Blockchain Developments: Supply Chain, IDs, Financial Products, UN Warnings, Regulator Actions

In this issue:

New Blockchain Solutions Seek to Secure Tuna, Ports, Identity and Communications

Institutional Crypto Products and Blockchain Infrastructure Pilots Announced

Crypto Regulators Display Flexibility, Enforcement Agencies Flex Muscle

UN Addresses North Korea Crypto Hacks, Storage and Stablecoin Vulnerabilities Reported

New Blockchain Solutions Seek to Secure Tuna, Ports, Identity and Communications

By: Robert A. Musiala Jr.

According to a press release published last Friday, “North America’s largest branded shelf-stable seafood company” announced that it is using the cloud-based Blockchain as a Service (BaaS) platform of a major international software company “to trace the journey of yellowfin tuna from the Indonesian ocean to the dinner table.” According to the press release, “consumers and customers will be able to easily access the complete origin and history of … yellowfin tuna simply by using their smartphones to scan a QR code on the product package.”

Last week in Singapore, the government announced TradeTrust, a blockchain pilot project for port authorities that will seek to “turn paper-based bills of lading into digital documents that can be shared and accessed when container ships dock and unload in Singapore and consequently cut costs and the risk of fraud…” This week, the European Union Blockchain Observatory and Forum issued a report focusing on blockchain scalability, interoperability and sustainability. Among many other findings, the report highlights that blockchains “will need to interact with the off-chain world as well as with each other.” Another report published from Europe this week focused on the danger of collusion posed by blockchain solutions, and proposed “methods of action for antitrust and competition agencies.”

This week a press release announced that government agencies in Canada are working to build a blockchain-based identity solution that will seek to streamline the process of authenticating company credentials for government and business. The solution would leverage the Hyperledger Indy blockchain. Enhancing data security through blockchain was also the subject of a patent granted this week to a subsidiary of a major U.S. telecom firm. The patent envisions a system that uses blockchain to secure communications and recordings.

This week MyEtherWallet announced EthVM, a new open source Ethereum blockchain explorer tool. Ethereum analytics tools continue to advance and provide more data from the Ethereum blockchain, with one recent analysis finding that over 80 percent of the total existing supply of ether is held by only 7,572 wallet addresses.

For more information, please refer to the following links:

Institutional Crypto Products and Blockchain Infrastructure Pilots Announced

By: Simone O. Otenaike

According to recent reports, the Swiss-based Amun AG recently received approval to list a cryptocurrency exchange-traded fund (ETF) that tracks the price of XRP on SIX, Switzerland’s primary stock exchange. The firm currently has approval to issue cryptocurrency ETFs linked to four other cryptocurrencies, including bitcoin cash, litecoin, stellar lumens and EOS. Meanwhile, a U.S.-based investment management firm also announced plans to launch a blockchain ETF on the London Stock Exchange this week. The ETF initially will target 48 companies, selected through a proprietary scoring system, that are involved with blockchain technology. Coinciding with these ETF announcements, a Boston-based multinational financial services firm’s new digital asset platform went live last week with select clients.

Blockchain consortium and credit union service organization CULedger recently announced its partnership with a global information technology firm to pioneer permissioned blockchain network solutions for credit unions. The new partnership seeks to offer credit union members the ability to instantly authenticate financial transactions between members of any credit union on the global network through a customizable CULedger-issued digital credential, MyCUID. This same global information technology firm also announced plans to host the beta version of a New York investment firm’s custody solution for digital assets. The solution reportedly leverages the global information technology firm’s private cloud and encryption technologies and utilizes a hardware security module that functions like a lockbox to safeguard and manage digital keys. This appears to represent a shift from the current model of cold storage solutions, where private keys are held in a device not connected to a network.

The German Ministry of Finance made news this week with its recommendation that the country recognize securities issued in digital form as a legitimate form of financial instrument. The recommendation also called for legislation that creates a framework to regulate such digital instruments to avoid the possibility of manipulation. Also this week, a major market infrastructure provider for the global financial services industry published a white paper that outlines guiding principles for regulators and market participants for the post-trade processing of tokenized securities. The framework identifies key issues in trading cryptocurrencies that must be addressed to protect market stability. According to another recent report, the emergence of regulated security token offerings (STOs) has led to a decline in the number and volume of initial coin offerings (ICOs) and STOs during the second half of 2018. The report notes that ICOs and STOs still remain attractive to investors as a mechanism for venture capital financing.

For more information, please refer to the following links:

Swiss 4th ICO and STO Report – growing less, but growing up

Crypto Regulators Display Flexibility, Enforcement Agencies Flex Muscle

By: Brian P. Bartish

In a letter recently made public, Securities and Exchange Commission Chairman Jay Clayton endorsed analysis advanced by the SEC’s director of corporate finance, William Hinman, in a 2018 speech stating the view that ether is not a security. Citing to the Howey framework, Chairman Clayton, in response to a letter from U.S. House Representative Ted Budd, indicated that where purchasers no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts, a digital asset may not represent an investment contract. According to a recent announcement on the SEC’s FinHub website, the SEC is also looking to establish stronger working relationships with the cryptocurrency and wider fintech community through local peer-to-peer meetups and a new online portal, hosted by FinHub, where interested attendees can report general areas of interest or a specific inquiry, including “determination of instrument as a ‘security.’”

Last week, Thailand’s SEC approved the first ICO portal, with the first public ICO reported to be conducted under digital asset royal decree to follow in the near future. The Thai SEC is also working to issue criteria that will allow companies to conduct STOs in Thailand. In Malta, the Malta Financial Services Authority (MFSA) recently appointed blockchain forensics firm CipherTrace to oversee regulatory processes and conduct risk management audits of virtual asset businesses, following recommendations from the IMF that MFSA take immediate action to close gaps in AML and CFT oversight.

Cryptocurrency schemes continue to see strong action from law enforcement and regulators, with the Commodity Futures Trading Commission (CFTC) announcing a Consent Order with Marshall Islands-based 1pool Ltd. The company was required to pay $990,000 to resolve claims that 1pool illegally offered retail commodity transactions margined in bitcoin, failed to register as a futures commission merchant (FCM) and failed to meet supervisory duties. Also last week, a joint investigation involving the U.S. Attorney’s Office for the Southern District of New York, the New York District Attorney, the Internal Revenue Service-Criminal Investigation (IRS-CI) unit and the FBI resulted in the arrest of Konstantin Ignatov on wire fraud charges for his role with OneCoin, which authorities are calling a multibillion-dollar pyramid scheme involving cryptocurrency.

For more information, please check out the following links:

UN Addresses North Korea Crypto Hacks, Storage and Stablecoin Vulnerabilities Reported

By: Joanna F. Wasick

According to a United Nations (UN) Security Council expert panel report, North Korea has been carrying out major cryptocurrency hacks in order to bypass economic sanctions imposed due to its nuclear program. The hacks, including at least five attacks on Asian cryptocurrency exchanges between January 2017 and September 2018, reportedly created losses totaling $571 million. A number of attacks on overseas financial institutions and exchanges were also reported. The UN report urged member states to be vigilant in sharing any information they have about North Korean cyberattacks on other governments and domestic financial institutions.

Early last week, Ledger, a manufacturer of offline, cold/hardware cryptocurrency wallets, issued a report identifying five security “vulnerabilities” in devices manufactured by its direct competitor, Trezor. Ledger claimed that it told Trezor of these purported weaknesses and only went public with them after Trezor failed to take “appropriate measures.” Trezor has since responded, claiming that none of the weaknesses were critical, and any exploitation of them would require physical access to the wallet, specialized equipment, significant time and technical expertise. Trezor also stated that some of the identified vulnerabilities had already been patched.

Tether, a cryptocurrency stablecoin, recently updated the terms of its website in a manner that indicates its USDT stablecoin may not in fact be backed 100 percent by fiat reserves. Since its inception, Tether had asserted that it supported a direct coin-to-dollar ratio. The Tether website now qualifies this, stating that while its reserves include traditional currency, “from time to time” they may also include “other assets and receivables from loans made by Tether to third parties.”

For more information, please refer to the following links:

New Cryptocurrencies and Blockchain Reporting Tools, International Developments, and Crypto Crime Reports

In this Issue:

New Cryptocurrencies Announced, Difficulties Integrating Crypto With Banks Persist

International Market Developments, New Blockchain Reporting Tools Announced

Updates on QuadrigaCX, New Reports on Crypto Crimes From Public and Private Sectors

New Cryptocurrencies Announced, Difficulties Integrating Crypto With Banks Persist

By: Simone O. Otenaike

According to recent reports, a leading social media network and a global messaging firm will each launch their own cryptocurrency over the next year, allowing users to send cryptocurrency across international borders through their respective messaging systems. The social media network’s cryptocurrency reportedly will be pegged to the value of a basket of different foreign currencies, rather than just the U.S. dollar. The global messaging firm’s cryptocurrency will operate like a traditional cryptocurrency, with fluctuating values and a decentralized design. Meanwhile, Tether has announced plans to launch a new cryptocurrency backed one-to-one by U.S. dollars in partnership with the Tron Foundation. Tether currently offers a cryptocurrency for the bitcoin and ether blockchains that is tied to the U.S. dollar.

TrustToken recently announced a new feature available to traders of the firm’s TrueUSD cryptocurrency. TrustToken will partner with an accounting firm to offer traders real-time confirmation that TrueUSD is backed by real-world value. The new service aims to make this information for collateralized cryptocurrencies available quicker and may set a new standard for tokenized assets in the future. Medici Ventures recently announced that its portfolio company Bitt will use blockchain technology to pilot a digital version of the Eastern Caribbean Central Bank’s (ECCB) dollar across the Eastern Caribbean Currency Union. The ECCB is the third-largest monetary union in the world. Bitt’s pilot will offer the digital EC dollars to the public in phases. The company’s ultimate goal is to use blockchain technology to provide banking options to countries in the Eastern Caribbean region and ultimately stimulate economic growth and financial access.

The difficulties faced by cryptocurrency companies in gaining access to banking services was the subject of two news reports this week. One report noted that many large financial institutions refuse to work with cryptocurrency companies due to the banking industry’s rigid know-your-customer and anti-money laundering policies. The report noted that a compliance and monitoring system that meets these standards but also accommodates the distributed network structure will be expensive – and most banks conclude that the risk isn’t worth the reward. Another report noted that despite Malta’s bid to bring more blockchain firms to the country, Maltese financial institutions are reluctant to service these firms and are willing to open accounts only for firms that are able to secure a Malta Financial Services Authority (MFSA) license. The MFSA aims to issue its first licenses for registration as VFA Agents under Malta’s Virtual Financial Assets Act within the first quarter of the year. Access to banking was also at issue in a recently introduced bill in California. The new law would allow cannabis companies to make tax payments in cryptocurrency to facilitate electronic payments without traditional banking services and reduce the vast amounts of cash that end up in state tax offices.

