Crypto Exchanges Launch Initiatives, NFT Hype Continues, Token Safe Harbor Proposal Updated, Digital Euro Study Published, Hacked Bitcoin is On the Move

In this issue:

Cryptocurrency Exchanges Forge New Paths, Bitcoin ETF Applications Continue

MLB Gets In on NFT Hype, Chinese Alliance Seeks to Bring NFTs to Streamers

Token Safe Harbor Proposal Updated, IRS Memo Addresses Bitcoin Hard Fork

ECB Publishes Survey on Digital Euro, Study Addresses Bitcoin Electricity Usage

Judgment Entered in Crypto Fraud Case, Hacked Bitcoin Seen on the Move

Cryptocurrency Exchanges Forge New Paths, Bitcoin ETF Applications Continue

By: Keith R. Murphy

This week one of the largest U.S. cryptocurrency exchanges, Coinbase, completed its initial public offering through a direct listing of its shares on Nasdaq. Separately, according to a press release, last week cryptocurrency platform Exodus opened its blockchain-based SEC-qualified public offering of common stock, with each share of common stock represented by a “Common Stock Token.” The company, which offers a multi-asset cryptocurrency wallet, reportedly has received subscriptions for nearly $60 million from more than 4,000 accredited and non-accredited investors.

A well-known financial services company focused on digital assets and cryptocurrencies recently filed a bitcoin exchange traded fund (ETF) application with the Securities and Exchange Commission (SEC), according to a recent report. Another recent report noted that the SEC recently began review of a separate bitcoin ETF application by an ETF sponsor and index developer. The SEC has not yet approved any bitcoin ETFs, although multiple applications are currently pending at the agency.

Binance recently issued a press release announcing that it has launched no-commission, digital tradeable tokens that allow users to buy and trade fractional stocks.  The release states that the tokens are backed by a depositary portfolio of underlying securities, and that holders of the tokens qualify for economic returns, including dividends, relating to the underlying securities. A press release notes that the first stock available for use with the tokens is a well-known electric car company pioneer, and Binance also reportedly intends to tokenize Coinbase stock. Prices for the new Binance products will reportedly be settled in Binance USD (BUSD).

For more information, please refer to the following links:

MLB Gets In on NFT Hype, Chinese Alliance Seeks to Bring NFTs to Streamers

By: Veronica Reynolds

This week, a large U.S. trading card company, in partnership with a major U.S. professional sports organization, announced plans to release flagship baseball cards in the form of non-fungible tokens (NFTs), to be released on the Wax blockchain. The NFTs are set to launch on April 20, 2021, allowing consumers to “[b]uy, sell, and trade exclusive, officially licensed NFTs featuring modern-day stars in new and classic … card designs.” According to reports, the trading card company launched a low-profile test run of NFTs last year.

Last week, a large Chinese mobile streaming platform launched a strategic alliance through its wholly owned subsidiary and a global digital marketing promotions, rebates and loyalty solutions provider. The alliance seeks to leverage the in-app digital currency solutions offered by the Chinese subsidiary and the loyalty rewards system offered by the digital marketing promotions provider, allowing streamers the opportunity to earn points by generating engagement. Points generated through such use could be redeemed for digital rewards, including bitcoin and retailer gift cards, and in-app digital currency. In addition, the alliance seeks to provide a pathway for streamers to launch their own NFTs and allow users to use in-app points to bid on NFT “mementos” from their favorite streamers.

For more information, please refer to the following links:

Token Safe Harbor Proposal Updated, IRS Memo Addresses Bitcoin Hard Fork

By: Teresa Goody Guillén

This week, U.S. Securities and Exchange Commission (SEC) Commissioner Peirce (not the SEC) released an updated token safe harbor proposal, which amends her original proposal from February 2020. The safe harbor would seek to provide network developers with a three-year grace period to facilitate participation in and development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. The updated safe harbor proposal makes three significant changes from the prior version: (1) to enhance token purchaser protections, the proposal adds semi-annual updates to the plan of development disclosure and a block explorer; (2) at the end of the grace period, the proposal adds an exit report requirement, which would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934; (3) the exit report requirement provides guidance (not a bright-line test) on what outside counsel’s analysis should address when explaining why the network is decentralized.

