Crypto Payment Products Target Foreign Markets, Blockchain Enterprise Solutions Launch, Private Lawsuits Target Crypto Firms, Major Mining Malware Attack Detected

In this issue:

Payments Evolve: USD Stablecoin Accounts for Latin America and Crypto Debit Cards

Blockchain Initiatives Launch for Food Supply Chain and Intercompany Transactions

Crypto Trade Group Meets With SEC, FinCEN Director Addresses Cryptocurrencies

Private Litigants Continue to Target Major Blockchain Industry Companies

Reports Detail Major Crypto-Mining Malware Attack, Cold Storage Vulnerabilities

Payments Evolve: USD Stablecoin Accounts for Latin America and Crypto Debit Cards

By: Jordan R. Silversmith

Last week, crypto startup Ledn announced the launch of a USDC savings account that will focus on Latin America. As Latin American foreign exchange rates continue to fluctuate, stablecoins have become increasingly popular across Latin America. Users of the Ledn USDC savings account will be able to convert their pesos into USDC and send those coins to the savings accounts, where they will accrue interest.

Crypto.com announced last week that it has begun shipping a Visa card to 31 European nations. These 31 countries, including the EU’s 27 member states, now have access to the company’s MCO Visa card, which can be used at traditional credit and debit card point-of-sale systems. The card works by exchanging users’ cryptocurrencies for local fiat currency when the user loads cryptocurrencies onto the card. The company followed up its entry into the European market by announcing this week that it has received the green light from regulators to introduce the MCO Visa to Canada.

For more information, please refer to the following links:

Blockchain Initiatives Launch for Food Supply Chain and Intercompany Transactions

By: Robert A. Musiala Jr.

A California berry farm is the latest company to join the Food Trust blockchain network for tracking products along the food supply chain. According to recent reports, the berry farm said that joining the blockchain network will allow the company “to streamline and identify opportunities for improvement around operational efficiencies with a focus on freshness.”

In another development involving blockchain data management, a major global accounting and consulting firm has launched a blockchain-based system for tracking and managing intercompany transactions. According to a press release, the newly launched solution “delivers real-time data-analytics dashboards that monitor intercompany transactions, including transfer-pricing compliance and treasury management.” The press release notes that “[i]ntercompany transactions are the fifth most common cause of corporate financial restatements.”

This week, a major U.S.-based blockchain technology company published a report titled “The Complete Guide to Blockchain Business Networks.” According to a press release, the guide “is designed for enterprises that want to understand the proven benefits of decentralized networks for business use cases and how they compare to traditional business networks.” The guide includes “best practices for creating a successful blockchain business network.”

For more information, please refer to the following links:

Crypto Trade Group Meets With SEC, FinCEN Director Addresses Cryptocurrencies

By: Robert A. Musiala Jr.

According to recent reports, the Proof of Stake Alliance (POSA), a trade association whose members include several major cryptocurrency industry firms, recently met with the U.S. Securities and Exchange Commission (SEC) to advocate for the position that “entities using stake networks should be seen as service or infrastructure providers, rather than financial product providers.” The POSA is a trade association “representing companies working with proof-of-stake technology for blockchain mining” to address regulatory, tax and legislative issues.

Last week, the U.S. Financial Crimes Enforcement Network (FinCEN) released the prepared remarks of FinCEN director Kenneth A. Blanco that were delivered at a recent blockchain conference. In addressing the “Travel Rule,” Director Blanco said, “The United States has long maintained an expectation that financial institutions identify counterparties involved in transactions for a variety of purposes, including AML/CFT and sanctions, even for transactions in virtual currency.” Director Blanco also noted increasing concern that “businesses located outside the United States continue to try to do business with U.S. persons without … registering, maintaining a risk-based AML program, and reporting suspicious activity, among other requirements.”

Analytics firm Crystal Blockchain recently released a report on darknet activity involving cryptocurrencies. Among other findings, the report found that in Q1 2020, the amount of bitcoin sent from darknet entities to mixers increased, while there was a decrease in the amount of bitcoin sent from darknet entities to exchanges that require verification. According to a separate recent report from Elliptic, for the past few years bitcoin transactions linked to illicit activities have remained below 1% of the total number of bitcoin transactions.

For more information, please refer to the following links:

Private Litigants Continue to Target Major Blockchain Industry Companies

By: Teresa Goody Guillén

Investors have lodged a proposed securities class action against Block.one in New York federal court based on Block.one’s alleged 2017 unregistered offering of EOS tokens. The complaint alleges Block.one made misstatements about its ability to more fully decentralize EOS blockchain technology, which artificially inflated its value. The proposed class is investors who bought EOS coins between June 26, 2017, and the present. A Block.one spokesperson reportedly stated that the company plans to successfully defend the matter and said the “complaint is filled with false claims, and demonstrates a profound lack of understanding of blockchain technology and decentralized networks.” Block.one paid a $24 million penalty last year to the U.S. Securities and Exchange Commission based on the alleged unregistered offering without admitting or denying the allegations, and it is currently facing a similar proposed securities class action over the offering in the same New York federal court.

BitMEX derivatives exchange is also facing a civil lawsuit in a California federal court alleging that BitMex’s parent company, HDR Global Trading Limited, through U.S. entity ABS Global Trading Limited and its founders, engaged in a widespread illegal scheme of unregistered money transfers and market manipulation. The recently filed complaint lodges further allegations of money laundering, wire fraud, unlicensed money transmission, and Racketeer Influenced and Corrupt Organizations Act violations. BitMEX reportedly stated that it will vigorously defend itself in the action.

For more information, please refer to the following links:

Reports Detail Major Crypto-Mining Malware Attack, Cold Storage Vulnerabilities

By: Teresa Goody Guillén

According to reports, several supercomputers across Europe were recently hacked and infected with cryptocurrency mining malware. The incidents are reported to have occurred in the UK, Germany, Switzerland and Spain. It is reported that the Computer Security Incident Response Team for the European Grid Infrastructure, a pan-European organization that coordinates research on supercomputers across Europe, released malware samples and network compromise indicators from some of these incidents. A UK-based cybersecurity firm reviewed the malware samples and said the attackers appear to have accessed the supercomputer clusters via compromised SSH credentials.

New research has revealed that it is possible to hack cryptocurrency hardware wallets or cold storage. It is reported that vulnerabilities were identified in certain cold-storage options that would have revealed their PINs. In one instance, an analysis indicated that memory chips used in the hardware wallets give off different voltage outputs at different times, which would make it possible to establish a link between the power consumption fluctuations and the data the chip is processing. Monitoring voltage output changes may make it possible for an attacker to determine the PIN itself, if the attacker has physical access to the hardware wallet.

For more information, please refer to the following links:

SEC and Kik Present Competing Arguments on Application of Securities Laws to Blockchain Tokens

On May 8, 2020, the U.S. Securities and Exchange Commission (SEC) and Kik Interactive Inc. (Kik) finished briefing their cross motions for summary judgment, which were previously filed on March 20, with opposition briefs filed on April 24. The briefing totals more than 400 pages of arguments by the parties in the SEC’s court challenge to Kik’s actions in raising funds through Simple Agreements for Future Tokens (SAFTs) and Kik’s 2017 public sale, valued at approximately $100 million, of Ethereum-based ERC20 tokens, known as Kin tokens.