Finally, a major online payments processor and Blockstream’s co-founder and CEO made news this week by supporting the Bitcoin Lightning Network through participation in a transaction on what has become known as the Lightning Torch. Separately, despite U.S. sanction concerns, the Lightning Torch also made it to Iran early this week. The capacity of the Bitcoin Lightning Network reportedly surpassed $2 million in December of last year.

For more information, please refer to the following links:

International Market Developments, New Blockchain Reporting Tools Announced

By: Diana J. Stern

Following our previous reporting on SIX Group, the Swiss stock exchange operator continues to expand its cryptocurrency-related listings. On Tuesday, trading commenced for its third cryptocurrency-based exchange-traded product (ETP) listing, Amun Ethereum ETP. Coindesk reports that the firm backing the ETP issued a prospectus for its cryptocurrency-based ETPs late last year, stating that the products are not subject to the Swiss Federal Act on Collective Investment Schemes or to the Swiss Financial Market Supervisory Authority FINMA. Separately, SIX selected R3’s Corda Enterprise platform to provide the infrastructure for its new digital trading platform, which is set to launch in the second half of the year. Also in Switzerland, blockimmo, Elea Labs and Swiss Crypto Tokens claim to have completed the first set of blockchain-based transactions for a tokenized Swiss property in Zug, also known as “Crypto Valley.” A recent report by the Lucerne University of Applied Sciences found that the Swiss fintech market grew 62 percent in 2018. The number of “distributed ledger companies” increased threefold and accounted for 34 percent of that growth. At the same time, the data revealed a cooling off in the ICO market.

The Thai Securities and Exchange Commission issued a press release regarding its updated list of cryptocurrencies eligible for ICO investment of base pair trades: BTC, ETH, XRP and XLM. The Commission emphasized that the announcement does not certify the cryptocurrencies’ legal status in any way. In other news, SWIFT, the Singapore Exchange, four major banks and a securities software provider have partnered up to trial a blockchain proof-of-concept for proxy voting. Additionally, this week a Big Four accounting firm unveiled its Crypto-Asset Accounting and Tax (CAAT) tool. The software helps institutional and individual clients alike consolidate data and generate reports for tax returns related to crypto-asset transactions. Finally, according to a recent study, worldwide blockchain solution spend is forecast to be almost $2.9 billion in 2019, compared with $1.5 billion in 2018.

For more information, please refer to the following links:

Updates on QuadrigaCX, New Reports on Crypto Crimes From Public and Private Sectors

By: Marc D. Powers

The court-appointed monitor of defunct Canadian cryptocurrency exchange QuadrigaCX has reported that six cold wallets supposedly holding $100 million of customer cryptocurrencies for 115,000 accounts at the exchange held only $400,000 in digital assets. At the time of the sudden death of QuadrigaCX’s founder, the exchange was supposedly holding over almost $200 million in customer funds and cryptocurrencies. There are various theories as to what happened to the customers’ coins. Cryptocurrency exchange Kraken recently offered a $100,000 reward for assisting in the recovery.

The Department of Justice in its February 2019 Journal of Federal Law and Practice focused on cybercrime and cyber threats. Of note was an article on “Attribution in Cryptocurrency Cases” and how best to prove criminal charges, despite the fact that these transactions are generally considered anonymous. Among its many findings, the report noted the challenges in proving attribution because of the way cryptocurrencies function, and stated it was key for prosecutors to understand blockchain and explain it clearly to juries. A Big Four accounting firm recently issued a report linking Iranian nationals behind the bitcoin ransomware scheme SamSam to the crypto exchange WEX. SamSam is ransomware demanding bitcoin that reportedly damaged multiple U.S. companies, government agencies, universities and hospitals. According to the report, within 34 months the hackers managed to extort over $6 million in bitcoin and caused over $30 million in losses. By analyzing the wallet addresses and emails used by the perpetrators, the accounting firm was able to link the Iranians to the WEX exchange and the SamSam scheme. In addition, another recent report from a cybersecurity firm provided details on yet another cryptocurrency mining malware scheme, detected in a program commonly used to run operating systems.

 For more information, please check out the following links:

Blockchain Pilots Announced, Global Laws Evolve, Exchanges and Payment Processors Make News, Enforcement and Threats Continue

In this issue:

New Blockchain Projects Announced in Supply Chain and Digital Identity

Blockchain Legal Frameworks Continue to Evolve in the US and Abroad

Headlines From Bitcoin Payment Processors, Decentralized Exchanges and Tokenized Real Estate

More Guidance on ICO Tokens as Securities, Crypto Fraud and Hacked Bitcoins Returned

Cryptocurrency-Related Crime and Fraud Generates Staggering Statistics

New Blockchain Projects Announced in Supply Chain and Digital Identity

 By: Robert A. Musiala Jr. 

This week, a trio of major global firms in the consulting, financial services and cloud provider sectors announced the launch of a blockchain platform targeted for use by consumer purchasers to verify product origins. The platform seeks to empower consumers with reliable information on how products are made and who makes them, and would include a “tipping” feature allowing consumers to send cryptocurrency gratuities to product producers. In more supply chain news, the Russian Ministry of Transport is reportedly planning a trial of TradeLens, the blockchain-based solution for maritime shipping spearheaded by one of the world’s largest technology firms and the world’s largest container ship and supply vessel operator. Separately, India’s largest e-commerce firm recently announced a partnership with Shipnext, another blockchain-based platform for the maritime shipping industry.

In the digital identity space, this week a Turkish telecommunications provider unveiled a blockchain-based solution for identity management that is reportedly designed to ensure compliance with the European Union’s General Data Protection Regulation. According to reports this week, blockchain self-sovereign identity startup Evernym is working with a major global humanitarian organization to implement a program called the Identity for Good Initiative, which is designed to help humanitarian aid agencies take advantage of new digital identity solutions. This week also brought the launch of two solutions for issuing and storing professional credentials on blockchain. One announcement came from a Big Four accounting firm and involves storing accounting credentials on a blockchain. The other announcement, from two major Japanese technology firms, seeks to store educational records on a blockchain.

Some notable statistics on blockchain adoption were published this week and last week. According to a Big Four accounting firm, in a survey of 740 global technology executives, 48 percent of respondents said blockchain will “likely or very likely” change the way their company does business in the next three years. Another survey of the digital marketing industry found that blockchain industry projects have increased from a count of 88 to 290 over an 18-month period. And statistics released by an employee recruitment company show a 517 percent increase in demand for blockchain engineers over a recent one-year period.

For more information, please refer to the following links:

Blockchain Legal Frameworks Continue to Evolve in the US and Abroad

 By: Alexandra Royal

Earlier this week, Coin Center published its Crypto Bills Tracker, a previously internal resource that tracks the introduction and current status of federal legislation that “mentions, or relates to, cryptocurrencies.” During the first few months of the 116th congressional session, Coin Center identified 11 bills that match this description, and has added each into the Crypto Bills Tracker to monitor the bills as they move through the legislative process. Also headlining on Capitol Hill, the Chamber of Digital Commerce, a blockchain advocacy group, called for the U.S. government to implement a national strategy for blockchain technology. The organization recently released its recommendations for the plan, urging the government to recognize the power of blockchain technology and promote the adoption of such modern technologies through clear and supportive public statements.

Of note in state legislatures this week, the Wyoming House of Representatives has passed three bills aimed at making the state a top destination for cryptocurrency and blockchain businesses. According to Caitlin Long, co-founder of the Wyoming Blockchain Coalition, these bills are “a big step forward for the state, and could prove a boon for crypto startups and users alike.” In other state-based news, the UCLA Law Review recently published an article discussing the theoretical consequences that the California Consumer Privacy Act (CCPA) could have on California-based companies that are researching or deploying AI and blockchain technologies. The article’s author argues that widespread deployment (and possibly existence) of AI and blockchain technologies in the California and national markets may not be possible if CCPA compliance is strictly enforced.

On the international front, digital currency exchange Rain has completed the Central Bank of Bahrain’s (CBB) Regulatory Sandbox, becoming the first exchange to gain the CBB’s approval to work in the country. The exchange reportedly passed a Shariah compliance certification on Feb. 26, which was led by a leading Sharia consultancy and audit firm licensed by the CBB, the Shariyah Review Bureau. Elsewhere in the world, Luxembourg has passed a bill providing financial market participants with a legal framework for securities issued using blockchain technology. Also in the European Union, French President Emmanuel Macron advocated for the use of blockchain technologies to innovate supply chain management in the European agriculture industry. “As blockchain gains increasing traction globally for rehauling agriculture – across management, financing and supply chain integrity – a report issued in fall 2018 forecast that blockchain in the agriculture market would be worth more than $400 million by 2023.” Macron’s remarks called for enhanced innovation across the European countries and increased utilization of vanguard technologies such as blockchain.

For more information, please refer to the following links:

Headlines From Bitcoin Payment Processors, Decentralized Exchanges and Tokenized Real Estate

 By: Simone O. Otenaike

This week, a leading mobile payments firm reported a net profit of roughly $1.69 million in revenue from bitcoin sales in 2018. According to the firm’s Securities and Exchange Commission (SEC) disclosures, the firm made a net profit of $3.3. billion in 2018, with 5 percent of sales coming from its cryptocurrency payment processing service. Meanwhile, a global electronics company recently announced its latest flagship phone will offer a secure storage function specifically for housing private keys for blockchain-enabled mobile services. Also this week, a global technology firm announced a new blockchain web-based platform, Stratis. The platform allows investors to purchase initial coin offering tokens with either bitcoin or Strat tokens in a secure and user-friendly environment. Stratis integrates a popular multicurrency exchange service to facilitate the process of converting fiat money or cryptocurrency into Strat.

An investment firm made a major announcement this week related to tokenizing roughly $260 million in four private real estate and debt transactions involving an office building in Miami, Florida, valued at $65.5 million; a student housing facility in North Dakota valued at $90 million; a North Dakota water pipeline worth $50 million; and a multifamily housing facility in Southwest Florida worth $75 million. According to reports, these transactions will be the largest pieces of real estate financed by a tokenized security. Once all four deals are finalized, the investment firm plans to auction off the tokenized shares of the buildings/assets, represented by ERC20 tokens on the Ethereum blockchain. The sale will adhere to the SEC’s private placement rules.

