedings, Italian authorities recently seized bitcoin from BitGrail. According to Endpoint security firm Carbon Black, there have been at least $1.1 billion in cryptocurrency-related thefts since December 2017.

Meanwhile, the U.S. Department of Justice recently announced that Gal Vallerius, aka “Oxymonster,” an individual involved in a criminal online marketplace known as Dream Market, pleaded guilty to conspiracy to possess with the intent to distribute controlled substances, and conspiracy to launder money. Dream Market was a dark website that only accepted bitcoin and other cryptocurrencies as payment. According to the complaint filed with the Southern District of Florida last year, Vallerius’ bitcoin “tip jar” tipped off the authorities about his identity. The tip jar was linked to his wallets on localbitcoins.com; it was not configured to go through the tumbler that anonymized Dream Market’s internal payments.

In Japan, prosecutors recently arrested 16 suspects in an ongoing criminal case of cryptojacking. Cryptojacking is an attack in which hackers deploy malicious code onto computers so that they mine cryptocurrency for the hackers’ benefit. The suspects in the Japanese matter were allegedly mining Monero (XMR) on victims’ machines. Ukrainian authorities also made arrests this week, apprehending four suspects for operating up to six fake cryptocurrency exchanges.

On the regulatory front, AML/KYC compliance appears to be gaining renewed attention. New research on U.S. and E.U. wallets and exchanges from P.A.ID Strategies shows that “of 25 prominent custodian wallets and crypto exchanges examined, 68% are allowing users to trade crypto and fiat currency with no formal identification and no Know Your Customer (KYC) checks.” In Asia, Japan’s Financial Service Agency (FSA) is reportedly gearing up to send “business improvement orders” to at least five exchanges, as it did with other exchanges earlier this year. The FSA recently rejected an exchange’s application for a license for the first time, citing concerns related to AML/KYC compliance.

Consumer Products Firms Announce Blockchain Advertising Pilots

By: Joanna F. Wasick

Earlier this week, Kiip, a mobile marketing and monetization platform, and AB InBev, the world’s largest brewing company, announced the launch of a blockchain mobile ad campaign that uses Kiip’s new “Single Ledger” blockchain to enable all players in the mobile ad sales chain to view and audit campaign data directly. Data such as impression, engagement, time stamps, and price will be written to the Ethereum blockchain for the brand to download and review. The intended result will be a clearer and simpler reconciliation of campaign performance data, reducing fraudulent reporting by third parties and ad servers, and streamlining the historically arduous reporting and payment process.

Along similar lines, Mediaocean, a New York-based advertising services and software company, and IBM iX, one of the world’s largest digital agencies, recently unveiled a pilot program that uses a custom blockchain built by IBM to record how digital dollars are being spent. The network will first focus on authorizing transactions between marketers and agencies, but will expand to include transactions by publishers and measurement companies. Featured participants in the program include Kellogg, Pfizer, Unilever and Kimberly-Clark.

These pilot programs seek to clarify how blockchain fits into the advertising space. The results of the programs will likely aid in determining whether the impact of blockchain technology on advertising sales is significant enough to compel others to follow suit.

Financial Firms Continue to Pursue Cryptocurrency Initiatives

By: Melonia A. Bennett

Last Friday, the U.S. Securities and Exchange Commission (SEC) issued a notice that it was delaying any decision on a rule change submitted by a New York Stock Exchange venue seeking to list its first exchange-traded funds (ETFs) based on the value of bitcoin, claiming it needs more time to review the proposal. This comes on the heels of public comments made by the director of the SEC’s Division of Corporation Finance, William Hinman, which appear to confirm that, as with bitcoin, sales of Ether are not securities transactions.

While the SEC continues to take a cautious approach to cryptocurrencies and ETFs related to cryptocurrencies, the financial industry continues to pursue cryptocurrency initiatives. Cboe Global Markets President Chris Concannon responded to Hinman’s comments by stating, “[The] announcement clears a key stumbling block for Ether futures.” Separately, Metropolitan Commercial Bank (MCB) has publicly applauded cryptocurrency business “pioneers,” and has banking clients including cryptocurrency exchanges, as well as other hedge funds and cryptocurrency investors. MCB has experienced a 300 percent increase in its Q1 2018 non-interest income, in large part due to fees earned from its crypto initiatives.

Goldman Sachs has also announced that it is considering additional cryptocurrency trading beyond assisting clients with bitcoin futures. Industry leaders such as Peter Thiel and Coinbase are also investing in one of several “stabilized cryptocurrencies” or “stable coins” that would function like normal money and be pegged to other assets.