In other regulatory news, the Office of the Chief Counsel of the Internal Revenue Service (IRS) recently released a memorandum responding to a request for tax advice from someone who received bitcoin cash as a result of the Bitcoin hard fork in August 2017. While this memorandum cannot be cited as precedent, it stated that cryptocurrency received from a so-called hard fork that altered Bitcoin’s underlying ledger to result in a split that generated bitcoin cash is considered taxable gross income. The analysis includes two hypotheticals that rely on whether the taxpayer had dominion and control over bitcoin cash to determine whether it is considered taxable income under Section 61 of the Internal Revenue Code.

A recent blog post brought to light the issue of whether virtual currency is subject to unclaimed property law given that state unclaimed property laws apply to a wide variety of assets or property types, and the IRS has defined virtual currency as property (IRS Ruling Notice 2014-21). The blog post provides an overview of state views and notes that the 2016 Revised Uniform Unclaimed Property Act developed and updated by the Uniform Law Commission (ULC), included virtual currency in its definition of property that is subject to unclaimed property laws.

For more information, please refer to the following links:

ECB Publishes Survey on Digital Euro, Study Addresses Bitcoin Electricity Usage

By: Jordan R. Silversmith

Earlier this week, the European Central Bank published a comprehensive analysis of its public survey on a digital euro, confirming that, by and large, what the public and professionals most desire from a digital currency is privacy. While 43 percent of respondents said privacy is the most important feature of a digital euro, fewer than one in 10 responses of members of the public showed support for full anonymity. Security was the second-most-important issue flagged by respondents. Absent from the responses was any discussion of Bitcoin’s continually rising power consumption: according to a report by a major U.S. bank, Bitcoin is consuming 66 times more electricity than it did in 2015. However, the Bitcoin Network’s electricity usage lags far behind its price, which has risen by around 170 times over that same period.

For more information, please refer to the following links:

Judgment Entered in Crypto Fraud Case, Hacked Bitcoin Seen on the Move

By: Joanna F. Wasick

Late last week, a Nevada federal court entered a default judgment against David Saffron, an Australian citizen residing in the U.S., and Circle Society, his Nevada corporation, for running a cryptocurrency Ponzi scheme. The case was brought by the Commodity Futures Trading Commission, which alleged that Saffron fraudulently solicited and accepted over $15 million of bitcoin and U.S. dollars from at least 179 individuals by falsely promising to invest the funds and generate guaranteed returns of up to 300 percent. Rather than using the funds as promised, the defendants allegedly misappropriated the funds, including by holding them in Saffron’s personal wallet and using some to pay out redeeming investors.

A former CIA director published an analysis last week of bitcoin’s use in illegal activities. The paper concludes that generalizations on the use of bitcoin in illicit finance are “significantly overstated” and cites a recent study by blockchain analytics firm Chainalysis stating that illicit activity among all cryptocurrencies was less than 1 percent of total cryptocurrency activity between 2017 and 2020. According to the paper, most of this activity consisted of “simple” scams and purchases on the dark web. For bitcoin specifically, the paper notes that illicit activity makes up less than 0.5 percent of total transaction volume. The paper also notes that blockchain ledger technology is underutilized by law enforcement and can become a highly effective crime-fighting and intelligence-gathering tool.

According to reports this week, long-dormant bitcoin stolen in the 2016 hack of cryptocurrency exchange Bitfinex were seen on the move. There were 63 transactions in all, totaling over $620 million, with the largest transaction worth over $78 million. Some of the transfers were between wallets associated with the hack, although many were to newly created wallets. Efforts to identify the hacker are ongoing.