Binance, the world’s largest cryptocurrency exchange, has launched a beta version of its decentralized trading service. The cryptocurrency exchange’s core service is centralized – the core service handles roughly $1 billion in daily trading volumes, sets the price of assets, picks the selection of assets on offer, and makes money from managing its customers’ fiat or cryptocurrency balances. The new decentralized platform will allow users to trade directly from their wallets, as opposed to requiring them to transfer tokens into an exchange to trade and then withdraw them afterward. The decentralized platform reportedly offers a near-instant transaction speed.

Finally, a major financial institution and a social media giant made news this week by supporting the Bitcoin Lightning Network through participation in a transaction on what has become known as the Lightning Torch. The Lightning Torch markets the Bitcoin Lightning Network by sending a bitcoin payment to a prominent member of the crypto community and enabling the recipient to pass the payment on after adding a nominal amount of bitcoin to the total. To date, the payment, 3,700,000 Satoshis (a small division of a bitcoin, valued at about $143), has passed through at least 137 countries and 224 different individuals.

For more information, please check out the following links:

More Guidance on ICO Tokens as Securities, Crypto Fraud and Hacked Bitcoins Returned

By: Joanna F. Wasick

Last week, the SEC announced its settlement with Gladius, a Washington, D.C.-based company that raised approximately $12.7 million in an initial coin offering (ICO) conducted in late 2017. The company did not register its ICO, despite the SEC’s statement in July 2017 cautioning that offers and sales of so-called ICO tokens are subject to federal securities laws. However, in the summer of 2018, Gladius self-reported its unregistered ICO to the SEC. Gladius then cooperated in the ensuing investigation, and ultimately agreed to compensate investors and register its coins as a class of securities. Importantly, the SEC did not impose fines, as it did in earlier actions against CarrierEQ Inc. (Airfox) and Paragon Coin Inc. – two companies that also issued unregistered ICOs after the SEC’s warning but did not self-report. The SEC’s stance that ICOs are subject to federal securities laws was also strengthened by a recent California federal court decision. The SEC sued Blockvest LLC in late 2018, and asked the court to prevent Blockvest’s planned unregistered ICO. The court initially declined the SEC’s request – a move that some commentators interpreted as the court’s reluctance to consider ICO tokens as securities. Amid the controversy, the SEC moved the court to reconsider its decision, and in mid-February the court did so, finding that Blockvest’s contemplated ICO was indeed an offer to sell securities.

Earlier this week, the U.S. Department of Justice announced that Randall Crater, the founder and principal operator of My Big Coin Pay Inc. in Las Vegas, had been charged for wire fraud and illegal monetary transactions in connection with his alleged participation in a scheme to defraud investors by marketing and selling fraudulent virtual currency. Additionally, the FBI has begun asking that investors in BitConnect tokens (BCC) identify themselves as victims and provide information to assist in an ongoing investigation, following the crash of the BCC market last January that occurred after regulators’ warnings of BitConnect’s Ponzi-type nature. And Bitfinex confirmed in recent blog post that, as a result of law enforcement efforts, the U.S. government collected and returned roughly 28 bitcoins stolen off the exchange during a major 2016 hack.

For more information, please refer to the following links:

Cryptocurrency-Related Crime and Fraud Generates Staggering Statistics

By: Brian P. Bartish

Data published from the first full year under Japan’s cryptocurrency exchange reporting regulations has shown a substantial increase in reports of suspected money laundering events –more than tenfold the amount reported between April and December of 2017. In 2018, 7,096 cryptocurrency transactions demonstrating certain suspicious indicia, such as those originating overseas but using accounts registered in Japan, were reported to Japanese police. Other suspicious transactions involved the use of accounts held under different names and birth dates but featuring matching photo IDs. The number of reports from 2018 represents a 960 percent increase over data from the nine-month period in 2017, beginning in April of that year, after Japan’s Payment Services Act took effect, requiring all crypto exchanges to be registered under an FSA license. According to reports, the increase in suspicious transactions in cryptocurrency tracks a wider increase in suspected money laundering events in Japan, increasing 2,296 percent between 2017 and 2018, when the Japanese watchdog heightened its focus on Anti-Money Laundering and Know Your Customer compliance programs.

Cryptopia is now reporting that losses from the January hack represent, in the “worst case,” 9.4 percent of its holdings. One data analytics firm estimated those losses as high as $16 million. Separately, a hacker allegedly made off with $7.7 million in EOS, due in part to the failure of one miner to update its blacklist protocol designed to freeze stolen funds. In South Korea, cryptocurrency exchange Coinbin declared bankruptcy after suffering losses of approximately $26 million (29.3 billion won), citing, in part, claims of embezzlement by an executive. In a final noteworthy item, approximately five years after Mt. Gox, formerly the world’s biggest bitcoin exchange, filed for bankruptcy, new research has emerged indicating that nearly 3 percent of transactions on the platform were tied to price manipulation.

For more information, please refer to the following links:

FDA Launches DSCSA Pilot Project Program, Supports Use of Blockchain Technology

Medical concept of futuristic health care technology and augmented reality. A female doctor hand is touching a virtual control panel. Communicate about innovative use of future health care technologyOn Feb. 7, 2019, the U.S. Food and Drug Administration (FDA) published a press release and on the following day published an accompanying notice in the Federal Register announcing a Pilot Project Program Under the Drug Supply Chain Security Act (DSCSA Pilot Project Program). According to the press release, the FDA “is invested in exploring new ways to improve traceability, in some cases using the same technologies that can enhance drug supply chain security, like the use of blockchain.” As stated by the FDA’s notice in the Federal Register:

The DSCSA Pilot Project Program is intended to assist FDA and members of the pharmaceutical distribution supply chain in the development of the electronic, interoperable system that will identify and trace certain prescription drugs as they are distributed within the United States. Under this program, FDA will work with stakeholders to establish one or more pilot projects to explore and evaluate methods to enhance the safety and security of the pharmaceutical distribution supply chain.

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Blockchain Applications Advance for Healthcare and Payments, CFTC Prioritizes Cryptocurrencies, QuadrigaCX Saga Continues

Blockchain network concept , Distributed ledger technology , Block chain text and computer connection with blue matrix coded backgroundIn this issue:

Blockchain Initiatives in Healthcare and Other Industries Target Data Integrity, Speed and Analytics

Blockchain Payment Systems Announced by Major Banks and Online Payment Processors

Forthcoming SEC Guidance Confirmed, Initiatives Continue at Banks and Cryptocurrency Exchanges

CFTC Makes Cryptocurrency a Priority, Foreign Agencies Take Enforcement Action

QuadrigaCX Saga Continues as Do Cryptocurrency Malware and Other Hacks

Blockchain Initiatives in Healthcare and Other Industries Target Data Integrity, Speed and Analytics

By: Brian P. Bartish

Last week, a not-for-profit alliance of life sciences industries firms announced an expansion of its blockchain project to improve data sharing, data identity and data integrity in the life sciences industry, with an emphasis on validating the sources identifying the data, ensuring the integrity of the data, and improving data sharing within and between organizations. In another recent announcement, a partnership between one of the world’s leading research-driven pharmaceutical companies and the Canadian subsidiary of a multinational information technology company will use blockchain technology in a clinical setting for the first time in Canada. The partnership aims to tackle issues with quality assurance and erroneous and incomplete records in clinical trials.

A recent Wired article reported on an emerging blockchain solution aimed at combating video manipulation. Amber Authenticate is a software solution that runs in the background as a device, such as a CCTV or police body camera, captures video. The software periodically generates hashes of the video content that can be stored on the Ethereum blockchain in order to detect changes to a video record. The solution is drawing interest from human rights activists, free speech advocates, and law enforcement and government agencies, including the DoD and DHS.

In other enterprise news, a multinational South Korean electronics company recently announced new technology that promises to speed up blockchain transactions and is offering developers tools to help test and expand the technology. And the enterprise data warehouse managed by a leading U.S. technology and cloud-services provider is expanding its blockchain offerings by adding data sets for six new cryptocurrencies: Bitcoin Cash, Dash, Dogecoin, Ethereum Classic, Litecoin and zCash. The service is offering new scripts that allow for comparative analysis and integration with other financial data management systems.

For more information, please refer to the following links:

Blockchain Payment Systems Announced by Major Banks and Online Payment Processors

By: Robert A. Musiala Jr.  

This week it was reported that the largest bank in the U.S. is planning to launch its own blockchain-based cryptocurrency token. According to reports, the token was created by the bank’s in-house engineers and will be used to improve the settlement speed of transactions between the bank’s corporate clients, replacing the need for wire transfers. According to Bloomberg, it appears the proposed cryptocurrency would have a value pegged 1:1 with the U.S. dollar and would be transferred on the bank’s private blockchain. Also this week, the largest bank in Japan announced that it is partnering with a U.S. fintech firm to build its own blockchain-based payments network, with the goal of launching in 2020. In related news, a major Japanese technology firm confirmed this week that it plans to launch a stablecoin backed 1:1 with Japanese yen sometime this year.

Several payment processors also made announcements this week related to integrating blockchain into their business models. A Hong Kong-based online payment processor announced a partnership with a fintech firm, BNC LedgerTech (BNC), to integrate with BNC’s blockchain platform in an effort to cut costs by reducing reliance on banks. Another online payments firm based in the Czech Republic issued a press release this week announcing plans to leverage the blockchain platform of a major U.S. multinational technology company to build a “secure payment system that removes the need for intermediaries, such as correspondent banks and clearing houses.” Meanwhile, in Thailand, two payments firms went live this week with cross-border remittance systems underpinned by the blockchain network of a major U.S.-based blockchain technology firm – similarly seeking to streamline clearing and settlement by reducing reliance on the traditional banking system. Finally, according to recent reports, one of the largest banks in the Philippines is planning to launch a cryptocurrency ATM product that would allow customers to convert physical fiat cash into cryptocurrencies, and vice versa.

For more information, please refer to the following links:

Forthcoming SEC Guidance Confirmed, Initiatives Continue at Banks and Cryptocurrency Exchanges

By: Robert A. Musiala Jr.

Last Friday, the SEC published remarks by Commissioner Hester M. Peirce on the topic of “Protecting the Public While Fostering Innovation and Entrepreneurship.” Among other things, the remarks confirmed that the “[SEC] is working on some supplemental guidance to help people think through whether their crypto-fundraising efforts fall under the securities laws.” The Commissioner’s remarks also highlighted the SEC’s “standing offer for people to come in for so-called no-action relief in connection with a particular token or project.” In a “no action” letter request, an applicant explains what it is seeking to do, and SEC staff can respond by advising on the application of the U.S. securities laws.

In more news related to ICOs, the University of Chicago Law School has published a study analyzing and seeking to reconcile the differences between how ICOs are treated under U.S. versus EU law. And according to recent data from crypto analytics website CoinSchedule, despite a slowdown in ICO activity in the second half of 2018, the current ICO market is still significantly larger than it was around this same time last year.

