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.

For more information, please refer to the following links:

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.

For more information, please refer to the following links:

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.

For more information, please check out the following links:

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.

For more information, please refer to the following links:

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.

For more information, please refer to the following links:

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.

For more information, please refer to the following links:

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.

For more information, please check out the following links:

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

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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.

Studies Analyze Cryptocurrency Market, New Announcements in Payments, Enterprise and Threats

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In this issue:

Multiple Studies Analyze Recent Cryptocurrency Market Trends

Stablecoins, “Trading Pairs” and Other Developments in Cryptocurrency Payments

Threat Update: Ransomware, Crypto-mining Malware, BTMs and ICO Fraud Schemes

Blockchain Enterprise Developments in France, Spain and South Korea

UK Issues Cryptocurrency Guidance; US Issues Remain

Monetizing Positions in Cryptoassets Without Triggering Taxable Gain or Loss

Multiple Studies Analyze Recent Cryptocurrency Market Trends

By: Robert A. Musiala Jr.

A recently issued report from the Blockchain Transparency Institute analyzed high-volume bitcoin “trading pairs” on various cryptocurrency exchanges and found “clear evidence of wash trading” on 22 of 25 exchanges analyzed. A bitcoin “trading pair” is an exchange of bitcoin for another type of cryptocurrency (or vice versa), and “wash trading” is a form of market manipulation where an investor simultaneously buys and sells the same financial instrument to create artificial market activity. The report claims to have identified four different “bot strategies” used to artificially inflate bitcoin trading pair volumes via wash trading on cryptocurrency exchanges. According to the report, over 80 percent of the top bitcoin trading pairs volume reported by CoinMarketCap is wash traded, with most of the trading pairs having actual volume under 1 percent of their reported volume.

Another recent report analyzed website traffic on the most frequently used cryptocurrency exchanges and found that many cryptocurrency exchanges with low website traffic report high transaction volumes. According to the report, this indicates that some cryptocurrency exchanges may be artificially inflating the dollar value of transactions processed on their platforms. Cryptocurrency market manipulation is also the topic of a recently published research paper co-authored by professors from four different universities that provides a detailed examination of “pump and dump” schemes in the cryptocurrency markets. The report’s findings suggest that such schemes are “widespread and often quite profitable.”

According to a recent Bloomberg article, a large U.S. hedge fund acknowledged emerging contingencies related to initial coin offerings (ICOs) by citing the risk that a significant percentage of ICOs it had invested in may be found in violation of U.S. securities laws. An analysis published Dec. 17 found rising outflows of Ethereum (ETH) from wallets reportedly controlled by ICO projects, with over 400,000 ETH moving out of ICO team wallets over a 30-day period. Another recently released analysis found that of the over 460 million “public key” addresses on the bitcoin blockchain, only about 172 million were “economically relevant” in that they are “controlled by people or services who currently own bitcoin,” with the remaining 63 percent of addresses used only temporarily to facilitate transactions.

Another apparent trend, reported by Diar, found that institutional bitcoin trading appears to be shifting away from traditional exchanges in favor of over-the-counter markets. Finally, the University of Cambridge has released its 2nd Global Cryptoasset Benchmarking Study, which “gathers survey data from more than 180 cryptoasset companies and individuals, covering 47 countries across five world regions” and provides analysis focused on mining, exchange, storage and payments. In one notable finding, the study reports that in the first three quarters of 2018, the number of ID-verified cryptocurrency users almost doubled, increasing from 18 million to 35 million.

For more information, please check out the following links:

Stablecoins, “Trading Pairs” and Other Developments in Cryptocurrency Payments

By: Robert A. Musiala Jr.

In recent developments in cryptocurrency payments, according to reports, the PAX stablecoin, which is backed 1:1 by U.S. dollars, recently exceeded $5 billion in transaction volume in just over three months of its September launch. Another recently launched stablecoin, USD Coin, has been added by the cryptocurrency exchange Binance as a “trading pair” option for six different cryptocurrencies.