For more information, please refer to the following links:

CBDC Initiatives Announced Across Globe, US Crypto Firms Pursue Licenses and Form Lobbying Groups, DOJ Targets Unlicensed Crypto MSB

In this issue:

Central Bank Digital Currencies Explored in Thailand, Japan and Sweden

US Crypto Firm Seeks Clearing Agency License, New Lobbying Group Formed

DOJ Targets Unlicensed Bitcoin Money Transmitter, ICO Extortion Scheme

Central Bank Digital Currencies Explored in Thailand, Japan and Sweden

By: Veronica Reynolds

According to a recent press release, the Bank of Thailand (BOT) is seeking public comment on the issuance and development of a Retail Central Bank Digital Currency (CBDC), an easily portable “digital form of money issued by the central bank comparable to physical banknotes,” which can be used in online and offline financial transactions. The main objective of the BOT’s exploration of Retail CBDC is to provide citizens with broader access to secure financial services. The BOT seeks to pilot Retail CBDC in spring 2022.

Similarly, the Bank of Japan recently announced plans to experiment with CBDC this year “to test the technical feasibility of the core functions and features required for CBDC.” Phase 1, Proof of Concept, began this week, with the goal being to “develop a test environment for the CBDC system and conduct experiments on the basic functions that are core to CBDC as a payment instrument such as issuance, distribution, and redemption.” Phase 1 is anticipated to last one year, with the goal being to test the functionality of CBDC and document key takeaways.

Sweden, too, announced CBDC-related news this week, with the country’s central bank, Sveriges Riksbank, publishing a recent study outlining the results of its digital currency pilot on a network based on R3’s Corda blockchain. The report cites, among other things, scalability as a major bottleneck in the development and adoption of the technology. Other issues also emerged from the report, including the need to protect information implicated in e-krona transactions in order to safeguard personal data and comply with bank secrecy laws. The head of Riksbank’s e-krona pilot division, Mithra Sundberg, said that Sweden’s CBDC may require “a new legal framework” before it can be launched.

For more information, please refer to the following links:

US Crypto Firm Seeks Clearing Agency License, New Lobbying Group Formed

By: Teresa Goody Guillén

A New York-based cryptocurrency firm recently announced that it will apply for a clearing agency license from the U.S. Securities and Exchange Commission (SEC) and hopes to secure registration in 2021. A clearing agency is an intermediary that facilitates the settlement of a trade between a buyer and a seller. Current settlement systems take two days to settle a trade. The crypto firm’s announcement follows its same-day trade settlement pilot test. This is reportedly the first live application of blockchain technology for equities markets in the United States. Reports state that, in February, the Depository Trust and Clearing Corporation said reducing the settlement time to one day would reduce market risk and lower margin requirements, especially during particularly volatile market conditions.

A group of major companies has formed the Crypto Council for Innovation to lobby policymakers. The council’s stated mission is to demonstrate the “transformational promise of crypto and communicate its benefits to policymakers, regulators, and people around the globe.” The council reportedly plans to appoint a board that would include each of the four initial members and add an executive team.

The U.K.’s Financial Conduct Authority (FCA) announced that it will increase its anti-money laundering supervision by expanding the types of companies that have to submit a special financial crime log to the FCA (known as REP-CRIM reports) to include cryptocurrency firms. The FCA stated that this will increase the number of reporting companies from 2,500 to 7,000 and brings the cryptocurrency sector further into line with banks and other finance firms. Companies that have been added to the list of reporting companies are required to start submitting financial crime reports in their first annual report after January 2022.

For more information, please refer to the following links:

DOJ Targets Unlicensed Bitcoin Money Transmitter, ICO Extortion Scheme

By: Joanna F. Wasick

On Monday, the U.S. Department of Justice (DOJ) announced that a New Jersey resident pled guilty to one count of running an unlicensed money transmitting business. According to the government, the individual had operated a website through which he converted clients’ fiat currency into bitcoin, transferred the bitcoin to client wallets and charged a fee for his services. The announcement contained no allegations of fraud or other wrongdoing, other than not registering his business as required by federal law.