Financial institutions continue to look to blockchain for settling traditional securities products. According to reports published late last week, a major international financial services firm based in Switzerland recently completed a successful test of a blockchain platform to process and manage investment fund trades. In a similar announcement, an executive at one of the largest banks in the world said the bank’s blockchain-based system could reduce the cost of settling foreign exchange trades by 25 percent. Also this week, a global financial services firm based in Spain announced a $700 million business transformation initiative in partnership with a U.S.-based global technology firm. The initiative seeks to further incorporate and take advantage of benefits offered by artificial intelligence, blockchain and big data.

In the cryptocurrency market, Bithumb recently became the next in an increasing number of cryptocurrency exchanges to launch an over-the-counter trading desk for cryptocurrencies. And Binance, the world’s largest cryptocurrency exchange by volume, announced plans to release Binance DEX, a decentralized cryptocurrency exchange. Meanwhile, according to a recent report by Diar, Bitcoin network transaction fees have dropped to a four-year low and are currently “at levels not seen since 2015.”

For more information, please check out the following links:

CFTC Makes Cryptocurrency a Priority, Foreign Agencies Take Enforcement Action

By: Simone O. Otenaike

Earlier this week, the U.S. Commodity Futures Trading Commission (CFTC) published its examination priorities for 2019, which include notable references to cryptocurrency market and trading surveillance. The CFTC monitors regulatory compliance for registrants of the Division of Market Oversight (DMO), Division of Swap Dealer & Intermediary Oversight (DSIO) and Division of Clearing & Risk (DCR). The DMO’s 2019 Examination Priorities include “cryptocurrency surveillance practices” as the first item in its list of “topics for in-depth examination.” On the state front, the Texas State Securities Board (SSB) issued its 2018 Enforcement Report, which reported a total of 16 orders against various entities and persons suspected of orchestrating cryptocurrency scam investments in 2018. According to the report, the SSB continues to partner with local law enforcement to crack down on illegitimate cryptocurrency schemes.

In international news, late last week the Mauritian Financial Services Commission (FSC) announced plans to establish a regulatory framework for digital asset custodian services. Through the new framework, the country aims to enhance the safety of custodian services for digital assets. The new regulation requires custodian services to adhere to AML/CFT international best practices. Meanwhile, Turkish police arrested 24 suspects in connection with the theft of 13 million liras’ worth of cryptocurrency held in bitcoin, ether and XRP. The suspects reportedly communicated via a popular online multiplayer game: PlayerUnknown’s Battlegrounds. After conducting raids of the suspects’ homes, Turkish authorities recovered 4,000 liras in cash and 1.3 million liras’ worth of cryptocurrency.

For more information, please refer to the following links:

QuadrigaCX Saga Continues as Do Cryptocurrency Malware and Other Hacks

By: Joanna F. Wasick

More details emerge in the QuadrigaCX saga. As reported here last week, the founder and CEO of the Canadian cryptocurrency exchange, Gerald Cotton, allegedly died in December, taking with him the only known keys and passwords needed to access “cold wallets” (wallets not connected to the internet) holding roughly $250 million in client funds. The exchange subsequently filed for creditor protection and a Canadian court appointed a Big Four auditing firm to oversee the case. That auditor recently issued a report describing how it has taken control of Cotton’s laptops, encrypted USB keys and cellphones in order to recover client funds. The auditor further stated that while it had located more than $900,000 in cryptocurrency held by Quadriga, $500,000 in bitcoin was later “inadvertently” transferred by Quadriga to its inaccessible cold wallets. Blockchain analytics companies and internet sleuths later used this news of the transfer, along with other information, to track down the addresses for the wallets. A number of these addresses have now been published and appear to comport with some of the details in the auditor report.

In an update to another major hack, Elementus, a blockchain analytics firm, tweeted earlier this month that, of the roughly $16 million in tokens reportedly stolen in January from New Zealand-based exchange Cryptopia, $3.2 million were recently liquidated on other major exchanges, with a large portion of the funds going through Etherdelta, Binance and Bitbox. On the app front, a major digital distribution service and store was found unwittingly hosting a malicious “clipper” app, which looked like a legitimate cryptocurrency app but operates to steal funds by transferring them to the attackers instead of to valid wallets. The app has since been removed from the platform. In its attempt to defend against potential hacks, Coinbase recently issued a $30,000 bug bounty for a critical vulnerability in its system. Currently, Coinbase has a four-tier reward system, ranging from $200 to $50,000, depending on the impact of the bug. Coinbase also announced this week a means for safely backing up encrypted private wallet keys on widely used personal cloud-based storage accounts.

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Supply Chain Pilots Advance, Bitcoin Decentralization Improves, Hacks Continue, Foreign Regulations Evolve

shiny bitcoins with stock market background.In this issue:

Blockchain Pilots for Supply Chain and Land Titles, Improved Analytics, and Decentralization

Blockchain Capital Markets Initiatives Continue Across the Globe

Canadian Exchange Claims Lost ‘Cold Storage’ Funds Amid Fraud Allegations

Scams, Hacks and Illicit Financing: Blockchain Threats Continue to Abound

SIM Swapping Hackers Convicted, Philippines Introduces New Token Offering Regulations

Blockchain Pilots for Supply Chain and Land Titles, Improved Analytics, and Decentralization

By: Nicholas C. Mowbray

Earlier this week IBM announced the completion of a shipment tracking trial that recorded the bill of lading on a blockchain. The trial consisted of a shipment of 28 tons of mandarin oranges that originated in China and were delivered to Singapore. The trial appeared to demonstrate that a blockchain-based shipment tracking system can cut costs by speeding up document processing, improving the handling of information and providing a traceable and tamper-proof record of maritime shipments. In related news, this week the Food and Drug Administration of the Chinese Chongqing Yuzhong District announced that it intends to apply blockchain technology to improve its operations. The proposed blockchain system will be used to strengthen the supervision of food and drug quality assurance, ensure there is better traceability of the product life cycle, and improve anticounterfeiting measures.

In Mexico this week, Medici Land Governance, a subsidiary of a major U.S. online retailer, signed a memorandum of understanding with a municipality to develop a blockchain-based digital land records platform. Also this week, the United States Patent and Trademark Office awarded one of the largest pharmaceutical companies in the world a blockchain patent relating to a system that uses a combination of artificial intelligence and blockchain technology to establish the authenticity of unique physical objects. The technology will seek to use machine learning to link physical objects to a blockchain through their own unique identifiers or fingerprints (e.g., chemical signatures, DNA or image patterns). The goal of the technology will be to increase the security of supply chain systems.

Blockchain ETL, a project of one of the world’s largest technology companies, made the news this week in an article in Forbes. The Blockchain ETL project is seeking to make blockchain more accessible by loading the Bitcoin and Ethereum blockchains into a big-data analytics platform and developing the ability to conduct searches of the data. Finally, a Canadian financial services firm reported its findings this week that Bitcoin is becoming more decentralized. Citing statistics relating to Bitcoin’s hashrate distribution, the company noted that increased competition among mining chip manufacturers has led to no single mining pool controlling more than 20 percent of Bitcoin’s hashrate. According to the report, this is an improvement in decentralization from a time in mid-2014 when a single mining pool controlled approximately 50 percent of the Bitcoin hashrate, creating potential for a 51 percent attack. Reasons cited for the improved decentralization include the increased commoditization of bitcoin mining chips.

For more information, please refer to the following links:

Blockchain Capital Markets Initiatives Continue Across the Globe

By: Diana J. Stern

Despite the bear market, some cryptocurrency exchanges continue efforts to expand their offerings. Last week, a filing to list a bitcoin exchange-traded fund (ETF) was resubmitted to the SEC by SolidX, another financial services firm, and the largest U.S. options exchange. There are a number of competing proposals, but if approved, this would be the first bitcoin ETF in the U.S. Early this week, Kraken announced its nine-figure acquisition of Crypto Facilities, a futures trading startup registered with the U.K. Financial Conduct Authority (FCA). By purchasing an entity with a current license, Kraken does not have to repeat the years-long process of obtaining regulatory approval from the FCA. In addition, Reuters reported that Swiss exchange SIX expects to launch a new digital trading platform that uses blockchain technology. Instead of taking several days, the alternative bourse can complete a trade in fractions of a second. Regulatory issues are still being worked out with Finma. In further news, users can now trade bitcoin, ether, litecoin and XRP on a new mobile application made available by the Boerse Stuttgart Group, operator of Germany’s second-largest stock exchange.

At the end of last year, the Saudi Arabian Monetary Authority and the UAE Central Bank announced that they were developing a cryptocurrency for cross-border payments. This week, six commercial banks from the regions joined the initiative. According to reports, issuance could occur in the next year if the two institutions leading the project determine the cryptocurrency is feasible. In other international developments, Coinbase extended the option to withdraw cash balances into PayPal accounts for its customers in 32 European countries (U.S. customers already had this feature). This week, Huobi.com added three USD-cryptocurrency trading pairs. According to reports, the new pairs require users to open a custodial account with Nevada-registered chartered trust company Prime Trust and complete their KYC verification. Huobi.com is the U.S. partner of Huobi, a cryptocurrency exchange based in Singapore.

According to statistics published this week by data analytics firm DataLight, U.S. traders account for 60 percent of total traders on Coinbase, and between 24 and 28 percent on Binance, Bittrex and Poloniex. According to another report issued this week, a greater number of ICOs occurred in Q4 2018 than in Q3, but they raised 25 percent less. In the last quarter, Singapore led globally both by number of offerings and amounts invested, followed by Switzerland.

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Canadian Exchange Claims Lost ‘Cold Storage’ Funds Amid Fraud Allegations

By: Robert A. Musiala Jr.

On Jan. 31, 2019, Canadian cryptocurrency exchange QuadrigaCX filed for protection in Nova Scotia under the Companies’ Creditors Arrangement Act, which allows companies to restructure in order to avoid bankruptcy. According to reports, the company claims that it is unable to repay approximately $190 million owed to approximately 92,000 clients due to the recent alleged death of its founder, 30-year-old Gerald Cotten. Cotten allegedly was the only person who had the private keys needed to access approximately $147 million in cryptocurrency assets held on behalf of the company in off-line “cold storage” accounts. According to the company, Cotten died “due to complications with Crohn’s disease on December 9, 2018 while travelling in India, where he was opening an orphanage to provide a home and safe refuge for children in need.” A Cointelegraph article claimed that Cointelegraph had obtained a copy of Cotten’s death certificate issued by the India Government of Rajasthan’s Directorate of Economics and Statistics.