This week, Coinbase began allowing its retail customers to trade bitcoin in “trading pairs,” where bitcoin is exchanged for another type of cryptocurrency. Coinbase also recently announced that its U.S. customers now will be able to withdraw cash balances to their accounts at a major U.S. internet payment processor. And startup OpenNode recently announced that it has closed a seed-funding round from a major U.S. venture capital firm to develop a new bitcoin payment processing system for merchants that want to accept bitcoin as payment.

For more information, please check out the following links:

Threat Update: Ransomware, Crypto-mining Malware, BTMs and ICO Fraud Schemes

By: Shea M. Leitch

Scammers recently delivered messages to various targets threatening to detonate explosive devices carried by an unidentified “mercenary” unless the targets paid a $20,000 ransom to a bitcoin wallet by the end of the business day. The sender(s) targeted individuals in geographically dispersed English-speaking countries, such as the U.S., Canada and New Zealand. Authorities in these jurisdictions have reported that no explosives were actually found.

In addition to so-called crypto-ransomware, another emerging threat are bitcoin ATMs (BTMs), which according to a recent report are spreading quickly and may pose high risks of money laundering. Perhaps the most pervasive current threat is crypto-mining malware, which, according to a new Threats Report from McAfee Labs, has increased 4,000 percent over the past year.

Financial regulators in France and Belgium have sought to minimize the impact of cryptocurrency fraud on investors, each blacklisting a number of crypto-related investment websites this week and warning against unauthorized or fraudulent ICOs. The Belgian Financial Services and Markets Authority announcement contained a blunt warning to investors.

“The principle remains the same: they offer you an investment they claim is secure, easy and very lucrative. They try to inspire confidence by assuring you that you don’t need to be an expert in cryptocurrencies in order to invest in them. They claim to have specialists who will manage your investments for you. You are told that your funds can be withdrawn at any time or that they are guaranteed. In the end, the result is always the same: the victims find themselves unable to recover their money!” (Emphasis in the original)

Greece’s high court issued a ruling this week affirming a lower court’s decision to extradite to France Alexander Vinnik, who is accused of laundering up to $4 billion through the now-defunct cryptocurrency exchange BTC-e. Russia has also sought Vinnik’s extradition. Vinnik’s legal representatives have expressed the belief that his extradition to France will result in his eventual extradition to the United States to face charges of fraud, identity theft, money laundering and a number of other crimes related to his alleged operation of the BTC-e cryptocurrency exchange.

For more information, please check out the following links:

Blockchain Enterprise Developments in France, Spain and South Korea

By: Simone O. Otenaike

According to a recent report, French officials plan to invest about $569 million in state-level blockchain projects over the next three years. In the same report, officials expressed a desire to create a more bitcoin-mining-friendly environment in France. Despite these potential initiatives, the country’s commitment to the blockchain and cryptocurrency industries seems tenuous – just last month, France’s central bank failed to endorse a plan involving the sale of bitcoin at thousands of tobacco kiosks. Meanwhile, Spanish renewable energy company ACCIONA Energía launched the GREENCHAIN project, which will use a blockchain platform to track the supply chain of renewable energy from five wind and hydro facilities in Spain to four corporate customers in Portugal in real time. According to reports, ACCIONA Energía will be the first entity in Spain and Portugal to trace renewable energy through blockchain technology and allow clients to certify from any location in the world that 100 percent of the energy supplied is green.

In South Korea, the Ministry of Science, ICT and Future Planning and the Ministry of Oceans and Fisheries announced plans to launch its maritime blockchain pilot project, which will promote efficiency in the country’s container shipping industry. The port-logistics pilot will run for one year out of the Port of Busan, the country’s largest port, and the fifth-busiest container port worldwide. The pilot is part of the South Korean government’s overall strategy to raise $204 million for blockchain technology by 2022.