How the court responds to the parties’ competing arguments could have significant implications for the legal status of blockchain tokens in the United States. On one side, Kik warns that the SEC is seeking “an unprecedented and dramatic expansion” of its regulatory authority by “stretch[ing] the definition of a ‘security’ … far beyond [its] plain language” and in a way that “would be confusing and potentially inconsistent with the actions of other agencies.” On the other side, the SEC asks the court to apply an analysis similar to the reasoning in the recent decision in the Telegram case (which we previously covered in this article) and argues that the court should look at the economic reality of the transactions. On May 12, Telegram announced that as a result of the court’s decision in the Telegram case, it has canceled its TON blockchain project. This raises the stakes in the Kik case, with the Kik court’s decision now set to either affirm, reject or alter the Telegram court’s analysis. Continue Reading

Bitcoin Fund Completes Offering, Major US Bank Opens Accounts for Crypto Exchanges, DOD Awards Blockchain R&D Contract, IRS Enlists Crypto Contractors

In this issue:

Bitcoin Fund Completes Offering, Ether Futures Launch, Crypto Funds Report Published

Major US Bank Opens Accounts for Crypto Exchanges, Trade Finance Solution Expands

Seafood Value Chains and DOD Data Integrity: Blockchain Enterprise Developments

Telegram Cancels TON Blockchain, IRS Enlists Contractors to Evaluate Crypto Taxes

Bitcoin Fund Completes Offering, Ether Futures Launch, Crypto Funds Report Published

By: Teresa Goody Guillén

We previously reported that a Toronto-based investment manager was launching a Bitcoin Fund, and it has now completed a $48 million offering in that fund, trading on the Toronto Stock Exchange. Notwithstanding the funds’ being denominated in U.S. dollars on the Canadian exchange, the statement announcing the investment opportunity makes clear that it is not available in the U.S. Specifically, the statement conspicuously reads “NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES” and “This news release does not constitute an offer to sell or a solicitation of an offer to buy any of the securities in the United States. The securities have not been and will not be registered under the United States Securities Act.”

This week, ErisX launched the first U.S.-based exchange-traded ether futures contracts. The new products will enable individual and institutional investors to access physically delivered futures contracts based on ETH-USD with monthly and quarterly expirations. According to the press release, the ErisX ether futures market is regulated under the jurisdiction of the Commodity Futures Trading Commission (CFTC), the spot market is licensed in accordance with state and federal licensing requirements, and ErisX voluntarily applies CFTC core principles to the spot market.

A “Big Four” multinational professional services firm has published the “2020 Crypto Hedge Fund Report,” in which it provides a global overview of crypto hedge funds as well as insights into both quantitative and qualitative aspects of the funds. Notably, the report excludes data from crypto index/tracking/passive funds and crypto venture capital funds. Some key takeaways include:

  • Estimated total assets under management of crypto hedge funds globally increased to more than US$2 billion in 2019 from US$1 billion in 2018.
  • The median crypto hedge fund returned +30% in 2019 (compared with -46% in 2018).
  • 90% of investors in crypto hedge funds are either family offices or high-net-worth individuals.
  • Most crypto hedge funds trade Bitcoin (97%), followed by Ethereum (67%), XRP (38%), Litecoin (38%), Bitcoin Cash (31%) and EOS (25%).
  • Crypto hedge funds using an independent custodian increased to 81% in 2019 from 52% in 2018.
  • Crypto hedge funds with at least one independent director on their boards increased to 43% in 2019 from 25% in 2018.

For more information, please refer to the following links:

Major US Bank Opens Accounts for Crypto Exchanges, Trade Finance Solution Expands

By: Robert A. Musiala Jr.

According to reports this week, the sixth-largest bank in the world and largest bank in the U.S. is now providing banking services to two of the largest and most well-known cryptocurrency exchanges in the U.S. – Coinbase and Gemini. The bank accounts were reportedly approved in April and transactions are now being processed. According to reports, the bank will “process wire transfers, and deposits and withdrawals through the Automated Clearing House network” for the exchanges.

A major Vietnamese bank recently announced that it has joined Contour, a blockchain-based trade finance network. The Contour network is built on the R3 Corda blockchain protocol and is focused on streamlining letter of credit processes. According to a press release, the Vietnamese bank will leverage Contour to provide “an opportunity for Vietnamese corporates to take advantage of the online negotiation and streamlined management of letters of credit with counterparties in Asia, Europe, the Middle East, and the US.”

On April 28, 2020, the U.S. Congressional Research Service published a report titled “Fintech: Overview of Innovative Financial Technology and Selected Policy Issues.” The report includes sections on cryptocurrency and initial coin offerings (ICOs). Among other things, the report addresses issues such as whether cryptocurrencies are properly regulated and how they could affect monetary policy. With respect to ICOs, the report discusses application of the securities laws and notes fraud and consumer protection concerns.

For more information, please refer to the following links:

Seafood Value Chains and DOD Data Integrity: Blockchain Enterprise Developments

By: Jordan R. Silversmith

The United Nations Food and Agriculture Organization (FAO) recently released a report on developments in applying blockchain-based technologies in seafood value chains. The report establishes chain traceability as the foundation for building a blockchain-based ecosystem in the seafood industry and examines possible applications of blockchain to the industry’s supply chain.

The U.S. Department of Defense (DOD), which accounts for almost 40% of all federal R&D appropriations, has awarded a Small Business Innovation Research (SBIR) Phase I contract to Simba Chain, an Indiana-based blockchain company, to create a proof-of-concept blockchain-based system. The proposed system is part of DOD’s project, dubbed ALAMEDA (Authenticity Ledger for Auditable Military Enclaved Data Access), to create a single system for the efficient sharing of R&D documents and scientific data sets by augmenting existing systems using distributed ledger technologies to protect integrity and authenticity, while also creating a control layer for adding groups, users and permissions to shared documents. ALAMEDA will begin June 1, 2020 and will run through Sept 30, 2020.

For more information, please refer to the following links:

Telegram Cancels TON Blockchain, IRS Enlists Contractors to Evaluate Crypto Taxes

By: Joanna F. Wasick

In a Tuesday blog post, messaging app Telegram said it would abandon work on building its digital ledger, TON. In March, a New York federal court granted an injunction sought by the Securities and Exchange Commission (SEC), preventing Telegram from distributing its digital tokens, Grams, to 175 purchasers around the globe who spent $1.7 billion for rights to receive the tokens once TON was launched. The SEC had argued that the distribution would constitute an unregistered securities offering that violated federal securities laws. Distribution of Grams had already been on pause since October, after the SEC obtained a temporary restraining order. In Tuesday’s blog post, Telegram’s CEO stated: “We are leaving it to the next generation of entrepreneurs and developers to pick up the banner and learn from our mistakes. . . . We hope that you succeed where we have failed.”

This week, the Internal Revenue Service (IRS) demonstrated its continued interest in taxing cryptocurrency transactions. The government agency announced it is soliciting third-party staffing to aggregate cryptocurrency transactions from on-chain data, off-chain data, application programming interface (a type of computing interface) and tax submissions. Afterward, the assets must be valued, and gains and losses must be determined. The announcement comes after the agency, in 2019, sent out thousands of letters to cryptocurrency holders who allegedly failed to report earnings. Notably, this year’s 1040 form includes, for the first time, a question on taxpayers’ cryptocurrency activities.