According to Bloomberg, 12 days before his apparent death, Cotten signed a will leaving all of his assets to his wife, Jennifer Robertson, and making her the executor of his estate. Multiple reports have emerged this week questioning whether Cotten’s death may have been part of a fraudulent “exit scheme.” One report claimed to provide blockchain analysis demonstrating that QuadrigaCX didn’t have any cryptocurrency reserves, and suggested that the company was using customer deposits to pay out other customer withdrawals in an apparent Ponzi scheme.

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Scams, Hacks, and Illicit Financing: Blockchain Threats Continue to Abound

By: Brian P. Bartish

British watchdog The Financial Conduct Authority (FCA) issued a warning earlier this week, alerting potential investors to the dangers of cryptocurrency scams. The FCA’s warning noted that cryptocurrency investment scams, together with scams involving stocks and bonds and foreign exchanges, accounted for nearly 85 percent of all scams, totaling £197 million, or $255 million, reported in 2018. Recently, the FCA has been ramping up enforcement in response, revealing in December 2018 that it was investigating 18 firms over cryptocurrency use.  According to CipherTrace, in 2018 $1.7 billion was obtained through illegal means, including thefts from cryptocurrency exchanges and fraudulent ICOs.

Recently, a Romanian hacker group known as Outlaw was pegged for responsibility with an uptick in Monero mining malware. In other recent news, Zcash released a report detailing its remediation of a vulnerability in the Zcash cryptocurrency that would have enabled the creation of counterfeit Zcash. Their analysis indicated that the vulnerability was not successfully exploited.

A recent report from an Israeli blockchain intelligence firm claims to have identified proof that bitcoin donations were being made to Hamas. According to the report, some of those donations were even made from well-known exchanges located in jurisdictions that list Hamas as a terrorist organization.

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SIM Swapping Hackers Convicted, Philippines Introduces New Token Offering Regulations

By: Simone O. Otenaike

Late last week, a 20-year-old college student who stole more than $5 million in cryptocurrency was convicted of “SIM Swapping” or “SIM Hijacking” in Santa Clara County, California. SIM Swapping involves calling a cellphone carrier’s tech support number, pretending to be the hacker’s target, and requesting the target’s phone number be transferred, or ported, to a new SIM card that the hackers own. By hijacking a phone number, the hackers can exploit “two-factor authentication” and intercept text messages with the security codes required to access the target’s bank or cryptocurrency accounts. According to reports, the student will be the first person sentenced for SIM Swapping. Meanwhile, the first prosecution of SIM Swapping in New York also emerged late last week. The 20-year-old defendant was charged with Iidentity theft, grand larceny, computer tampering and scheme to defraud, among other charges, for stealing the identities and funds of more than 50 victims across the United States from his Ohio home. On the civil side, an investor recently filed a lawsuit in New York claiming he was misled into investing $2 million in the cryptocurrency MCash. The filing alleges that the defendants committed federal securities fraud and common law fraud. The plaintiff is demanding the return of his investment in addition to compensatory damages worth $6 million.

The Philippines recently introduced a new regulatory framework for Digital Asset Token Offering (DATO). The new framework was promulgated by the country’s Cagayan Economic Zone Authority and covers the acquisition of crypto assets, including utility and security tokens. Going forward, all DATOs must have the requisite offering documents and accompanying advice and certification of experts. Additionally, tokens must be listed on a licensed Offshore Virtual Currency Exchange, and stakeholders must have confirmed arrangements with accredited wallet providers and custodians.

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New Crypto Products in U.S. and Abroad, Enterprise Pilots Announced, Data Published on Cryptocurrency Scams and Money Laundering

Modern research and information technologies in cyberspace

In this issue:

DFS Issues New BitLicenses, Corda Gains Integration Partners, New Stablecoin Launched

New Cryptocurrency Products, Increased Demand for Bitcoin Reported in Africa and Latin America

New Blockchain Pilots Address Worker Well-Being, Healthcare and Conflict Minerals

Startup Challenges SEC Enforcement Action, International Arrests and Exchange Cooperation

New Reports Provide Data on Cryptocurrency Scams and Money Laundering

DFS Issues New BitLicenses, Corda Gains Integration Partners, New Stablecoin Launched

By: Robert A. Musiala Jr.

Late last week, the New York State Department of Financial Services (DFS) granted the DFS BitLicense to Robinhood Crypto LLC and Moon Inc., dba LibertyX. DFS authorized Robinhood Crypto LLC to buy, sell and store seven different virtual currencies, while LibertyX will be the first DFS licensee to allow customers to use debit cards to purchase bitcoins from traditional ATMs. DFS also recently granted a BitLicense to Bitcoin ATM operator Cottonwood Vending LLC. This week also brought two significant announcements from the R3 consortium, with the global payments network SWIFT and a major Japanese financial services firm both announcing plans to integrate with R3’s Corda blockchain payments platform.

A Forbes article this week revealed that a major U.S. stock exchange has sold its transaction surveillance technology to seven major cryptocurrency exchanges that intend to use the tech to detect and prevent fraud and market manipulation. One of those cryptocurrency exchanges, Gemini, announced this week that it successfully passed an SOC 2 Type 1 review performed by a Big Four auditing firm. SOC 2 reviews are used to demonstrate security in protecting customer data and funds.

According to Bloomberg, a major U.S. financial services firm is planning to launch an institutional bitcoin custody service as early as March 2019. Also this week, a first-of-its-kind stablecoin was launched. The Wrapped BTC (WBTC) stablecoin is an ERC-20 token that is backed 1:1 with bitcoin. WBTC is a joint initiative by startups Kyber Network and Republic Protocol, with involvement from a major cryptocurrency custody firm.

For more information, please refer to the following links:

New Cryptocurrency Products, Increased Demand for Bitcoin Reported in Africa and Latin America

By: Jaime B. Petenko

The Saudi Arabian Monetary Authority and the United Arab Emirates Central Bank recently announced the launch of a pilot project to create a digital currency, Aber, for use in financial settlements between the two countries. The two institutions described Aber as a “proof of concept” of the feasibility of the use of the cryptocurrency for remittances, including determining whether the cryptocurrency improves the remittance process and reduces costs, and assessing any related technical risks.

This week, Bitspark, a Hong Kong-based money transfer platform, reportedly launched the first stablecoin, Sparkdex HKD, pegged to the Hong Kong dollar. While U.S. dollar stablecoins have dominated the stablecoin market, Bitspark hopes to lead the way to increased currency diversity in the sector. Also this week, Binance, the world’s largest cryptocurrency exchange adjusted by trading volume, announced that it has partnered with payment processing firm Simplex to enable the purchase of bitcoin, ether, litecoin and XRP with credit cards. These cryptocurrencies can then be traded against up to 151 tokens offered by the exchange.

Paxful, a peer-to-peer marketplace that enables the purchase of bitcoin using hundreds of payment methods, recently reported that Africa, its largest market, experienced a 130 percent increase in the volume of transactions processed, averaging 17,351 trades per day. In Africa, demand for bitcoin may be linked to it being viewed as an alternative to unstable national currencies. Similarly, bitcoin ATM networks report that the ATM market is thriving, particularly as an alternative to banks in emerging markets. According to reports, demand is growing especially in Latin American markets, with the first bitcoin ATM in Venezuela slated to publicly launch in early February and additional ATMs planned for Argentina and Mexico, among other countries.

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New Blockchain Pilots Address Worker Well-Being, Healthcare and Conflict Minerals

By: Simone O. Otenaike

Late last week, the Blockchain Trust Accelerator at New America, along with a global blockchain consulting firm and the Harvard T.H. Chan School of Public Health, launched a two-year collaborative blockchain-based initiative to anonymously and securely track and measure factory worker well-being with an immutable and digitally authenticated blockchain solution. The collaboration is based on Harvard T.H. Chan School of Public Health’s Sustainability and Health Initiative for NetPositive Enterprise Health and Well-being Index. The blockchain-based solution will be piloted in three factories in Mexico producing goods for a major international retailer and employing 5,000 workers. New America also released a blueprint for blockchain and social innovation last week. The blueprint outlines blockchain-use cases for how governments can leverage blockchain to reduce inefficiencies.

Also last week, a global technology company, three major national healthcare insurance providers and a national banking institution announced plans to design a blockchain-based network that will address key healthcare industry challenges, including efficient claims and payment processing, current and accurate provider directories, and secure and frictionless healthcare information exchanges. In other enterprise developments, Hyperledger recently announced Grid – a new project that seeks to facilitate supply chain solutions. Additionally, Hyperledger Fabric was recently implemented in a blockchain solution for tantalum mined in Rwanda, where questionable mining practices threaten to classify tantalum as a “conflict mineral.” This new blockchain solution seeks to provide critical traceability to tantalum, protect against conflict concerns, and ensure investment and stability in Rwanda-sourced tantalum, which is frequently used to manufacture electronics and medical devices.

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Startup Challenges SEC Enforcement Action, International Arrests and Exchange Cooperation

By: Robert A. Musiala Jr.

This week, following a report from the Wall Street Journal, the CEO and founder of social media startup Kik published a blog post providing details on Kik’s interactions with the SEC following the company’s 2017 ICO, which reportedly raised approximately $100 million. The blog post provided a link to the SEC’s Wells Notice explaining the SEC’s position that the Kik ICO was a sale of unregistered securities, and Kik’s Wells Response arguing that it did not violate the securities laws. In its Wells Response, among other things, Kik argues that its Kin token is a currency, not a security. Kik’s Wells Response also indicates that the company is willing to litigate the issue in court.

In South Korea this week, four major cryptocurrency exchanges – Bithumb, Coinone, Korbit and Upbit – announced a partnership to share information related to suspected money laundering, including establishing a shared database of suspicious wallet addresses. This comes on the heels of a report issued late last week by the International Monetary Fund (IMF) that cited the growth of the blockchain industry in Malta as having created “significant risks” related to money laundering and terrorist financing.

Late last week Europol, UK and German law enforcement arrested a suspect in the theft of cryptocurrency valued at approximately 10 million euros that allegedly was stolen from 85 victims since January 2018. In other news from Europe, the owner of the hacked cryptocurrency exchange BitGrail was declared bankrupt by an Italian bankruptcy court, with the court reportedly authorizing seizures of many of the owner’s personal assets to compensate victims of the hack.

For more information, please refer to the following links:

New Reports Provide Data on Cryptocurrency Scams and Money Laundering

By: Joanna F. Wasick

Major reports were issued this month on cyber-criminal activity. A report from Chainalysis, a blockchain analytics software provider, found that sophisticated hacks were on the rise and that most could be traced to two professional criminal groups. Together, these two groups reportedly stole $1 billion, with an average of $90 million stolen per hack. The Chainalysis report also describes a significant increase in darknet market activity (with transaction volume surpassing $600 million despite falling cryptocurrency prices), and a surge in Ethereum scams related to phishing, Ponzi schemes and ICO exit scams.