For more information, please check out the following links:

UK Issues Cryptocurrency Guidance; US Issues Remain

By: Roger M. Brown and Nicholas C. Mowbray

This week, the U.K. tax authorities (HMRC) published guidance on the taxation of cryptoassets. The guidance states that HMRC does not view such cryptoassets as currency or money – which aligns the HMRC view with the general U.K. regulatory position. The guidance identifies three types of cryptoassets:

— Exchange tokens (including bitcoin and other cryptocurrencies)

— Utility tokens

— Security tokens

The guidance notes that labels do not control; rather, the functionality and substance do. The guidance focuses on the taxation of exchange tokens while noting that it also provides a beginning discussion point for rules that may ultimately be developed for the other types of tokens.

The guidance states that, in the vast majority of cases, individuals hold cryptoassets as a personal investment and hence will be liable to pay capital gains tax on any profits arising when they dispose of their cryptoassets. Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, organization and sophistication that the activity amounted to a financial trade – the profits of which would be subject to income tax rather than capital gains tax.

HMRC specifically notes that it does not consider the buying and selling of cryptoassets to be the same as gambling – the proceeds of which would be tax-free. This is a clear change of position from their March 2014 guidance, which stated “depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable.”

Under the U.K. guidance, cryptoassets received from mining or from airdrops may be subject to income tax on receipt, depending upon the nature of the activity giving rise to the receipt. Cryptoassets received as earnings from employment are treated as “money’s worth” and are therefore subject to income tax and national insurance contributions.

The U.K. guidance raises questions that are similar to those that must be addressed from a U.S. tax perspective when transactions in cryptocurrency occur. Some of these questions focus on:

– The proper category of property in which to place tokens

– Which types of transactions give rise to taxable gains or deductible losses

– The applicable rate at which to tax gains

– Application of employment compensation rules to cryptoassets (or rights therein), including when there are conditions of continued employment associated with the retention of such rights

– Treatment of cryptocurrency or tokens received in exchange for performing some activity (e.g., mining, social actions, validating)

– Actions that give rise to a taxable gain (or loss) when cryptocurrency is disposed of, as well as planning opportunities that can defer taxable gains

– Tax treatment of forks – both hard and soft

– Record keeping and reporting

In the absence of comprehensive guidance in the U.S. on cryptocurrency issues, taxpayers will borrow from other areas in doing their best to comply with their tax obligations – while identifying opportunities to optimize their tax situations when applicable doctrines permit.

* * * * *

The U.S. discussion above was provided by Roger Brown and Nicholas Mowbray of Baker Hostetler LLP. The U.K. discussion above was provided by Darren Oswick of Simmons & Simmons, LLP.

Monetizing Positions in Cryptoassets Without Triggering Taxable Gain or Loss

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

Strategies still exist to monetize a position in crypto without triggering current taxable gain or loss, as a recent case shows: Estate of McKelvey v. Commissioner (906 F.3d 26, 2nd Cir. 2018).

Many people historically have sought to diversify their crypto holdings by exchanging one cryptoasset for another. Some people sought to avoid recognition of taxable income by taking the position that the exchange of cryptocurrencies was exempt from current taxation under the “like kind exchange” rules. However, that’s no longer possible, due to 2017 tax law changes.

Nevertheless, a number of common law doctrines continue to exist that permit current monetization without current taxable income. One example is illustrated by the transaction undertaken by the founder of the Monster.com website, Andrew McKelvey (McKelvey). McKelvey had substantial appreciation in his shares, and he sought to monetize that value without triggering current taxable gain by entering into variable prepaid forward contracts (VPFCs).

Under VPFCs, a buyer of the shares agrees to make an upfront payment for the right to receive at a future date a maximum amount of the designated assets or their cash equivalent. The exact number to be delivered, however, would be determined by a minimum price and a maximum price that limit the amount of property to be delivered in the future.

As security for performance, the buyer gives the seller cash up front, effectively “monetizing” the shares upfront. In turn, the seller receives the maximum amount of assets at a future date that the buyer may have to deliver. Custodians can be involved to minimize performance and execution risks.

The IRS did not take issue with the fact that the VPFCs of McKelvey were effective in allowing the taxpayer to monetize his position. Rather, the IRS said that McKelvey’s modification of the VPFCs by extending their settlement dates shortly before delivery was effectively an event that triggered taxable gain. The appellate court agreed.