For more information, please refer to the following links:

FDA Blockchain Report Released, Crypto Fund Launched, Blockchain Trading Platforms Developed, Crypto Payment Firms Make Announcements, Bitcoin Mining Map Published

In this issue:

FDA DSCSA Blockchain Pilot Report Released, Consortium Formed for Energy Grids

New Crypto Funds, Crypto Broker-Dealer Applications, Blockchain Securities Clearing

Libra Association Hires CEO, Crypto Payments Firms Report Growth and Gain Licenses

Bitcoin Network Difficulty Increases Prior to ‘Halving,’ Bitcoin Mining Map Published

FDA DSCSA Blockchain Pilot Report Released, Consortium Formed for Energy Grids

By: Robert A. Musiala Jr.

A final report provided in February 2020 to the U.S. Food and Drug Administration (FDA) has been released with details on the FDA’s Drug Supply Chain Security Act (DSCSA) Blockchain Interoperability Pilot Project. The project participants included four major global firms from the technology, pharmaceutical, grocery/retail and audit/consulting industries. The DSCSA sets a deadline of Nov. 27, 2023, for members of the pharmaceutical supply chain to build an electronic system to verify, track and trace prescription drugs as they are distributed in the United States. The four firms participating in the pilot project propose a blockchain solution as a response to the DSCSA requirements. The firms “believe that blockchain technology with its shareable ledger, immutable data, and inherent ability to track drug provenance, is uniquely qualified to address the various challenges of the pharmaceutical supply chain.” According to the report, the pilot program was successful in demonstrating that a blockchain-based system can (1) “provide a common record of product movement by connecting disparate systems and organizations to meet DSCSA 2023 interoperability requirements in a secure way” and (2) “[i]mprove patient safety by triggering product alerts and increasing visibility to relevant supply chain partners in the event of a product investigation or recall.”

According to reports, the same technology firm from the DSCSA pilot has created a blockchain consortium with three of Europe’s electricity grid operators. The consortium will reportedly leverage the Hyperledger Fabric blockchain protocol and will focus on solutions to enable the transition to renewable energy. In another recently released report, a major global consulting firm provides a “C-Suite Briefing” covering “5 Blockchain Trends for 2020.” The five trends identified by the report are (1) The Hype Is Over, (2) Evolving Platforms, (3) Adoption Rates Across Industries, (4) Governance Is Critical and (5) The Rise of Tokens.

For more information, please refer to the following links:

New Crypto Funds, Crypto Broker-Dealer Applications, Blockchain Securities Clearing

By: Teresa Goody Guillén

A major U.S. venture capital firm has announced the launch of its $515 million Crypto Fund II, which is said to focus on the “next generation” of payments and decentralized finance (DeFi) companies. This comes after an initial $350 million fund the firm launched in mid-2018. Crypto Fund II’s focus on payments is reported to be on systems in which the recipient immediately possesses the actual value upon clicking “send” without third-party dependencies, as opposed to a delayed settlement process. With respect to DeFi, Crypto Fund II is reported to focus on financial services (such as lending, derivatives, insurance, trading, crowdfunding, etc.) that are built on top of blockchains and embrace “the open internet, including 1) open access to anyone in the world; 2) commitment to open source code; 3) permissionless extensibility by third-party developers; 4) minimal-to-no fees; and 5) encryption-backed security and privacy.”

tZERO has announced that it is seeking to become a FINRA-registered broker-dealer by Q2 of 2020, with the intention to expand trading by combining equity and traditional securities with crypto and digital assets. tZERO Markets, the proposed future retail broker of the business, submitted its application to FINRA last year and is awaiting approval.

According to recent reports, a major U.S. clearing agency and derivatives clearing organization that has been designated a “systemically important” financial market utility under Title VIII of the Dodd-Frank Act is in the process of moving its stock lending infrastructure to a technical platform underpinned by the Axcore blockchain. According to reports, each participant in a deal will run its own nodes on the Axcore blockchain, and thus provide participants with direct access to the same data in real time, as opposed to a series of messages requesting and receiving data. Development of the blockchain platform began in early 2019 with the proof of concept and is scheduled to be ready for clients in 2022.

For more information, please refer to the following links:

CLibra Association Hires CEO, Crypto Payments Firms Report Growth and Gain Licenses

By: Marc D. Powers

The Geneva-based Libra Association has hired the current chief legal officer from a large international financial institution, and he will soon become the Association’s first CEO. Stuart Levey is reported to be starting in the new position this summer and will be based in Washington, D.C. Levey’s career had been mostly in public service before his prior role at the financial institution. Levey began his career at the U.S. Justice Department, where he served as the principal associate deputy attorney general before joining the U.S. Department of the Treasury. At the Treasury Department, Levey’s work included oversight of the Office of Foreign Assets Control and the Financial Crimes Enforcement Network. Levey’s imminent arrival at the Libra Association comes at a time when the organization has scaled back its original plan to create a global stablecoin directly tied to a basket of fiat currencies and securities and applied for a license before FINMA, the Swiss Financial Market Supervisory Authority, to launch its platform.

In a Securities and Exchange Commission (SEC) quarterly filing, a U.S. fintech and payments company reported that bitcoin revenue in its Cash App topped fiat revenue for the first time in Q1, with gross profit growing 115% year over year. The Cash App brought in $222 million on all its fiat-powered services in the quarter, while revenue from bitcoin was $306 million. Still, the SEC filing by the company noted that gross profit on the Cash App continues to be coming mostly from fiat revenue.

In other payments news, it is reported that Eris Clearing has secured a virtual currency license from the New York State Department of Financial Services. Eris Clearing is the clearing and settlement arm of the ErisX platform for spot and regulated futures on cryptocurrencies. To date, the ErisX entities are licensed to operate in 47 states and jurisdictions, including New York.

For more information, please refer to the following links:

Bitcoin Network Difficulty Increases Prior to ‘Halving,’ Bitcoin Mining Map Published

By: Robert A. Musiala Jr.

According to reports this week, the Bitcoin Network mining difficulty has neared its all-time high as the Bitcoin Network approaches the much anticipated “halving” event, which is expected to take place close to May 11. The Bitcoin Network mining difficulty measures the computer processing power needed for Network nodes (i.e., miners) to compete for the bitcoin rewards granted to nodes that are first to verify new “blocks” of transactions on the Network. The “halving” will reduce the newly mined bitcoin on the Bitcoin Network from 1,800 bitcoin per day (12.5 bitcoin per “block”) to 900 bitcoin per day (6.25 bitcoin per “block”). According to reports, following the “halving,” the mining difficulty is expected to drop. Related reports note that the Bitcoin Network’s total node count recently fell to 47,000, the lowest since 2017. The decline in nodes supporting the Bitcoin Network may be linked to the recent increase in difficulty of mining new transaction “blocks” on the Network.