But the enthusiasm for cryptocurrency financial products continues to be met with regulatory criticism, specifically focused on initial coin offerings (ICOs) that pose serious risks for investors. Nasdaq CEO Adena Friedman recently denounced the insufficient public information, as well as a lack of transparency, regulation and accountability in the ICO market. Friedman is reportedly supportive of the SEC’s claims that ICOs are securities offerings.

To read more about financial firms’ cryptocurrency initiatives, see the following:

This Week in Blockchain: Market Manipulation, ICO Taxation, Enterprise Solution Rollouts, and International Developments

In this issue:

Price Manipulation Suspicions and Hacks Drive Market Volatility

Tax Implications of Initial Coin Offering Events May Be Enormous

Enterprise-backedBlockchain Rollouts Continue to Gain Steam

Foreign Regulatory and Market Environment Continues to Evolve Rapidly
 

Price Manipulation Suspicions and Hacks Drive Market Volatility

By Stephanie N. Malaska

Recent events have increased suspicion of cryptocurrency valuations and the reliability of cryptocurrency exchanges. The U.S. Commodity and Futures Trading Commission (CFTC) recently subpoenaed the trading data of four major cryptocurrency exchanges as part of an investigation into potential price manipulation in bitcoin futures products listed on the Chicago Mercantile Exchange (CME). CME uses pricing data from Bitstamp, GDAX (Coinbase), itBit and Kraken – all of which were subjects of subpoenas. According to Cointelegraph, news of the subpoenas appeared to trigger a sharp drop in the price of all of the top 100 cryptocurrencies.

This week also saw the release of new research into bitcoin price manipulation. On June 13, University of Texas professor John Griffin and graduate student Amin Shams published a detailed assessment of Bitfinex’s use of its Tether currency and its effect on bitcoin’s price. Through an analysis of transaction records, timing and price fluctuations, Griffin and Shams concluded that “entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling” and that “such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention.”

Continued cyber hacks are also contributing to price volatility. Last weekend, South Korean exchange Coinrail reported that its cryptocurrency reserves had been hacked, resulting in a loss of around $40 million. Japan also recently initiated its first cryptojacking criminal case, charging three individuals for constructing websites that would harness unwitting visitors’ computing power to mine Monero. In Australia, a recent investigation revealed that a Singapore firm may have utilized a “back door” in its smart contract code to withdraw $6.6 million of cryptocurrency from a business partner’s account.

To learn more about the CFTC investigation, Bitfinex and recent hacks, see the following:

Tax Implications of Initial Coin Offering Events May Be Enormous

By Heather K.P. Fincher

As controversy continues over the Security and Exchange Commission’s (SEC’s) treatment of cryptocurrency tokens used in so-called initial coin offerings (ICOs), parties to ICOs would be well-served to also consider how funds raised in ICOs will be treated by the Internal Revenue Service (IRS). The potential tax consequences of an ICO should not be underestimated and can be very surprising. The tax treatment of an ICO token sale depends on how the token is characterized, such as equity, debt, prepaid goods or services, currency, or other property. The general rule is that all income is taxable unless it qualifies for an exception, such as a contribution to capital or a gift. As companies argue that tokens issued in an ICO should not be considered securities, they should consider that this argument may make the issuer of the ICO tokens subject to current taxation under the tax rules for sales of property or prepayments for goods or services (although such a prepayment might permit income deferral for one year). With approximately $5.5 billion raised in ICOs last year and approximately $9 billion raised this year, the tax consequences could be enormous.

To add to the confusion, a token’s characterization for tax purposes at times may differ from its characterization under the rules of a separate regulating body, such as the SEC or CFTC. And in the international context, the regulation, legislation and guidance often differ greatly from one country to another.

The ICO space is ripe for guidance by the IRS, but any guidance may be a long time coming. President Trump signed a new tax bill into law at the end of 2017, and Treasury’s Priority Guidance Plan, released May 9, 2018, was full of projects implementing the new tax laws but makes no mention of any project related to blockchain technology or cryptocurrency. Taxpayers therefore must continue to examine and apply existing tax authorities – which represent imperfect analogies – to determine the likely tax treatment of tokens.