As trading activity in cryptoassets increases, taxpayers seek to monetize positions without triggering taxable gains or losses. Traders also seek to enter into different forms of “long” and “short” positions to profit from market movements. VPFCs are among the established tools that can be used to achieve these goals in the crypto space – just like they have been for other asset classes.

Blockchain Developments: Government and Transport Sector Solutions, Legislation, Payment Applications and Global Enforcement Actions

In this issue:

• Blockchain Transport Applications, Public Sector Initiatives, Protocol and Market Developments

• Capital Markets Initiatives Continue as US Congress Issues New Research and Two New Bills

• Blockchain Payments Networks Evolve, New Cryptocurrency Exchange Lands in US

• SEC Achieves Settlements, FATF Evaluates UK, Regulator Actions in Denmark and New Zealand

• Tax Analysis: Securitized Tokens Backed by Real Property or Other Assets

Blockchain Transport Applications, Public Sector Initiatives, Protocol and Market Developments

By: Diana J. Stern and Simone O. Otenaike

Transportation, oil and gas industry players have put the pedal to the metal to push blockchain pilots. According to reports, the Abu Dhabi National Oil Company (ADNOC) is working on a blockchain-based system that automates the accounting process for oil and gas production from end to end. In addition, Maritime Blockchain Labs has announced plans to further develop its blockchain-based platform for tracking marine fuel quality and quantity assurance, with the goal of facilitating data-driven decision-making and alleviating industry-wide pain points. National Transport Insurance, a truck and transport insurer, is taking part in a trial to improve food safety, better animal welfare and monitor exports by leveraging blockchain technology, innovative packaging and IoT systems to secure supply chain provenance for Australian beef. Finally, State Farm is testing whether blockchain technology can streamline the manual process of subrogation, the legal right to seek damages from a third party responsible for a loss suffered by the insured.

In the public sector, the U.S. Department of Homeland Security is soliciting applications for a funding program that provides blockchain startups and small businesses with the opportunity to receive grants of up to $800,000 for the development of anti-counterfeiting solutions. At the state level, Vermont’s Attorney General has established a working group to study blockchain technology by engaging with stakeholders, associations, industry experts and state agencies. On the international front, UNICEF’s Innovation Fund will invest up to $100,000 in six companies selected from more than 100 applications to fund open-source blockchain prototypes aimed at solving global challenges such as transparency in healthcare delivery and access to mobile phone connectivity. Early this week, the European Union Blockchain Observatory & Forum published a report that sets out use cases, advantages and challenges for deploying blockchain technology in government and public service applications – urging that experimentation needs to continue and that digital identity and blockchain-based central bank digital currencies (CBDCs) are fundamental building blocks.

Last Friday, Ethereum core developers agreed to launch the Constantinople hard fork (Constantinople) at block 7,080,000. Constantinople incorporates five separate Ethereum Improvement Proposals that soften Ethereum’s transition from proof-of-work (PoW) consensus to a more energy-efficient proof-of-stake (PoS) consensus algorithm. This upgrade to a PoS consensus algorithm has the potential to fundamentally change the Ethereum blockchain system. Meanwhile, earlier this week, Hyperledger announced that 16 more organizations have joined its project as general members and four as associate members. According to a leading accounting firm, the price of bitcoin is down more than 80 percent from its December 2017 high, the total market value of all cryptocurrency has fallen 87 percent from its early January high, and about 86 percent of the ICOs from 2017 are trading below their listing price while 30 percent have lost nearly all of their value. According to reports, these market declines are causing investors to put pressure on crypto-based and blockchain-based enterprises to produce revenue-generating products.

A major online retailer’s investment arm may soon become its core business. Yesterday, the retailer’s founder announced that the publicly traded company is seeking to sell its flagship retail site by February and keep its portfolio companies, many of which have business models based on blockchain. These include the security token trading platform tZERO, enterprise technology provider Symbiont, voting application Voatz, lending startup Ripio and data managing platform Factom, among others.