The University of Cambridge recently published a “Bitcoin Mining Map,” which “visualises the approximate geographic distribution of global Bitcoin hashrate” and shows the “average hashrate share by country.” The Bitcoin Mining Map also includes “a second map with an exclusive focus on China’s hashrate distribution by province.” The map reveals that more than 65% of the hash power supporting the Bitcoin Network is located within China. In other mining news, according to recent reports, a Turkish company was granted approval to set up what is expected to be the largest cryptocurrency mining operation in Iran to date.

For more information, please refer to the following links:

Digital Asset Platforms Evolve, Token Models Confront Complexities, WEF Issues Blockchain Toolkit, Foreign Crypto Crimes Uncovered, AML Solution Launched

A side view on a digital panel merging binary numbers with an integrated circuitIn this issue:

Digital Asset Marketplaces Evolve in US, Japan and Switzerland

Blockchain Token Models Confront Legal Complexities in US Filings and Court Cases

WEF Issues Blockchain Toolkit, New Enterprise Solutions Announced

Foreign Police Uncover Crypto Crimes, Analytics Firm Launches AML Solution for Banks

Tether Mints 160 Million USDT as Bitcoin Price Climbs

Digital Asset Marketplaces Evolve in US, Japan and Switzerland

By: Marc D. Powers and Teresa Goody Guillén

The Public Private Execution Network (PPEX), an alternative trading system (ATS) that supports transactions in exempt digital asset securities, recently completed its FINRA continuing membership application and filed its Form ATS with the U.S. Securities and Exchange Commission (SEC). PPEX reportedly supports secondary trades for all exempt securities, including traditional securities and digital asset securities native to a blockchain.

R3 recently announced a collaboration agreement with the owner and operator of a major U.S. stock exchange to facilitate institutional grade offerings for digital assets exchanges. According to a press release, R3 intends to work with the stock exchange to integrate its proprietary enterprise blockchain software, Corda, in building a platform and lifecycle solutions for digital assets marketplaces on a 24/7/365 basis.

Japan’s Financial Services Agency (FSA) has announced it has certified two local blockchain trade groups, the Japan STO Association and the Japan Virtual Currency Exchange Business Association (JVCEA), as self-regulatory groups for derivative transactions and security token offerings of digital assets. The JVCEA, which is the official SRO for the cryptocurrency industry in Japan authorized to create regulations and policies for cryptocurrency exchanges in the country, will be renamed the “Japan Crypto Asset Trading Business Association” on May 1. As of March 2020, there were 21 registered and licensed crypto exchanges in Japan.

In Switzerland, the Capital Markets and Technology Association, an independent association of financial experts formed to promote the use of new technologies in capital markets, recently issued a report setting forth a Digital Assets Custody Standard (DACS). The DACS consists of requirements and recommendations for technology solutions enabling the custody and management of digital assets to satisfy traditional concepts of safekeeping financial assets.

For more information, please refer to the following links:

Blockchain Token Models Confront Legal Complexities in US Filings and Court Cases

By: Teresa Goody Guillén

Blockstack PBC – the first cryptocurrency company to qualify a Regulation A+ token offering with the SEC – explained in its annual 1-K filing that it is considering the status of its STX token as a security. Blockstack explained that the company expects “this determination to turn on whether the Blockstack network is sufficiently decentralized; this will, in turn, depend on whether, at the time the board evaluates this question, purchasers of Stacks tokens reasonably expect Blockstack to carry out essential managerial or entrepreneurial efforts, and whether Blockstack retains a degree of power over the governance of the network such that its material non-public information may be of special relevance to the future of the Blockstack network, as compared to other network participants.”

In the ongoing litigation involving the SEC’s enforcement action against Canadian messaging company Kik Interactive Inc., the parties recently set forth their arguments in their opposition briefs to the cross-motions for summary judgment. The SEC contends Kik’s SAFTs and Kin token sales were unregistered securities offerings regardless of whether the SAFT and token sales are a single offering, two integrated offerings, or two independent offerings. Kik argues the Kin sales were distinct from the SAFTs and were sales of goods, not of securities. Kik further argues that it would be “fundamentally unfair” to expect it to have known the Kin sale would violate the federal securities laws, citing lack of guidance. The SEC relies on the notice from the DAO report and asks the court to apply a similar analysis as in the Telegram case.

In Telegram, a federal court recently held that Telegram cannot launch its blockchain or issue its gram tokens until the case is resolved. When the SEC brought the action, it is reported, Telegram offered to return up to 72% of each purchaser’s stake and set a revised launch deadline of April 30, 2020. It is now reported that purchasers who choose to forgo their 72% can lend their investment to Telegram until this time next year, and in return they will receive 110% of the original investment by April 30, 2021, which is 53% higher than the amount that would otherwise be returned.

For more information, please refer to the following links:

WEF Issues Blockchain Toolkit, New Enterprise Solutions Announced

By: Jordan R. Silversmith

The World Economic Forum (WEF) has published a blockchain toolkit that is intended to provide guidance on deployment of new blockchain-related solutions in the economy and highlight key enterprise requirements. According to the WEF, the toolkit “was developed through lessons from and analysis of real projects, to help organizations embed best practices and avoid possible obstacles in deployment of distributed ledger technology.”

The food supply chain continues to be a ripe use case for blockchain, with a major food company recently announcing a five-year blockchain plan for stronger food safety. The fruit and vegetable distributor plans to launch blockchain product tagging and other “advanced traceability solutions” across its three business divisions. In a separate development involving the digital supply chain, a major Chinese technology firm was recently granted a patent for a process that leverages blockchain to track and protect music copyrights.

The U.S. Department of Transportation (DOT) recently released a tech report arguing that blockchain can bring more trust to large-scale use of commercial drones. As commercial usage of unmanned aircraft systems (UAS) becomes more prevalent, logistics relating to the safe management of droves of unmanned aerial vehicles (UAV), as well as operations near “high risk” areas such as airports, remain problematic. One of the concepts outlined in the report was a blockchain-based flight recorder, or “black box,” which could help law enforcement monitor drones’ flight patterns in real time and help industry regulators track and review drone flight data to ensure better decisions about the safest routes to specific destinations.

For more information, please refer to the following links:

Foreign Police Uncover Crypto Crimes, Analytics Firm Launches AML Solution for Banks

By: Joanna F. Wasick

On Tuesday, Norwegian police reported they arrested Norwegian multimillionaire Tom Hagen for murdering his wife, who went missing from her home in October 2018. Hagen had reported that his wife had been kidnapped and said he received a ransom note demanding $10 million worth of the cryptocurrency Monero. When announcing the arrest, the police inspector said, “There was no kidnapping, no real negotiating counterpart or real negotiations.” Rather, Hagen purportedly lied about the cryptocurrency ransom request to sidetrack the investigation.

Earlier this week, a South Korean news agency reported that police used information from a raid of 20 of the biggest cryptocurrency brokerages and exchanges in South Korea to trace and find 40 people suspected of having made cryptocurrency payments to access videos of rape and sexual exploitation of minors on “Nth Room” – chatrooms on the messaging app Telegram that had been operating since 2018 to share pornographic videos of children as young as 11 years old. Police successfully traced one account to a crypto wallet belonging to Cho Joo-bin, the suspected mastermind behind the Nth Room, who has already been charged by the prosecution and is awaiting trial. South Korean police are reportedly interested in obtaining data from overseas-based exchanges, as a number of crypto transactions made to suspected Cho-owned wallets have been traced to addresses at exchanges based outside South Korea.