According to a recent report by CipherTrace, criminals stole or scammed $1.7 billion in cryptocurrency in 2018 – 3.6 times the amount in 2017. The CipherTrace report breaks down the process through which these funds are laundered and identifies services and tools that the cryptocurrency launderers use. The report also lists what CipherTrace believes to be the top cryptocurrency threats – the highest being SIM swapping, a type of identity theft whereby the victim’s phone number is stolen and used to obtain access to two-factor authentication codes.

Terrorist financing was also featured in recent cryptocurrency news, with a message sent by a spokesman for the armed wing of Hamas urging supporters to make donations in bitcoin in order to circumvent international restrictions on funding the organization. And the Cryptopia saga continues. About two weeks after the widely reported hack of the New Zealand-based exchange, the same hacker has reportedly resumed its attack. Elementus, a blockchain data analytics firm, reported that an additional 1,675 ether from 17,000 wallets had been stolen in this recent attack.

For more information, please check out the following links:

A Bid for a US Publicly Traded Crypto Exchange, Institutional Investments, International Regulatory and Enforcement Actions

Block chain network and programming concept on technology backgroundIn this issue:

2018 Cryptocurrency Recap, Developments in Cryptocurrency Exchanges and Payment Providers

New Blockchain Capital Markets Platforms Announced With Institutional Investment

Are Crypto Regulations Getting Tighter or Looser? Depends About Where You’re Asking

The Curious Case of Cryptopia, and Updates on Threats and Enforcement Actions

2018 Cryptocurrency Recap, Developments in Cryptocurrency Exchanges and Payment Providers

By: Emily R. Fedeles

According to a recent report, despite a lower price compared to the previous year, bitcoin’s total trade volume for 2018 is $2.2 trillion, which is almost four times the volume of what was traded in 2017. Another recent statistic states that BitPay, the largest global cryptocurrency payment processor, processed more than $1 billion in 2018 and grew its B2B business more than 250 percent. BitPay added new features in 2018, such as integrating its wallet with major gift card brands and supporting new cryptocurrencies such as the stablecoins launched by Circle, Gemini and Paxos. BitPay’s payment processing services could extend even further if a proposed New Hampshire bill passes, which would let state-level agencies – including the tax office – accept cryptocurrencies as payment.

There were several announcements from major cryptocurrency exchanges this week. Binance launched a crypto-to-crypto over-the-counter (OTC) trading desk with access to more than 80 cryptocurrencies. Seed CX launched a bitcoin spot trading market for its institutional clients and announced plans to add cryptocurrency trading pairs and trading pairs with foreign currencies, such as euros and Japanese yen. Cryptocurrency exchange Bithumb is seeking to go public in the United States through a reverse merger (also known as a reverse initial public offering), where it would acquire Blockchain Industries, a U.S. public company. The combined entity – Blockchain Exchange Alliance – would become the first U.S.-listed cryptocurrency exchange. And bitcoin wallet and cold storage provider Xapo announced that it is transferring key operations from Hong Kong to Switzerland, citing Switzerland’s friendlier regulatory environment as the driving factor behind the move.

According to recent reports, professors from seven U.S. colleges have teamed up to create a digital currency that they hope can achieve speeds bitcoin users can only dream of, without compromising decentralization. The project, called Unit-e, seeks to create a globally scalable decentralized payments system that solves the challenge of blockchain scalability, which many believe has hindered cryptocurrencies from achieving widespread adoption. In another move aimed at solving the scalability problem, Bitfury has released a suite of tools aimed at driving adoption of the Bitcoin Lightning Network. The nascent Bitcoin Lightning Network promises to enable bitcoin transactions with near-instantaneous confirmation speeds without having to store information directly on the blockchain.

For more information, please refer to the following links:

 New Blockchain Capital Markets Platforms Announced With Institutional Investment

By: Robert A. Musiala Jr.

On Jan. 24, tZero, a subsidiary of a major U.S. online retailer, went live with its long-awaited secondary trading platform for so-called security tokens. According to reports, the tZero platform is now open to accredited investors for the secondary trading of blockchain-based tokens issued in so-called security token offerings (STOs). Also this week, a new cryptocurrency custody solution, Anchorage, was launched with backing from several major U.S. tech investors and venture capital funds. According to an article posted on Medium, Anchorage will offer an innovative cryptocurrency custody platform that “combines multi-person integrity with hardware-based systems, allowing us to build a platform that is more secure than cold storage, but has the benefits of keeping the assets accessible.” On the same day, Symbiont.io Inc., a New York-based startup focused on applying blockchain to the capital markets, announced a major funding round from two major U.S. financial institutions and a well-known blockchain investor. In a third announcement, Templum Markets, a blockchain-based platform for issuance and secondary trading of so-called smart securities, and IPwe, Inc., launched a “patent finance market” that seeks to enable companies to “efficiently finance their patented intellectual property.”

According to a notice published by the Securities and Exchange Commission (SEC), a proposed rule change seeking to launch a physically backed bitcoin ETF was withdrawn this week. According to reports, the withdrawal is temporary and was due in part to delayed discussions with the SEC resulting from the ongoing partial government shutdown. Outside the U.S., the Jamaica Stock Exchange and Canadian fintech firm Blockstation recently announced completion of a “live digital currency trading pilot with selected regulated market participants including broker-dealers, market makers and the Jamaica Central Securities Depository (JCSD).” According to the press release, the platform eventually will seek to list security tokens.

For more information, please refer to the following links:

Are Crypto Regulations Getting Tighter or Looser? Depends About Where You’re Asking

By: Jonathan D. Blattmachr

This week, a host of news on the crypto regulatory front has come out, some making investing more onerous, some making it better. A recent report from the Organisation for Economic Co-operation and Development (OECD) traces the process of initial coin offering (ICO) fundraising and the potential risks for offerors and buyers. The report highlights many ICO benefits, including cost savings, direct access to investors and the active participation of buyers. The identified risks include potential conflicts of interest; lack of standardized, vetted disclosure; and high volatility and counterparty risks. The OECD calls for a “delicate balance” in developing a regulatory scheme that will “not deprive the ICO mechanism of its speed and cost benefits.” At the same time, “ICOs are, by nature, not the right solution for every project,” and the possibility for ICOs to be “a mainstream financing option” is limited.

The UK’s Financial Conduct Authority (FCA) has issued guidance regarding digital assets and their potential interaction with various regulatory schemes, including MiFID II. While the guidance is not binding, the FCA hopes it “will enable firms to understand whether certain crypto assets fall within the regulatory perimeter,” giving those companies greater certainty about this space. According to the guidance, certain types of digital assets, such as security tokens, fall under the FCA’s purview, while others, such as bitcoin and litecoin, do not.

In the Netherlands, a proposed licensing requirement would end anonymous crypto trading. Under the potential new regs, crypto exchanges and wallet providers would be required to monitor their customers’ trades and report suspicious activity and certain information about the customers themselves. The new licensing scheme is being proposed because the Dutch financial authority is concerned that crypto carries “high financial crime risks.”

Wyoming legislators have introduced a bill to provide further legal clarity to draw blockchain business to the state. Among other things, the proposed legislation would authorize banks to opt into a digital asset custody supervisory regime designed to meet the SEC’s standards for digital assets’ “qualified custodians.” Virtual currencies would also have the same legal status as fiat currency under the UCC, providing further protection to asset holders.

For more information, please check out the following links:

The Curious Case of Cryptopia, and Updates on Threats and Enforcement Actions

By: Brian P. Bartish

After the massive hack on the cryptocurrency exchange Cryptopia last week, a blockchain data analytics platform provider is estimating that more than $16 million in ether and ERC20 tokens were stolen from more than 76,000 wallets in the highly atypical hack, where attackers likely gained access to thousands of private keys. In another sign of hackers becoming more sophisticated, security researchers recently published findings on a new variant of monero-mining malware that has the built-in ability to block rival mining software and disable cloud security agents, including those of a number of leading cloud service providers. Last Thursday, the victim of the theft of $24 million in cryptocurrency released the name of the suspected thief, a suspect previously arrested for SIM-swapping, alleging that this individual stole more than $80 million in cryptocurrency.

On Jan. 18, Switzerland-based exchange ShapeShift released a Compliance Transparency report detailing a 175 percent increase in law enforcement requests for data, including crypto addresses and transaction IDs. Law enforcement, however, continues to struggle in keeping criminal activity on the dark web at bay, as a recent report noted that dark web cryptocurrency activity continued to grow even as the economic transaction value of cryptocurrency fell. In fact, one industry analyst cited six of the eight most common cryptocurrency transaction types as demonstrating some kind of criminal or nefarious purpose.

Turning to fraud and consumer protection, the Monetary Authority of Singapore recently issued a warning to an ICO issuer not to proceed with a planned STO, as the issuer violated the conditions of a prospectus exemption by advertising the STO, leaving potential investors uninformed and subject to risks of fraud. In Taiwan, authorities charged a group of seven with violating the nation’s Banking and Multi-Level Marketing Supervision acts in connection with a years-long scheme that attracted more than $51 million and defrauded more than 1,000 people. And a South Korean court recently handed down jail sentences to two executives from the crypto exchange Komid, including a three-year sentence to the CEO, for deceiving investors through the use of fake accounts, a trade bot and millions of false transactions that helped to bring in approximately $45 million in fees.

For more information, please check out the following links:

Blockchain for NASA and IoT, Developments in Crypto Products and Payments, Cryptocurrency Exchange Hacked

Financial trading chart at digital display

In this issue:

The Blockchain Effect: NASA, IoT, Supply Chain and State Initiatives

Blockchain Announcements From Traditional Financial Institutions and Emerging Platforms

Cryptocurrency Exchanges and Payment Providers Announce New Products

Cryptocurrency Exchange Hacked, Crypto-Malware and Wallet Vulnerabilities Exposed

International Regulators Target Cryptocurrency Exchanges, ICOs and Tax Compliance

Tax Analysis: Crypto Thefts; Market Declines – Strategies to Manage Losses

The Blockchain Effect: NASA, IoT, Supply Chain and State Initiatives

By: Diana J. Stern

On Monday, NASA Ames Research Center published a paper about a permissioned blockchain framework that addresses privacy and security issues for FAA air traffic data using certificate authority, smart contract support and secure communication channels. The impetus for the proposal is that the FAA is mandating national adoption of an Automatic Dependent Surveillance Broadcast system, but, as the paper argues, the system leaves a question mark around certain security concerns. Also in security, a report found that only approximately 48 percent of businesses can detect a breach of their IoT devices – and that there will be more than 20 billion connected devices by 2023. In addition, of 950 IT professionals surveyed, 23 percent believe blockchain could be the answer for securing IoT devices. The results of the study suggest that 91 percent of organizations that do not use blockchain technology today are likely to consider it going forward.