For more information, please check out the following links:

Capital Markets Initiatives Continue as US Congress Issues New Research and Two New Bills

By: Jonathan D. Blattmachr 

This week brought a slew of developments in the block and crypto capital markets space, largely in Europe. In Germany, solarisBank is working with the Boerse Stuttgart Group to create full-spectrum infrastructure for digital assets. The two entities are seeking to launch a crypto trading venue by the first half of 2019, with bitcoin and ether initially available for trading and an eye toward providing a platform for ICOs and secondary market trading for tokens. Blockchain consortium R3 has partnered with several major European banks to produce live commercial paper transactions, which follows a simulated transaction conducted last year. The program aims to cut inefficiencies from current models. The Gibraltar Stock Exchange subsidiary is now providing insurance coverage for crypto assets (both online and offline) traded on the Gibraltar Blockchain Exchange. This makes the Gibraltar Blockchain Exchange at least the third digital exchange offering such insurance, but coverage remains insufficient to cover all trades made daily worldwide. To quell concerns that its stablecoins may not be backed one-to-one with euros, Malta-based Stasis has hired an outside auditor to provide assurance to investors. In October, similar concerns led to Tether’s USDT tokens losing parity with the dollar. Outside Europe, a major South Korean bank announced it will begin blockchain recordkeeping to reduce human error and increase efficiency.

While bipartisanship can feel unfathomable these days, congressmen from different sides of the aisle have introduced two bills focused on cryptocurrency market manipulation. The lawmakers say the proposed legislation will help shape regulations that will also promote competitiveness. The Congressional Research Service (CRS), which operates for and under the direction of Congress, has issued a report on cryptocurrencies, economics and policy issues. The CRS report notes that cryptocurrencies’ “role and value … remain highly uncertain,” largely because of functionality questions. The report also notes cryptocurrency-related concerns about consumer protections, proper regulatory schemes, potential facilitation of crime and the effect on monetary policy. CRS also wrote that central bank digital currencies could provide certain benefits, including allowing individuals to have accounts at central banks, which could improve systemic stability and cause commercial banks to offer interest rates to entice customers.

For more information, please check out the following links:

Blockchain Payments Networks Evolve, New Cryptocurrency Exchange Lands in US

By: Joanna F. Wasick

Financial services firms in the Middle East, Europe and Asia continue to build on cryptocurrencies’ ability to facilitate domestic and cross-border payment transactions. According to reports, the United Arab Emirates’ (UAE) central bank and the Saudi Arabian Monetary Authority are collaborating to issue a cryptocurrency that will be used exclusively by banks for transactions between the two countries. In Germany, cryptocurrency payments startup Bitwala and German fintech startup solarisBank are reportedly launching a banking system that enables users to manage bitcoin and euro deposits in one place, with the same services, safety and convenience of a traditional German bank account. In Asia, Coinone Transfer, a subsidiary of Coinone, recently introduced Cross, South Korea’s first blockchain-based remittance app and web service, which can be used regardless of whether the user has a bank account. Cross is enabled by RippleNet, blockchain technology from U.S. startup Ripple, and is being launched with support from the Siam Commercial Bank in Thailand and Cebuana Lhuillier in the Philippines. The UAE Exchange and Ripple announced plans to launch another cross-border remittance service in Asia by the first quarter of 2019.

On the domestic front, Amplify Exchange has announced plans to open U.S. operations in Knoxville, Tennessee. Amplify Exchange reportedly operates on a decentralized internet system enabled by its sister company, Substratum, and allows users to access the internet privately and irrespective of certain government use restrictions. Also reflecting a premium on privacy, Mastercard recently applied for a patent on a system that obfuscates the point of origin and amount of certain cryptocurrency transactions. In other payments news, U.S.-based cryptocurrency exchange Kraken, following a recent valuation of $4 billion, is reportedly preparing for an initial private offering targeted to high-net-worth investors.