To learn more about the tax treatment of cryptocurrencies, see the following:

Enterprise-backed Blockchain Rollouts Continue to Gain Steam

By Brian P. Bartish

Companies of all sizes continue to roll out blockchain enterprise solutions. In the financial services sector, recent reports indicate that Fidelity Investments is seeking to deploy its own digital asset exchange and cryptocurrency custody service. A recently published patent application reveals that Mastercard is researching a solution that could move its payment verification and processing functions to a public blockchain. Santander Bank and Ripple are collaborating with another major payment card brand on a blockchain solution, intended to be released this year, that would enable cross-border transactions at higher speeds and with greater levels of transparency. Outside the developed world, South African startup Wala is working on a blockchain solution that enables the company to facilitate approximately 6,300 transactions a day, the vast majority of which are under $1. With a new round of funding from a token sale and partnerships with banks and trading firms, Wala has plans for future blockchain applications aimed at individuals in the developing world.

Blockchain technologies also continue to gain traction in use cases involving an array of global trade applications across various industries. Last week, DHL announced a partnership with TradeIX, a blockchain trade finance platform, that will enable DHL to “embe[d] multiple funding and risk mitigation options into their product offerings.” With pressure to comply with the requirements of the Drug Supply Chain Security Act, which imposes heightened tracking requirements on certain prescription drugs, many pharmaceutical companies see promise in blockchain solutions that can provide a neutral ground for sharing data. Drug distributor AmerisourceBergen has been exploring a number of pilot projects with manufacturers to better track the provenance of prescription drugs as they move through the supply chain. At the Consensus 2018 Building Blocks Hackathon, winning team LocalTrail unveiled a solution to track produce and other perishable foods quite literally from farm to table. The London Bullion Market is inviting proposals for a similar solution that could help mitigate threats to the integrity of the global precious metals market, including preventing metals used to fund armed conflict from entering the market.

With the increased interest in blockchain’s use in global trade, the United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) has opined on the “smart contract, electronic notary and decentralized process coordination” features of blockchain as a means to move away from paper-based processes and remove the need for trust in systems needed to manage supply chains. While UN/CEFACT noted a number of issues with blockchain technology in the global supply chain, it conceded that the technology held “clear value and use cases.”

For more information on the use cases above as well as additional examples, please see the following articles:

Foreign Regulatory and Market Environment Continues to Evolve Rapidly

By Robert A. Musiala Jr.

In foreign jurisdictions, regulators and market actors continue to take a wide range of actions in the blockchain space. Thailand’s securities regulator recently approved a new set of regulations governing ICOs that are set to take effect in late June. According to the Bangkok Post, the Thailand regulator is evaluating 50 ICOs under its new set of rules and has granted approval to five of these. Lithuania’s Ministry of Finance also recently issued new guidance that addresses ICOs and the application of certain tax and anti-money laundering laws to cryptocurrencies. In Indonesia, the Ministry of Trade reportedly has ruled that cryptocurrencies are commodities that can be traded on futures exchanges, thus allowing the launch of bitcoin futures products.

Binance, the world’s largest bitcoin exchange by trade volume, has made recent headlines in multiple jurisdictions. The company historically offered only crypto-to-crypto exchanges but has reportedly been granted a bank account in Malta, through which it intends to begin offering crypto-to-fiat exchanges. Binance also recently signed a memorandum of understanding with an industry organization in Jersey to develop a cryptocurrency exchange in that country. Meanwhile, Chinese financial services firm JD Finance recently announced plans to issue blockchain-based securities, and Japanese mobile content provider I-Freek Mobile Inc. has indicated its intention to enter the cryptocurrency exchange market.

In other foreign jurisdictions, concerns are being raised about the risks of cryptocurrencies and money laundering. Canada recently proposed new anti-money laundering regulations that would tighten rules related to cryptocurrencies, and the UK Financial Conduct Authority has issued a warning to banks on “cryptoassets and financial crime.” Most notably, according to The New York Times and Reuters, the Financial Action Task Force intends to begin discussions soon to draft new guidance governing cryptocurrency exchanges.

For more information on blockchain developments in foreign jurisdictions, see the following:

Five Things Blockchain Firms Need to Know About the GDPR

We’re witnessing the convergence, and perhaps the collision, of two powerful new forces in data privacy: the European Union General Data Protection Regulation (GDPR) and the emergence of blockchain based privacy solutions. These two forces share similar fundamental principles, such as individual control over personal information and data minimization, and blockchain may very well offer simple and powerful solutions to implement some of the GDPR’s mandates. At the same time, these two forces – which have emerged independently – are on a potential collision course, particularly with respect to the GDPR’s right to erasure, also known as the ‘‘right to be forgotten.’’ Although blockchain developers have reason to be nervous, or at least very vigilant, about GDPR compliance, we believe that the GDPR does not preclude businesses engaged in processing EU personal data from using blockchain. Read the full article to learn more about how companies can harness the benefits of blockchain while ensuring that data stored on a blockchain is compliant with GDPR requirements.

 

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