Also this week, CipherTrace, a blockchain analytics company, reported its release of Armada, a monitoring solution designed to help large banks and financial institutions achieve better compliance with anti-money laundering rules. Armada is said to work with the institutions’ existing monitoring tools to identify transactions with virtual asset service providers (VASPs), thereby creating increased visibility into suspicious cryptocurrency transactions.

For more information, please refer to the following links:

Tether Mints 160 Million USDT as Bitcoin Price Climbs

By: Marc D. Powers

In the past week, the price of bitcoin has reportedly increased by more than 20%. During this same time, as bitcoin made its move past $9,000 for a period of time on Thursday, April 30, reports indicated that 160 million USDT tokens were minted. Over a two-day period, Tether, the company behind USDT, reportedly minted 60 million USDT when bitcoin was valued just over $8,000. Soon afterward, Tether reportedly issued another 100 million in USDT just before the bitcoin price hit $8,500. According to reports, some have speculated that the Tether Treasury mints USDT to influence and manipulate the market price of bitcoin. There are now reportedly 7.8 billion USDT in circulation.

CFTC Approves Bitcoin Futures, Crypto Initiatives Launch, Blockchain Traceability and Energy Solutions Deployed, South Africa and Singapore Issue Regulations

Modern research and information technologies in cyberspaceIn this issue:

CFTC Approves Bitcoin Futures and Prosecutes Fraud, Amicus Brief Filed in Kik Case

Emerging Blockchain Payment and Crypto Custody Solutions Announce New Milestones

Blockchain Solutions Deployed in Egg Traceability, Energy Trading and Mobility Services

South Africa and Singapore Issue New Cryptocurrency Policies and Regulatory Guidance

CFTC Approves Bitcoin Futures and Prosecutes Fraud, Amicus Brief Filed in Kik Case

By: Teresa Goody Guillén

The Commodity Futures Trading Commission (CFTC) has issued an Order of Designation to Bitnomial Exchange, LLC, granting it status as a designated contract market (DCM), thus the exchange can offer bitcoin futures and options contracts. Bitnomial stated that it was the “first and only startup exchange” to receive approval to offer both margined and physically delivered bitcoin futures and options contracts in the U.S. Bitnomial is reported to be currently setting up user acceptance testing, which is expected to begin on April 27, and has opened user signups.

The CFTC recently filed a complaint in the U.S. District Court for the Middle District of Florida charging Alan Friedland and his Florida-based companies, Fintech Investment Group Inc. (Fintech) and Compcoin LLC, with fraudulently soliciting more than $1.6 million from customers and prospective customers to purchase a digital asset, Compcoin. The complaint alleges that the defendants falsely promised that Compcoin would allow customers to gain access to Fintech’s proprietary foreign-currency exchange (forex) trading algorithm known as ART, which they falsely advertised would deliver high rates of return.

The Blockchain Association, an industry advocacy group, has filed an amicus brief in the Securities and Exchange Commission’s (SEC) lawsuit against Kik in the U.S. District Court for the Southern District of New York. The Association argues that the SEC’s position conflates the pre-sale investment contracts with the underlying asset, Kin tokens, sold to the public. The Association’s brief also argues that Kik’s presale model of offering investment contracts to accredited investors under an exemption from registration, such as Regulation D, is consistent with SEC rules and guidance – as opposed to an integrated scheme to distribute unregistered securities to the public.

For more information, please refer to the following links:

Emerging Blockchain Payment and Crypto Custody Solutions Announce New Milestones

By: Robert A. Musiala Jr.

Last week, the organization building the proposed Libra cryptocurrency published an updated version of its whitepaper. According to a “cover letter” that accompanies the updated whitepaper, “[f]our key changes have been made to address regulatory concerns.” The cover letter provides the following brief description of these concerns: (1) offering single-currency stablecoins in addition to the multicurrency coin, (2) enhancing the safety of the Libra payment system with a robust compliance framework, (3) forgoing the future transition to a permissionless system while maintaining its key economic properties and (4) building strong protections into the design of the Libra Reserve. According to reports, in conjunction with the updated whitepaper, the organization “filed a license application seeking authorization from the Swiss Financial Market Supervisory Authority, FINMA, to launch its platform.”

In a recent blog post, Gemini Custody and Exchange announced that it has completed a SOC 1 Type 1 examination conducted by a Big Four consulting firm. According to the post, completing the exam “makes Gemini the world’s first cryptocurrency custodian and exchange to demonstrate this high standard of financial operations compliance.”

Last week, blockchain technology firm Ripple announced that it has partnered with a Malaysian cross-border remittance firm to integrate Ripple technology into the remittance firm’s payment services for small and medium-sized enterprises (SMEs). The integration has reportedly lowered costs and increased speed for cross-border SME payments.

For more information, please refer to the following links:

Blockchain Solutions Deployed in Egg Traceability, Energy Trading and Mobility Services

By: Robert A. Musiala Jr.

Last week, a free-range and organic egg farm in Iowa announced the launch of a blockchain-enabled traceability feature that will allow its customers “to access information regarding the day the eggs were picked up at the farm, where they were packed and from what farm, as well as giving them information on the actual farmer and his life and certifications.” According to the press release, the new feature will allow customers to “scan the QR code on their carton which will then take them to a website where … they will have access to all the information regarding the origin of their carton of eggs.”

This week, an Australia-based energy trading technology firm announced plans to integrate its blockchain-based platform into two apartment complexes that generate energy from solar panels. The integration will reportedly allow the apartment complexes to “track energy consumption and transactions” and “enable the residential developments to sell surplus solar energy to other residents.”

Also this week, a major global electronics manufacturer based in Japan announced that it has developed a blockchain-based “mobility as a service” (MaaS) platform designed to integrate with various transportation methods such as trains, buses, taxis, ride shares and bicycle rentals to “provide users with information regarding optimal routes to desired destinations and recommended transportation means and services.” According to a press release, the solution enables, among other things, “anonymized travel history and revenue allocation” features.

For more information, please refer to the following links:

South Africa and Singapore Issue New Cryptocurrency Policies and Regulatory Guidance

By: Joanna F. Wasick

Earlier this week, South Africa’s Intergovernmental Fintech Working group (IFWG), whose members include various banking and finance governmental entities, issued a policy paper providing a road map for the nation’s first set of cryptocurrency laws. In the paper, the IFWG states that digital assets and activities associated with them can no longer remain outside of government regulation and should be subject to formal restrictions on when and how they can be utilized. The paper recommends that cryptocurrencies remain without “legal tender status” and calls for a prohibition against using cryptocurrency as a settlement tool within South African financial infrastructure, although the IFWG’s recommendations do allow for the recognition of cryptocurrency for domestic payment purposes, subject to certain guidelines. The paper urges that initial coin offerings (ICOs) be regulated in alignment with South Africa’s traditional securities regulations. The IFWG’s recommendations are open for comment through May 15.