For more information, please check out the following links:

SEC Achieves Settlements, FATF Evaluates UK, Regulator Actions in Denmark and New Zealand

By: Marc D. Powers

The SEC was successful this week in two enforcement settlements. It obtained an order from a federal court in Texas requiring the former CEO and COO of AriseBank to pay $2.7 million to settle registration and anti-fraud violations. The case arose from the ICO of AriseCoin, where AriseBank executives falsely claimed their company was a first-of-its-kind decentralized bank offering a variety of cryptocurrency-related services. As part of the settlement, the executives agreed to an Officer and Director bar. The former CEO was criminally charged for the same conduct shortly before the settlement was finalized. In another settlement, CoinAlpha Advisors LLC (CoinAlpha) settled registration violation charges when it agreed to return $600,000 raised from 22 investors from several U.S. states. The SEC alleged that CoinAlpha engaged in a general solicitation of unregistered securities and took no reasonable steps to ensure only accredited investors purchased interests in its fund.

Also this week, in a class action alleging sales of unregistered securities related to an ICO, a district court denied the defendants’ motion to dismiss, finding the defendants were unable to demonstrate that the tokens subject to the lawsuit were not “investment contracts” subject to SEC registration requirements. In a voluntary action, a well-funded startup, Basis, announced that it would return its funding to investors and cancel its project to build a stablecoin that would maintain a stable price based on algorithmic functions. As reported by Forbes, Basis decided to cancel the project after a meeting with the SEC left the company and its lawyers believing that the proposed stablecoins would be deemed unregistered securities. In another item of note this week, the CFTC published a request for information seeking public comment and feedback on the underlying technology, opportunities, mechanics, use cases and markets related to Eether and the Ethereum Network to benefit its LabCFTC, created in May 2018.

In international news, a new report was published last week by the Financial Action Task Force (FATF) that evaluated anti-money laundering and counter-terrorist financing (AML/CFT) measures in place in the United Kingdom. The report pointed out that “virtual currency exchange providers are not yet covered by AML/CFT requirements” and cited this as an “emerging risk.” The report also stated that “there is not yet evidence to suggest that broad scale ML/TF is occurring in the UK through this relatively small sector.” According to another recent report, Denmark has identified 2,700 individuals that it claims owe substantial taxes on bitcoin profits from 2015 to 2017. Meanwhile, New Zealand has blacklisted three more cryptocurrency platforms as scams. Harking back to the days of Mt. Gox, prosecutors in Japan are seeking a 10-year prison sentence for Mark Karpeles, who they claim stole $3 million from customer accounts in late 2013, months before the exchange collapsed in the wake of a hack. In a recent cybersecurity incident, hackers reportedly have set in motion a massive campaign that scans for internet-exposed Ethereum wallets and mining equipment, stealing the ether. Finally, a Dec. 12 blog post from the University of Oxford noted that an interesting precedent may have been set in a recent Canadian court case, where the court ordered a substantial amount of ether to be returned to the plaintiff after the plaintiff demonstrated, using blockchain analysis, that the ether had been transferred in error.

For more information, please check out the following links:

Tax Analysis: Securitized Tokens Backed by Real Property or Other Assets

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

In October 2018, an asset management company, Elevated Returns, reportedly raised $18 million through securitized tokens backed by commercial real estate. Other asset managers are thinking of similar token issuances.

Many investors in such token issuances may think the asset they hold is a new token. However, the U.S. tax law likely would treat the investors in these types of token issuances as owning an interest in the underlying real estate. This can be important for a number of reasons, including where a token holder is not a U.S. tax resident.

In such an instance, the investor not only may be subject to U.S. tax on the sale of a token but also may be required to comply with special tax rules applicable to transfers by a non-U.S. resident of a U.S. real property interest. Moreover, under these rules, the purchaser of the token could be responsible for withholding and depositing with the IRS 15 percent of the proceeds they transfer to the seller. Special tax filing obligations can also apply to the non-U.S. resident, and certain pre-certifications may be needed prior to any sale – regardless of whether the token seller is a U.S. or non-U.S. person.

These results are generally different from the normal rules that would apply to a sale of a token, such as bitcoin or ether. In other words, the federal and state tax consequences on the sale of a token may vary based on whether and what assets back a particular token. Similar rules may apply in other countries, as well, where the real estate or other assets backing the token are outside of the United States.