In supply chain initiatives, a major U.S.-based international automaker and other companies at various stages of the mineral supply chain launched a pilot to monitor the responsible production, trade and processing of cobalt. The eventual goal is to explore an open, industrywide blockchain platform for tracking minerals used in consumer products. The World Wildlife Fund was also active in supply chain this week. The WWF Australia launched a tool that enables businesses and consumers to track food using QR codes and blockchain technology. In other enterprise news, a major U.S.-based package delivery and supply chain management company made a strategic investment in Inxeption Corporation, a blockchain-based B2B e-commerce platform that helps merchants increase online sales.

A major energy company in Spain is using Energy Web Foundation, a blockchain-based platform purpose-built for the energy industry, for a renewable energy pilot. One of the company’s takeaways from the test drive was to use blockchain tech to issue a guarantee of origin so that consumers have a verifiable certificate about the source of the energy they consume. The largest cargo shipping company in Israel, Zim, has been piloting a blockchain-enabled platform for electronic bills of lading for over a year, and is now making the offering available to its clients for selected trades. Zim said the value proposition includes improved workflow and digitization of paper-based processes. Finally, Vermont put out an RFI to test whether blockchain technology can improve the efficiency, accuracy, security and transparency of regulatory processes. The pilot program will allow new captive insurance companies to register with the state.

For more information, please refer to the following links:

Blockchain Announcements From Traditional Financial Institutions and Emerging Platforms 

By: Robert A. Musiala Jr.

On Monday, one of the largest banks in the world announced that over the course of 2018 it settled $250 billion in foreign exchange trades using an internally developed blockchain platform that, among other benefits, allowed the bank to verify settlement without external confirmation. Meanwhile, a major Swiss investment bank announced that it is launching a cryptocurrency custody service targeted at institutional market participants. In the commodities markets, the blockchain-based commodities trading platform Vakt, which runs on the Quorum blockchain, has added a major U.S.-based multinational energy company to its platform and industry consortium. On Jan. 10, cryptoasset index provider Bitwise Asset Management filed a registration statement with the SEC seeking approval for a physically held bitcoin exchange-traded fund (ETF). According to a press release, the proposed ETF will differ from prior ETF proposals because it will use regulated third-party custodians to hold its physical bitcoin.

According to reports, late last week the security token trading platform tZERO announced that it has begun releasing security tokens into the custody of investors who purchased the tokens during a private offering completed in August 2018. Another announcement this week stated that the Aspencoin, a securitized token associated with the St. Regis Aspen Resort, will be migrated to the Securitize platform to enable trades across multiple exchanges. In Europe, the Belarus-based blockchain technology company Currency.com issued a press release claiming to have launched “the world’s first fully-functional trading platform for tokenised securities.” According to the press release, the platform will offer “a tokenised version of a contract for exchange of a specific equity, commodity or index.”

In recently published findings, a study by MarketWatch searched the SEC’s Edgar database and identified 287 Form D filings that contained key terms indicating that funds raised from accredited investors involved an initial coin offering (ICO). The study estimated the total value of Reg D exempt ICO-related fundraising events at $8.7 billion for the year 2018. Another study recently published by BitMEX analyzed ICO tokens issued to members of ICO teams. The study found that the total value of tokens held by ICO team members has declined from $24 billion to $5 billion, due mostly to falling market prices for the tokens.

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

Cryptocurrency Exchanges and Payment Providers Announce New Products

By: Joanna F. Wasick

Ways to exchange cryptocurrency continue to grow. Bittrex, a U.S.-based cryptocurrency exchange, announced its launch of an over-the-counter (OTC) trading desk that will support the nearly 200 cryptocurrencies the exchange currently offers. According to Bittrex, the OTC desk will allow parties to transact directly, unlike exchange trading, which matches buy and sell orders through an order book. Binance, another prominent exchange, announced its new fiat-to-crypto exchange, which will be based in the island of Jersey. “Jersey Binance” will purportedly enable traders in Europe and the UK to trade Bitcoin and Ethereum against the British pound and the Euro. New reports also reflect a continued increase in the number of cryptocurrency ATMs, citing roughly 4.9 ATMs installed per day worldwide (with more installed in the United States than in any other country). Getting paid in cryptocurrency by an employer may soon become easier as well. Bitwage, a cryptocurrency payment and wage service, announced a new system that allows companies to pay salaried employees in cryptocurrency. The system includes a new crucial feature that converts a portion of funds into dollars so employers can pay withholding taxes. And one fiat-backed cryptocurrency began the new year with positive news. Cryptocurrency finance company Circle released the third audit of its fiat-backed stablecoin USD Coin. The audit, conducted by a major U.S. accounting firm, confirmed that USDC tokens do not exceed the company’s fiat reserves.

According to recent reports, daily volatility of bitcoin is down a full 98 percent from last year. This volatility decrease comes hand in hand with a significant decrease in price ‒ the price for bitcoin is down nearly 68 percent from this time last year. Some predict that the decrease is here to stay: bitcoin’s spot price is currently higher than its futures price. Regardless of pricing, one company is making sure cryptocurrency owners can store their wealth in style. A luxury Swiss watchmaker is now offering “Blockchain Watch,” a handcrafted timepiece with a built-in crypto-wallet. The watch is priced over $100,000 and can only be purchased with bitcoin.

For more information, please check out the following links:

Cryptocurrency Exchange Hacked, Crypto-Malware and Wallet Vulnerabilities Exposed

By: Jordan R. Silversmith

On Jan. 15, several news outlets reported that a New Zealand-based cryptocurrency exchange, Cryptopia, had gone offline after being hacked, with about $2.44 million worth of ether tokens and about $1.18 million worth of centrality tokens being transferred to unknown wallets on Jan. 13. Shortly after the hack, cryptocurrency exchange Binance froze and quarantined certain tokens sent to its exchange by the entity allegedly responsible. In related news, gate.io announced that $100,000 worth of cryptocurrency stolen from its exchange during the 51 percent attack on Ethereum Classic allegedly has been returned by the hacker who took it. Gate.io mentioned in its post that the hacker may have been a “white-hat” hacker seeking to demonstrate security risks.

Recent hard forks of Ethereum Nowa (ETN) and Ethereum Classic Vision (ETCV) have reportedly been tarnished by malware that appropriates the private keys of users trying to redeem their forked coins. Meanwhile, malware posing as a movie file on popular torrenting site The Pirate Bay reportedly has been found to trigger a chain of nefarious activities that include cryptocurrency thefts. Additionally, a recent report has highlighted vulnerabilities in numerous “cold storage” cryptocurrency wallets, including Trezor One, Ledger Nano S and Ledger Blue. The report, titled “wallet.fail,” outlined research into the vulnerabilities of popular hardware wallets, which are typically considered more secure than wallets hosted online.

A recent rash of ransomware attacks known as the Ryuk ransomware, estimated to have earned hackers $2.5 million in Bitcoin, likely came from Russian cybercriminal activity rather than state-sponsored North Korean actors, crypto-focused news site Hard Fork reported on January 14. According to a recent report from Zerohedge, Russia is preparing to make major investments in bitcoin as part of a larger trend in which the country has been liquidating its U.S. Treasury holdings and investing in other foreign currencies and commodities like gold. One source has claimed that Russia intends to purchase as much as $10 billion in bitcoin, beginning as early as February. Russian government officials have refuted this claim.

For more information, please check out the following links:

International Regulators Target Cryptocurrency Exchanges, ICOs and Tax Compliance

By: Simone O. Otenaike

Bitmex, a Hong Kong-based Bitcoin derivatives exchange registered in the Seychelles, reportedly deactivated the trading accounts of clients from the U.S. and the Canadian province of Quebec this week. Bitmex also imposed similar restrictions against clients from North Korea, Iran, Syria, Cuba, Sudan and Crimea, to avoid violating anti-money laundering and anti-terrorist financing laws. Coincheck, a Japanese cryptocurrency exchange registered with the Kanto Financial Bureau, recently lost $530 million in altcoin tokens due to a hack. Despite the loss, Japan’s Financial Services Agency granted full permission for Coincheck to continue operations in the country. According to a recent report from South Korea’s Ministry of Science and ICT, Internet & Security Agency, and the Ministry of Economy and Finance, only a third of cryptocurrency exchanges satisfy the government’s network, security and wallet management standards. The South Korean agencies inspected a total of 21 cryptocurrency exchanges from September to December 2018 and examined 85 different aspects. Only seven of the cryptocurrency exchanges satisfied the applicable standards: Upbit, Bithumb, Gopax, Korbit, Coinone, Hanbitco and Huobi Korea.

Also this week, the Finance Minister of Malaysia announced that the Securities Commission plans to regulate initial coin offerings and the trade of cryptocurrencies effective Jan. 15. Meanwhile, The Cyberspace Administration of China (CAC) introduced new regulations for blockchain-based companies that operate in China. The CAC’s guidelines require companies to permit authorities to access stored data and obtain an ID card or mobile number from its users ‒ the new regulations will be effective Feb. 15. In Spain, The Spanish National Securities Market Commission added 23 unauthorized cryptocurrency exchanges to its warning list this week. The Danish Tax Council will soon permit its Tax Agency to access cryptocurrency trader information from exchanges. Upon the Tax Agency’s request, cryptocurrency exchanges must produce trader information, including trades, names and addresses, and central person registration numbers, for the period spanning 2016 – 2018. The Danish Tax Agency ultimately plans to use this trader information to determine if citizens are paying taxes on any profits.

For more information, please check out the following links:

Tax Analysis: Crypto Thefts; Market Declines – Strategies to Manage Losses

By: Roger M. Brown and Nicholas C. Mowbray

It’s hard to read about developments in the cryptocurrency space without seeing articles about token thefts, post-initial coin offering declines in value and market volatility. These are recurring themes reported on in our Blockchain Monitor blog posts. According to a recent survey, U.S. investors who have sold bitcoin collectively have realized approximately $1.7 billion in losses, but only 53 percent plan to report bitcoin gains and losses on their tax returns.

Like most commercial events, tax planning presents ways to provide value, reduce risk and/or enhance operating efficiency for crypto market participants. Proper tax planning can yield positive results and should be considered by investors with significant crypto market activity. Favorable tax treatment can be achieved by addressing the fact that crypto assets are capital assets for market participants that are not dealers. That means that gains and losses are not “ordinary” from a tax perspective, which in turn means that any net capital losses of an individual taxpayer can be carried forward to provide for a $3,000 annual deduction only until the carryforward is used up (assuming there are no capital gains in that or proceeding years).