Last week, the Inland Revenue Authority of Singapore (IRAS), the country’s tax authority, published its “Income Tax Treatment of Digital Tokens,” which provides guidance on “payment tokens, utility tokens and security tokens.” Each token has a new definition and corresponding tax treatment from the IRAS. “Payment tokens” include cryptocurrencies such as bitcoin, and the guide provides that they will be treated as “intangible property” instead of legal tender, such that transactions with them are “barter trade” – meaning that the good, and not the cryptopcurrency, will be taxed. The use of a “utility token” to exchange for goods or services is “unlikely to create an income subject to tax” but may give rise to a deductible expense. The taxability of the return derived from a “security token” depends on the nature of the return, e.g., whether it is in the form of interest or dividend. The IRAS also details the tax ramifications of certain events such as airdropped payment tokens, blockchain hard forks and ICOs.

For more information, please refer to the following links:

Bitcoin and Blockchain Products Launch in Financial Products and Data Management, Reports Address Crypto Regulatory Risks, Agencies Warn Against New Scams and Hacks

A side view on a digital panel merging binary numbers with an integrated circuitIn this issue:

Bitcoin and Blockchain Financial Products Launch in Public Funds, Commodities, Debit Cards and Mining “Hash Contracts”

New Initiatives Leverage Blockchain for Records Management and Data Provenance

Reports Address Regulatory Challenges and Opportunities Involving Crypto Assets

FBI and Philippines SEC Issue Crypto Scam Warnings, New Hacking Methods Reported

Bitcoin and Blockchain Financial Products Launch in Public Funds, Commodities, Debit Cards and Mining “Hash Contracts”

By: Teresa Goody Guillén

According to an April 9 press release, a Canadian asset manager has become the first firm to launch a fund tied to bitcoin, The Bitcoin Fund, on the Toronto Stock Exchange (TSX). After completing an initial public offering and a merger, The Bitcoin Fund has 1,491,800 Class A Units outstanding, which represents approximately $14 million of total assets. The fund operates in the same fashion as an exchange-traded product such that it is a closed-end fund in which investors purchase shares in the fund and are exposed to changes in the underlying assets’ price. According to reports, bitcoin in the fund will be custodied by New York-based cryptocurrency exchange Gemini Trust Company LLC.

Six global agriculture supply chain partners recently completed a trade transaction of wheat from North America to Indonesia on a blockchain platform provided by Singapore-based dltledgers. The wheat shipment was valued at $12 million and settled in five days, and the blockchain platform created a shared, immutable record of the transaction. Traditional trading processes are reported to take up to a month.

A major financial services firm has teamed with San Francisco-based startup Fold to offer a new debit card that earns rewards denominated in bitcoin, as opposed to other traditional rewards. In addition to spending their rewards with some retailers accepting bitcoin, Fold users are able to spend bitcoin within the company’s system to buy U.S. dollar-denominated gift cards at major U.S. companies.

According to reports, a New York power plant that uses proprietary facilities to mine bitcoin has sold up to 30 percent of its computing power to undisclosed buyers consisting of hedge funds and family offices. The deal was enabled through the execution of “hash contracts,” which allow institutional buyers to get exposure to bitcoin mining without purchasing and setting up equipment. Given the Bitcoin Network’s reported current mining competition level, the deal would reportedly yield the buyers approximately 1.8 bitcoin per day, in addition to the hardware pledged as collaterals.

For more information, please refer to the following links:

New Initiatives Leverage Blockchain for Records Management and Data Provenance

By: Robert A. Musiala Jr.

Late last week a major Italian news agency announced a new initiative, developed in collaboration with a major global consulting firm, that will use blockchain to allow readers to track the origin of news distributed by the news agency. In a separate development, this week a press release announced that Medici Land Governance “has signed a Memorandum of Understanding (MOU) with Carbon County, Wyoming to develop a blockchain-based land records and information platform in 2020.”

A major U.S. technology firm and provider of cloud-based software recently announced that it has integrated Lition into its customer relationship management (CRM) platform. Lition is a “layer-2” DApps infrastructure built on top of the Ethereum blockchain. According to a press release, the integration will enable users of the firm’s CRM software to “easily record, certify and protect important information in a confidential and tamper-proof manner using Lition’s App” and “will put Lition’s blockchain at the fingertips of more than 150,000 users around the world with a simple setup process.”

The World Economic Forum (WEF) has published a white paper that is the sixth paper in the WEF’s series of publications addressing the deployment of blockchain for supply chains. Among other things, the paper discusses blockchain interoperability layers related to business models, platforms and infrastructure; outlines approaches to achieving interoperability; provides a framework for selecting an interoperability approach; describes current interoperability solutions; and presents example real-world use cases.

For more information, please refer to the following links:

Reports Address Regulatory Challenges and Opportunities Involving Crypto Assets

By: Veronica Reynolds

In a recent report, a G20 body warns that the existing global regulatory framework addresses only some risks raised by the proliferation of stablecoins, an example of which is the proposed digital currency Libra. The body warns that the technology underpinning stablecoins has not been tested at scale, raising concerns of yet-unknown vulnerabilities that may be realized only during and after adoption by mainstream consumers. Additionally, the organization encourages governments worldwide to monitor the digital asset space in order to address potential issues with the application of current regulatory frameworks, which may contain yet-unknown loopholes.

A separate report released by a European policy department promotes regulation as a solution to cryptocurrency-related crime. The report focuses its analysis on “crypto-assets,” which it defines broadly to include stablecoins and private “tokens” issued by private platforms as a method for raising funds. The report notes that if mass adoption of crypto-assets materializes, it could greatly reduce criminal activities such as money laundering since the transactions are public and traceable, properties that cash transactions do not possess. However, the report notes this view may be theoretical only, given that other crypto-asset properties, such as ease of use and pseudonymity, make them particularly attractive for use in financial crimes. The report suggests numerous regulatory solutions to address these and other risks posed by the continued development of crypto-assets.

For more information, please refer to the following links:

FBI and Philippines SEC Issue Crypto Scam Warnings, New Hacking Methods Reported

By: Jordan R. Silversmith

Earlier this week, the FBI reported that it expects a rise in crypto-based scams related to the COVID-19 pandemic. Among the schemes for which it expects to see the greatest uptick, the FBI lists blackmail attempts, work-from-home scams, and payments for nonexistent treatments or equipment. This seems likely to include a scheme called “The Billion Coin” (TBC), which is the third crypto scam that the Philippines Securities and Exchange Commission has flagged this month. According to its April 14 advisory, TBC’s promoters market the asset as a so-called abundance-based cryptocurrency, which is a term used to justify an asset diverging from market-driven norms. The advisory warns investors against any investment in TBC, particularly during the pandemic, and notes that individuals could face a maximum penalty of 21 years in prison for acting as “salesmen, brokers, dealers or agents of such unauthorized entities.”

According to a recent security report, last month the operators behind the Sodinokibi Ransomware posted to a hacker and malware forum that the ransomware will stop accepting bitcoin and instead begin to accept the monero cryptocurrency in order to make tracing funds more difficult for law enforcement. Hackers who use a combination of the Tor browser and privacy coins such as monero make tracing funds exceedingly difficult, if not impossible. Another recently reported threat involves phishers that have begun to use fake browser extensions to target users of specific cryptocurrencies. While malicious browser extensions are not new, these attacks have reportedly begun to target well-known crypto brands via mainstream internet advertising and other channels.