Blockchain Patents and Patient Data Pilots, Capital Markets Movements, Mining Malware, and More

In this issue:

Blockchain Enterprise Developments in Food Supply Chain, Patient Data, Patents, Mobile Devices and More

Regulation, Investment and a Bad Week for Bitcoin: Blockchain and Cryptocurrency Capital Markets Developments

Global Regulatory Consensus Beginning to Take Shape; Cryptocurrency Mining Malware Evolves 

Blockchain Enterprise Developments in Food Supply Chain, Patient Data, Patents, Mobile Devices and More

By: Simone O. Otenaike

An international supermarket conglomerate operating in 17 countries worldwide recently announced that it will implement TE-FOOD’s blockchain-based food traceability solution in five countries: France, Italy, Spain, Portugal and Senegal. More than 6,000 companies, including other leading global food retailers, have implemented TE-FOOD’s solution. In related news, a major online retailer’s crypto fund announced plans to purchase $2.5 million of equity stake (roughly 10 percent) in GrainChain, a startup that is developing a blockchain platform to aid farmers and purchasers in the grain industry by providing a more transparent vision of a grain supplier’s source and eliminating the need for middlemen. Roughly 500 farmers are currently piloting the network, and the company expects to go live sometime in the first quarter of next year.

SwissPost, Switzerland’s national postal service, and Swisscom, the state-owned telecom provider, have announced plans to team up and develop a private blockchain platform designed to meet the high security levels required by banks and to assist in securing applications such as maintaining temperature measurement data during the transport of pharmaceuticals. In Barcelona, Spain, last week, Sirin Labs unveiled the final design of its blockchain phone, the Finney. The Finney will start shipping in late December and seeks to make decentralized applications and cryptocurrency platforms easier to use through functions like automated conversion between various cryptocurrencies.

Earlier this week, one of the top five hospitals in the U.S. announced plans to collaborate with Korean blockchain startup MediBloc to develop a secure solution for health information exchange that supports data sharing. Ultimately, MediBloc aims to develop a tool that would convert data held by hospitals, research bodies, and insurance and pharmaceutical companies into a universal format. Eight medical institutions across Asia and 14 tech companies are presently signed up to test MediBloc’s system.

In patent technology news, a U.S.-based global tech giant recently won a patent connected to a chip that reduces by 15 percent the amount of power needed for cryptocurrency mining operations. The patented chip would be smaller than those currently used by cryptocurrency miners and would promote energy-efficient, high-performance mining. Meanwhile, a U.S.-based multinational vehicle manufacturer and distributor published a patent application this week that discusses the use of a distributed ledger to store data and facilitate information sharing between vehicles.

According to a recent report, various Ohio venture funds will invest more than $300 million over the next three years in early-stage startups that focus on using blockchain technology for business or government. And Hyperledger recently launched a cryptographic library, Ursa, as a new tool for developers in the open source space. Ursa aims to avoid duplication of development efforts among blockchain developers by serving as a single repository of cryptographic implementations.

For more information, please check out the following links:

Regulation, Investment and a Bad Week for Bitcoin: Blockchain and Cryptocurrency Capital Markets Developments

By: Jonathan D. Blattmachr and Robert A. Musiala Jr.

In news that no Blockchain Monitor reader wants to hear, technical analysts are sounding the alarm bell on bitcoin. On Dec. 6, bitcoin slid below its 52-week low to around $3,400, which comes on the heels of November, in which it experienced its worst month in seven years. Chartists forecast that bitcoin could drop another 60 percent, to around $1,500. Fundamental analysts have blamed the drop on regulatory pressure, the recent hard fork and the choppy conditions in global markets generally. Due to the price drop, many bitcoin miners have ceased operations. This appears to have resulted in the second-largest drop in Bitcoin block hashing difficulty in history, with a drop of 15 percent reported on Dec. 3. A cryptocurrency mining pool recently reported that breakeven for mining operations, depending on various factors, is between $3,891 and $11,581, which means at current prices, many large-scale miners will spend more on mining than the price for which they can sell the bitcoin.