There are many strategies to minimize inefficiencies related to the characterization of gains and losses as capital verses ordinary. Some of these include:

  • Disposing of crypto assets in a way that creates an ordinary deduction rather than a capital loss.
  • Holding crypto assets in certain entities where character is less relevant and gains and losses offset each other without regard to character.
  • Planning to achieve dealer status where crypto assets are treated as ordinary in nature.

Depending on a taxpayer’s investment strategy, there may be a trade-off between long-term capital gains tax rates and tax rates for ordinary income. However, those rates will not apply when a crypto asset is held for less than one year. Moreover, avoiding inefficiencies of mountains of capital loss carryforwards could militate in favor of employing a strategy that is not reliant on a long-term holding period.

Separately, other considerations might exist when crypto assets are held by a domestic corporation. This is because capital losses can be carried back for three years, providing refunds of prior taxes paid on capital gains. In addition, corporations can carry capital losses forward for only five years, after which they vanish (whereas individuals can carry forward their capital losses indefinitely). Thus, corporations might have more pressure to pursue strategies that avoid capital losses.

New Blockchain Products, an FBI Raid, the $11 Billion Bitcoin Case, Hackers Strike With a 51 Percent Attack and Crypto Tax Analysis

Abstract Digital network communication digital concept

In this issue:

New Cryptocurrency Financial Products and Platforms Announced

An FBI Raid, the $11 Billion Bitcoin Case, and Other Enforcement and Regulatory Actions in the U.S. and Abroad

Hackers Strike With 51 Percent Attack and Crypto-Mining Malware

Tax Analysis: Token Taxonomy Act Would Allow Tax-Free Exchanges of Virtual Currencies

Tax Analysis: Impact of Increases to Crypto Trading and Organized Exchanges

New Cryptocurrency Financial Products and Platforms Announced 

By: Simone O. Otenaike

Last week, SEFToken Inc. launched a new tokenized instrument. The new token, known as a “covered warrant,” will be issued through the Securitize platform on the Ethereum blockchain. According to reports, the “warrant tokens” will be convertible into equity in Mercari, a licensed exchange based in Australia. Warrant token holders will hold the right to buy or sell the underlying security at a fixed price, up until a predetermined date. In the U.K., the country’s oldest Bitcoin exchange, Coinfloor Group, launched CoinFLEX (Coin Futures and Lending Exchange) ‒ the world’s first physically delivered bitcoin futures exchange. CoinFLEX will offer contracts that trade against Tether (a crypto token that is pegged to the dollar) and features the world’s first stablecoin-to-stablecoin futures contract, a contract to trade Tether against USD Coin.

According to reports, investors funded approximately $2.2 billion in U.S.-based crypto projects and $4.6 billion in global crypto projects over the course of 2018, a roughly 400 percent increase from last year. Last week, Bakkt, the Intercontinental Exchange’s cryptocurrency project, raised $182.5 million during its first institutional funding round. After achieving regulatory approval, Bakkt plans to launch a one-day physically delivered Bitcoin futures contract along with physical warehousing. Also this week, the Nasdaq-powered DX Exchange announced plans for its new trading platform. The exchange intends to offer investors the opportunity to trade tokenized stocks in select global companies and support various crypto-to-crypto and crypto-to-fiat pairs.

On the international front, Thailand’s Ministry of Finance, under the recommendation of the SEC Board, granted digital asset business licenses to three digital asset exchanges and one cryptocurrency broker-dealer. The SEC’s press release revealed that two other applicants failed to meet the SEC’s acceptable standards regarding the systems for custody of client assets, Know Your Customer controls and cybersecurity systems.

tZERO, an e-commerce giant’s cryptocurrency subsidiary, filed a patent for a “crypto integration platform” early last week. According to the patent filing, the system will trade securities, tokens, digital shares, cash equivalents and digital assets from broker-dealers and then translate the orders into digital assets on the platform. Among other things, the platform reportedly will aggregate market data from various cryptocurrency exchanges and generate the best price in the crypto market for the digital asset or liability involved in the transaction. tZero’s parent company also announced Thursday it plans to pay part of its business taxes in Ohio via the state’s new cryptocurrency taxpayer platform, OhioCrypto.com. The e-commerce giant will become the first company to pay part of its Ohio state taxes in Bitcoin.

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

An FBI Raid, the $11 Billion Bitcoin Case, and Other Enforcement and Regulatory Actions in the U.S. and Abroad

By: Robert A. Musiala Jr.

According to reports, late last month the FBI raided the offices of a Michigan-based nonprofit technology center in what appears to be an action related to unlicensed operation of a cryptocurrency exchange business. Late last week, U.S.-based cryptocurrency exchange Kraken reported that the number of inquiries it received from U.S. law enforcement agencies tripled from 2017-2018, with a total of 475 inquiries from global law enforcement agencies received in 2018. Also last week, a U.S. district court judge denied a motion to dismiss and set a Sept. 30 trial date for a civil lawsuit against Australian businessman and self-proclaimed Bitcoin creator Craig Wright, who is being sued by the estate of his deceased former business partner. The plaintiffs in the lawsuit claim Wright fraudulently took possession of over $11 billion of bitcoin that belonged to the deceased. Also, a second private class action lawsuit was recently filed related to the theft of $170 million in cryptocurrency assets from an Italian-based exchange.

In India, police recently arrested a suspect accused of involvement in a $71.6 million fraud scheme related to the sale of cryptocurrency tokens. In the United Arab Emirates, according to reports, the UAE financial regulators intend to introduce new regulations governing initial coin offerings sometime in the first half of 2019. Additionally, this week the European Banking Authority issued a report on “crypto-assets” that advised the European Commission to perform a cost-benefit analysis to assess “whether EU-level action is appropriate and feasible” to address the effects and implications of crypto-assets on the financial sector. On the same day, the European Securities and Markets Authority (ESMA) published a report on initial coin offerings and crypto-assets for the EU Commission, EU Council and EU Parliament. Issues highlighted in the ESMA report include anti-money laundering risks and investor risks related to certain crypto-assets that fall outside of current regulatory frameworks.

For more information, please refer to the following links:

Hackers Strike With 51 Percent Attack and Crypto-Mining Malware

By: Joanna F. Wasick

Barely into the new year, Ethereum Classic (ETC), an offshoot of Ethereum (ETH) and the 18th-largest cryptocurrency by market cap, was subject to a “51% attack” – a type of hack possible on cryptocurrencies using a proof-of-work (POW) protocol. In essence, a single entity or group gains a majority of the network hash rate, enabling it to rewrite blockchain data and therefore “double-spend” ‒ sell cryptocurrency for fiat, and then amend the ledger to get the coins back, while keeping the fiat. Reports indicate that nearly $1 million worth of ETC was stolen in the recent attack. A Chinese security firm, SlowMist, published technical details on the attack and claimed it may be able to identify more information on the attacker if certain cryptocurrency exchanges assisted by providing information. This news comes on the heels of The Ethereum Foundation’s announcement that it will slash energy consumption in 2019 by replacing POW with a proof-of-stake protocol, which cuts energy consumed per Ethereum transaction. In addition to ecological benefits, the protocol switch may thwart these kinds of thefts, although it is unclear whether other types of attacks will be made possible.

But POW-targeted attacks are hardly the only kind of theft in crypto news. A new study reports a staggering 4,000 percent rise this year in cryptocurrency mining malware ‒ malware used by criminals to hack into an innocent user’s computer, smartphone or other device in order to harness processing power to use for mining cryptocurrencies. The study estimates that illicit crypto-mining was responsible for nearly $57 million in revenue. The most popular cryptocurrency was Monero, 4.3 percent of which was mined through the use of illicit malware. Bitcoin was the second-most-targeted currency, but its popularity has declined over the past three years due to an increase in hash rate and difficulty in mining.

Conventional bitcoin wallet attacks continue as well. According to reports last week, a hack targeted at the Electrum bitcoin wallet provider stole approximately $750,000 worth of bitcoin from Electrum wallet users.

For more information, please check out the following links:

Tax Analysis: Token Taxonomy Act Would Allow Tax-Free Exchanges of Virtual Currencies

By: Roger M. Brown and Heather K.P. Fincher

The Token Taxonomy Act, introduced by Rep. Warren Davidson, R-Ohio, on Dec. 20, 2018, would treat so-called “trading pair” exchanges of virtual currency, where one cryptocurrency is exchanged for another cryptocurrency, as tax-free exchanges.[1]

Prior to 2018, many holders of virtual currency took the position that exchanges of one token for another qualified as a tax-free exchange of like-kind property under pre-tax reform rules (pre-2018 Section 1031 of the U.S. Tax Code). In certain ways, the rules could be flexible by focusing on like-kind asset classes, rather than on similar value.

This approach was applied to certain financial assets, such as an exchange of gold bullion for Canadian Gold Maple Leaf coins, and an exchange of one bundle of patents for another.

The 2017 Tax Cuts and Jobs Act changed the like-kind exchange rules. They now only apply to exchanges of real property. The Token Taxonomy Act would permit the tax-free exchange of virtual currency (in addition to real property), and apply to post-Jan. 1, 2017, exchanges.

All cryptocurrency assets are not created equal. Some may even fall into another bucket all together and be outside of what the bill treats as a crypto asset from a U.S. tax perspective. This is because labels mean little in tax law, and some tokens, particularly securitized tokens, may be treated as actual ownership in the underlying reference assets. In such an instance, the token could even be outside of the protection offered by the new bill.

[1] The proposed legislation would also exclude up to $600 of gain when virtual currency is sold or exchanged for cash or cash equivalents.

Tax Analysis: Impact of Increases to Crypto Trading and Organized Exchanges

By: Roger M. Brown and Nicholas C. Mowbray

On Dec. 11, 2018, the Commodity Futures Trading Commission released a request for public comments signaling their belief that there will be an increase in the trading of crypto assets and crypto-based derivatives on organized exchanges. This belief is evidenced by the launch of the Coin Futures and Lending Exchange, and the anticipated launch of Bakkt and the Eris Exchange’s crypto market.

The increases in trading and the number of organized exchanges give rise to unique U.S. tax issues that may not have applied to a crypto asset before, including:

  • Whether gain or loss will be triggered annually, regardless of whether the crypto asset is sold.
  • Whether a non-U.S. fund can trade a crypto asset without being subject to U.S. taxation.
  • Whether certain rules apply that can defer the recognition of a tax loss despite the sale of an asset.

This is because the tax consequences of trading in an asset can change as it becomes actively traded, and in some instances, whether trading is on an organized exchange.

Thus, holders of crypto assets should review their holdings and consider whether an asset’s trading has become sufficiently active to be subject to tax treatment that differs from its prior treatment. Further, the differences in active trading and whether such trading is on an organized exchange can cause differences in tax treatment among tokens.

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