For more information, please refer to the following links:

Blockchain Developments: Food Supply Chain, Shipping, M&A, Trading Platforms, Regulator Actions, Private Lawsuits, Foreign Laws, Malware, Hacks and More

In this issue:

Blockchain Developments in Food Supply Chain, Shipping Data and Project Best Practices

M&A Crypto Report Published, Blockchain Trading Platforms Make Announcements

New Crypto Legal Actions Brought by Federal, State, Private and Foreign Actors

Reports Highlight Crypto Threats to National Security, Banks, Malware and Hacks

Blockchain Developments in Food Supply Chain, Shipping Data and Project Best Practices

By: Jordan R. Silversmith

According to a recent report, GrainChain, a Texas-based startup that uses blockchain to track grain shipments, has used its blockchain data to show how a sharp decline in purchases of Texas grain may be linked to the devaluation of the Mexican peso. According to the report, an analysis based on data from GrainChain’s blockchain platform “is one of the first opportunities to see how a shared ledger of transactions can result in valuable, real-time data that might otherwise take months to gather.” In another development related to the food supply chain, a major food company has announced that it has expanded its use of the Food Trust blockchain technology platform to one of its coffee brands. According to a press release, consumers can scan the QR code on the packaging to follow the beans’ journey from various growing locations to factories where the beans are roasted and packed, as well as to get information about farmers, time of harvest and more. The company is also involved in blockchain pilots related to its milk and palm oil products.

A software company recently announced a pilot project in collaboration with a car manufacturer, the operator of all public terminals in the Port of Shanghai and a cargo shipping company for a new application aiming to change the cargo release process through blockchain. The project uses blockchain to conduct real-time exchanges of shipment data between ocean carriers and terminal operators and is designed to minimize verification steps in order to speed up the release of sea waybills, which will help truckers pick up their cargo at the terminal faster and help shippers meet delivery windows. According to reports, the application will be further developed for participants of the Global Shipping Business Network (GSBN), a consortium of ocean carriers serving the trans-Pacific market.

At the recent Hyperledger Global Forum in Phoenix, a blockchain platform architect spoke about 10 critical issues, based on his experience with numerous enterprise blockchain implementation projects. As described in a recent blog post, the 10 issues are using SQL for rich queries in smart contracts; data backup and recovery; ledger checkpoint and pruning/archiving; Byzantine Fault Tolerant consensus; governance; performance; privacy and confidentiality protection; inter-network support; pluggable cryptocurrency implementations; and auditing capability.

For more information, please refer to the following links:

M&A Crypto Report Published, Blockchain Trading Platforms Make Announcements

By: Marc D. Powers

A Big Four accounting firm recently issued its Global M&A Crypto Report for 2019. Among other findings, it reported that in the past year, fundraising went to more later-stage companies than in 2018. Also, the number of merger and acquisition (M&A) deals and deal size dropped substantially. The report concludes with the top 10 M&A deals of the year and the top investors in crypto companies.

In a recent filing with the Securities and Exchange Commission (SEC), a major online retailer disclosed plans for an air drop on May 19 of 4.37 million security tokens that will trade on the tZERO blockchain trading platform. According to the filing, one Digital Voting Preferred Stock will be dropped for every 10 shares of common stock owned by each shareholder.

The exchange Poloniex recently reported it is releasing a token platform, called LaunchBase. According to a press release, the new platform will seek to seed and promote the adoption of quality cryptocurrencies worldwide, “including via the sale of tokens to eligible participants on the Poloniex platform.” The first project is a TRON-based stablecoin lending platform called JUST, and its associated token is the JST.

For more information, please refer to the following links:

New Crypto Legal Actions Brought by Federal, State, Private and Foreign Actors

By: Robert A. Musiala Jr.

Late last week, the SEC brought charges against two individuals and their companies related to an alleged fraud scheme involving the sale of a TeshuaCoin, a blockchain token that the defendants falsely claimed was backed by bottled alkaline water, and investments in a nonexistent bitcoin mining operation. In an action by state regulators this week, the Texas State Securities Board and the Alabama Securities Commission issued an emergency cease-and-desist order against Ultra BTC Mining LLC. The order alleges Ultra BTC Mining LLC is involved in a fraudulent investment scheme that offers investments in computing power to mine cryptocurrencies. According to a press release, the alleged scheme “is promising to double investors’ money in one year while also claiming to contribute money to UNICEF to ‘fight COVID-19.’”

Last Friday, 11 class action lawsuits were filed in the Southern District of New York against four foreign-based cryptocurrency exchanges and seven mostly foreign-based issuers of blockchain tokens. The lawsuits allege the tokens that were issued and sold by the defendants were unregistered securities.

According to reports, two new laws regulating cryptocurrencies are set to take effect in Japan on May 1. The laws amend Japan’s Payment Services Act and Financial Instruments and Exchange Act to introduce defined terms and other concepts related to cryptocurrencies, initial coin offerings and other blockchain industry concepts. And in Spain, according to reports, the Spanish tax authority recently began sending warning letters to 66,000 cryptocurrency holders to remind them of their tax obligations.

For more information, please refer to the following links:

Reports Highlight Crypto Threats to National Security, Banks, Malware and Hacks

By: Joanna F. Wasick

Last week, two notable articles on fintech policy issues written by Yaya J. Fanusie, a former CIA analyst and an aAdjunct Senior Fellow at the Center for a New American Security, were published. One article draws on the March 2020 indictment of two Chinese nationals for allegedly laundering cryptocurrency on behalf of North Korea, and it goes on to describe how cryptocurrency obfuscation tools and techniques are a growing threat to U.S. national security. The article highlights how lax global anti-money laundering (AML) measures, access to unhosted cryptocurrency wallets and the existence of numerous cryptocurrency exchanges all work together to enable cryptocurrency laundering, thereby dampening the impact of U.S. economic sanctions and fostering terrorism financing. The other article posits that many banks are simply unaware of their exposure to risks associated with the cryptocurrency industry. The article advocates against banning crypto-asset clients and instead urges that banks accept such businesses, provided the banks implement advanced technologies to (1) assess how any illegal cryptocurrency financing might touch its clients’ businesses and (2) implement due diligence tailored to the cryptocurrency environment.

Malicious “cryptojacking” malware attacks focusing on container environments have reportedly been increasing. These attacks utilize Kinsing malicious malware to target misconfigured open Docker Daemon API ports to run a bitcoin miner. Once in the initial container, the malware spreads the miner to other containers and hosts.

This week, Bisq, a decentralized cryptocurrency exchange, disabled trading after a hacker exploited a software flaw to steal more than $250,000 in bitcoin and monero from users. The attacker posed as a seller and set the other users’ default fallback addresses (the destination where cryptocurrency is sent if a trade fails) to addresses controlled by the attacker. Among other things, the attack highlights certain vulnerabilities within decentralized exchanges, i.e., those that are carried out by smart contracts.