The plunge isn’t stopping the capital markets industry from moving forward with new ideas, however. Institutional investors will now be able to trade on the cryptocurrency exchange Poloniex. These investors will have access to different cryptocurrency trading pairs and API interfaces as well as no-fee transactions on all bitcoin/U.S. dollar (USD) coin trades made this month. In Hong Kong, a Chinese investor will be heading up a stablecoin project within a blockchain fund. This “stable digital currency system” will focus on major currencies, beginning with instruments pegged to the yen, Aussie dollar and USD.

In regulatory developments, the New York Department of Financial Services (DFS) announced approval of a new virtual currency with commercial banking applications. Launched by a regional, New York state-chartered bank, the blockchain platform allows no-fee transfers of virtual currency between client accounts at the bank. DFS announced that to gain approval, the bank had to, among other things, implement, monitor and update effective risk-based controls and other measures to prevent money laundering or terrorist financing. In national news, Rep. Warren Davidson (R-Ohio) announced a forthcoming plan to regulate initial coin offerings and cryptocurrency offerings. The proposed legislation would create a new asset class that would regulate tokens in a way that allows them to avoid being classified as securities.

Overseas, the Swiss market regulatory body, FINMA, published new rules allowing licensed fintech companies to accept public deposits of about $100 million. An applicant seeking licensure must provide details about its business plan, asset storage methods and anti-money laundering policies, and the applicant cannot invest or pay interest on the funds received. In France, 26 companies and five banks have completed a block-based know-your-customer (KYC) test where participants were able to implement KYC checks on a shared network. And a Singapore-based cryptocurrency exchange, Huobi, recently acquired a license to operate in Gibraltar.

Caveat emptor: An MIT study reported that pump-and-dump schemes account for about $7 million in cryptocurrency trading each month. Fraudsters buy a coin at a low price, work to boost its value, then sell holdings before new buyers are able to get out. Investors should be heartened that according to the report, this represents only 0.049 percent of traded volume and new tools are emerging that it is hoped will drop this to zero. Researchers investigating these frauds believe they have developed an algorithmic tool that will be able to spot the coins targeted for pumping and dumping before the scheme begins.

For more information, please check out the following links:

Global Regulatory Consensus Beginning to Take Shape; Cryptocurrency Mining Malware Evolves

By: Brian P. Bartish

Last weekend’s G20 Summit in Buenos Aires, Argentina, saw cryptocurrency regulation take a pivotal place on the global economic agenda, with leaders calling for the integration of crypto-asset regulation into existing Financial Action Task Force standards for anti-money laundering (AML) and countering terrorist financing. In addition, G20 leaders jointly delivered a document outlining a plan for a taxation system for cross-border electronic payment services, with a final version of regulations expected to be put in place by 2020.

In the U.S., the Department of Homeland Security Small Business Innovation Research program published a report looking into the feasibility of conducting forensic analysis on privacy-focused coins, such as zcash and monero, if they are used for illegal activity. In Estonia this past week, a new version of Estonia’s Anti-Money Laundering and Terrorist Financing Prevention Act came into effect, with new amendments specifically targeting the AML risks from cryptocurrencies and companies offering crypto-related services. According to reports, Canada appears to be eyeing similar legislation. Japan is reportedly working on separate initiatives to combat initial coin offering (ICO) fraud and to curb tax evasion on significant profits from cryptocurrency transactions. These new initiatives follow 2017 legislation that brought cryptocurrency exchanges under Japan’s AML and know-your-customer rules, which has already resulted in 5,944 reported suspicious transactions for the first 10 months of 2018 – a 788 percent increase over the period of April to December 2017.

Cybercrime continues to rise, with coin mining malware increasing in both usage and sophistication. The total number of cryptocurrency mining malware infections reportedly increased 500 percent this year after hackers allegedly stole certain code from the NSA. According to reports, infections of MikroTik routers alone have doubled, reaching 415,000, since the summer of 2018. Further, new malware continues to emerge and evolve, as researchers reportedly have identified changes to KingMiner, a monero-mining application that first appeared six months ago, that improve the malware’s ability to avoid detection.

For more information, please check out the following links:

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