For more information, please refer to the following links:

Blockchain GS1 Standards Published, Securities Pilots Continue, Tax Agency Seeks Quadriga CX Records, DOJ Cites Crypto in Charging Venezuelan Cartel

In this issue:

Blockchain GS1 Standards Published, Supply Chain Pilots Announced Across Industries

Telegram Request Denied, Firms Continue Blockchain Initiatives for Securities Trading

Tax Agency Seeks Quadriga CX Records, DOJ Cites Crypto Use by Venezuelan Cartel

Blockchain GS1 Standards Published, Supply Chain Pilots Announced Across Industries

By: Jordan R. Silversmith

Earlier this week, one of the world’s largest automobile manufacturers announced it will begin using blockchain to promote supply chain transparency. According to a press release, the company “is using this technology in purchasing to ensure the traceability of components and raw materials in multi-stage international supply chains.” In other supply chain news, a Swiss luxury watchmaker recently added its first timepiece to a blockchain. Instead of offering a certificate of authenticity, the company will now register each watch on a private blockchain that will follow its provenance from owner to owner.

Everledger, a blockchain startup that digitally tracks the life cycle of diamonds, announced that it will begin using blockchain technology to track rare-earth materials including cobalt and lithium, the two elements essential for batteries. Everledger was one of the first companies to demonstrate the use of blockchain beyond cryptocurrency, when it began creating immutable digital records for diamonds in 2015. A Malaysian startup has similarly begun using blockchain technology to improve traceability – in this case, palm oil. The Malaysian Palm Oil Council (MPOC) and blockchain startup BloomBloc recently announced the development of a blockchain app to trace palm oil through the entirety of the supply chain, from plantation to bottle. The new app follows on the implementation of the mandatory Malaysian Sustainable Palm Oil (MSPO) certification standard.

The American branch of a global business standards not-for-profit, has published a new guideline titled “Applying GS1 Standards for Supply Chain Visibility in Blockchain Applications,” an educational resource that can help industry enable supply chain visibility in blockchain implementations using GS1 Standards. The guideline shows how various GS1 Standards can be used in a blockchain ecosystem to enhance data sharing. The guideline was developed in collaboration with a Cross-Industry Blockchain Discussion Group, which was formed in November 2018 to help companies understand the transformative potential of blockchain in the supply chain and to prepare them for blockchain implementation using GS1 standards.

For more information, please refer to the following links:

Telegram Request Denied, Firms Continue Blockchain Initiatives for Securities Trading

By: Marc D. Powers

In the Securities and Exchange Commission’s (SEC’s) ongoing enforcement proceeding against Telegram, federal Judge Kevin Castel in New York for the second time in a week handed Telegram a significant loss. As previously reported, Judge Castel granted on March 24 the SEC’s request for a preliminary injunction, finding that the “entire scheme” of transactions, beginning with the 2018 sales of Grams and ending with the planned distribution of the Grams after the development of the Telegram Open Network blockchain platform, was an offering of “securities” under the Supreme Court’s Howey test and required registration. Following this ruling, Telegram sought to limit the injunction to U.S. investors, which would have allowed Telegram to distribute Grams to its foreign investors. The court rejected Telegram’s request, finding that the argument should have been raised earlier and that Telegram had not sufficiently demonstrated that the wallets for the tokens would ensure distribution solely to foreign investors.

An international commercial bank has reportedly placed $10 billion of paper-based private placement materials and agreements on the R3 Corda blockchain. While noting the project was not a full endorsement of digital assets and technology, the bank did recognize the “efficiency” of placing the records on the blockchain, calling it a “digital vault.” By allowing “real time access” and review by investors and the issuers, the bank reportedly plans to tokenize the private placements after it digitizes them.

Also, the SEC, in its review of a joint venture involving an affiliate of tZERO for a proposed digital exchange, to be known as BOX Options Exchange, has asked for public comment on new rule proposals by the applicant. Among other comments, the SEC wants feedback on whether the proposed exchange’s operations are consistent with the 1934 Exchange Act. In some preliminary comments, concerns have already been raised, including a comment by a major U.S. stock exchange stating that the underlying blockchain technology on the exchange would be available solely to the owner of the security token on the platform, BOX, placing other exchanges at a competitive disadvantage.

For more information, please refer to the following links:

SEC Seeks More Feedback on tZERO’s Proposed Security Token Exchange

Tax Agency Seeks Quadriga CX Records, DOJ Cites Crypto Use by Venezuelan Cartel

By: Joanna F. Wasick

Early last week, the court-appointed bankruptcy trustee overseeing the winding up of cryptocurrency exchange QuadrigaCX reported that the Canada Revenue Agency requested an extensive amount of information, including financial statements and other business records, a list of accounts and wallet addresses, and “detailed information” on the fiat and cryptocurrency owed to the exchange’s users. The trustee advised that it will try to comply with the request by copying the bulk of its entire database, which includes users’ personal information, account balances and transaction data. Legal counsel for QuadrigaCX represented that it will not oppose the production; however, members of the creditor’s committee did raise privacy concerns about sharing the information. QuadrigaCX entered into bankruptcy proceedings in 2019; its customers seek recovery of about $190 million that was deposited on the exchange.

Last week, the U.S. Department of Justice (DOJ) charged Nicolás Maduro Moros, the former president of Venezuela, and other top Venezuelan officials with narcoterrorism, corruption, drug trafficking and other related crimes. The indictment alleges that since at least 1999, the defendants operated a drug cartel and used otherwise-legitimate Venezuelan institutions to facilitate the importation of massive amounts of drugs into the United States. A separate superseding indictment also charges Venezuela’s superintendent of cryptocurrency and other defendants with a series of crimes relating to efforts to evade sanctions imposed against Maduro Moros by the Office of Foreign Assets Control (OFAC), an agency of the U.S. Treasury Department. As part of a press release on the proceedings, U.S. government officials stressed that they would rigorously pursue any criminals attempting to “hide behind cryptocurrency to further their illicit criminal activity.”

For more information, please refer to the following links:

Court Applies Single Scheme Theory To Grant the SEC’s Preliminary Injunction in Telegram Cryptocurrency Case

On March 24, Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York granted the Securities and Exchange Commission’s (SEC) motion for a preliminary injunction in the closely followed Telegram case. The preliminary injunction continues to prevent the delivery by Telegram Group Inc. and TON Issuer (collectively, Telegram) of “Grams,” a new cryptocurrency intended to be delivered in connection with the launch of the Telegram Open Network Blockchain (TON Blockchain), to the purchasers in private placements conducted in 2018. Given the lack of judicial precedent in this area as well as the size and profile of the Telegram project, these proceedings have been closely watched as industry participants look for clear guidance and a path forward that satisfies regulatory requirements.

The court conducted a fact-intensive inquiry and largely adopted the approach advocated by the SEC, based on the particular facts and circumstances in this case, and viewed the transactions as a single distribution, starting with the private placements of Grams purchase contracts (agreements to deliver Grams upon launch of the TON Blockchain) to accredited investors (the initial purchasers) in 2018, through the intended delivery of Grams to those initial purchasers at launch of the TON Blockchain and ultimately the sales by those initial purchasers in the secondary marketplace. The court looked at the series of transactions, undertakings and understandings in their totality and applied the Howey test (discussed below) at the time the offers and sales were made to the initial purchasers.

The court’s order and opinion can be found here. Continue Reading

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