In another announcement issued on Monday, the DOJ reported that Michael Hlady pled guilty in a Brooklyn federal court to conspiring to extort a startup company for millions of dollars’ worth of ether (ETH). According to court documents, while the company was planning its initial coin offering (ICO) in 2017, Hlady and a co-conspirator repeatedly threatened that they would destroy the company and its community unless the company sent them additional funds and company tokens. The company transferred 10,000 ETH in response to the threats.

According to reports published this week, South Korean prosecutors have sold bitcoin for the first time in the country’s history, transferring the proceeds into the national treasury. The 191 bitcoin had been confiscated in April 2017 from the operator of an illegal pornography site. While other countries, such as the United States, have been auctioning confiscated bitcoin for years, South Korean prosecutors have held on to the cryptocurrency due to legal ambiguity regarding its treatment. However, this recent sale follows the passage of the country’s new cryptocurrency legislation, which went into effect at the end of March.

For more information, please refer to the following links:

Financial Firms Launch New Crypto Products, NFTs Trending, Crypto Exchange Acquires Broker-Dealer, SEC, DOJ, IRS and CFTC Actions Target Crypto Actors

In this issue:

US Institutional Financial Firms, and Fintech Startups, Launch Crypto Products

Creative NFT Launches and Bitcoin Giveaways Continue To Trend

US Crypto Exchange Acquires Broker Dealer, SEC Action Targets Token Sales

US Enforcement Actions Target Cryptocurrency Darknet Activities and Fraud

DOJ and IRS Actions Target Crypto Tax Evaders, UK Addresses Staking Taxation

US Institutional Financial Firms, and Fintech Startups, Launch Crypto Products

By: Jordan R. Silversmith

A major U.S. financial services corporation announced this week that it would begin to settle transactions over the Ethereum Network in USD Coin (USDC), a stable coin backed by the U.S. dollar, becoming the first major payments network to do so. The corporation is piloting the capability with an online cryptocurrency platform and plans to offer the USDC settlement capability to additional partners later in 2021. According to a press release, the corporation believes that the ability to settle in USDC will help crypto native companies evaluate new business models without needing traditional fiat in their treasury and settlement workflows. Meanwhile, on Tuesday, another major U.S. financial services corporation launched its own crypto checkout service, which will allow U.S. consumers to use their cryptocurrency holdings to pay at millions of online merchants globally.

A U.S. cryptocurrency marketplace founded in 2018 recently announced the launch of its digital wallet to manage various cryptocurrencies and digital assets across one platform. The app will reportedly allow consumers to use their cryptocurrencies according to their preferences by converting participating rewards points to cash, or by using bitcoins as payment, for example. According to a press release, the company hopes that consumers will be able to use the new wallet to track and utilize the value of all kinds of digital assets, from bitcoins to gift cards to loyalty points.

According to a recent blog post, Ripple Labs has agreed to acquire 40 percent of a leading Asia-based cross-border payments firm. The new partnership will reportedly allow for the expansion of RippleNet’s On-Demand Liquidity service, which uses the XRP cryptocurrency, to instantly send money and reduce working capital needs.

For more information, please refer to the following links:

Creative NFT Launches and Bitcoin Giveaways Continue To Trend

By: Veronica Reynolds

A major U.S. news magazine recently sold three of its covers – two iconic and one original – as non-fungible tokens (NFTs) on NFT platform SuperRare. The magazine is one of many brands leaning into the NFT-hype, with the covers going for a total of $435,000. “This is not just about the collectibles and big drops,” according to the magazine’s president. “The more interesting part is what does this mean about the future of subscriptions, the future of community, the future of membership.” In another recent NFT campaign, a large U.S. brand of potato chips recently offered a new virtual chip “flavor” – limited-edition animated images of a gold-plated tube of chips, available as NFTs on Rarible. SuperRare and Rarible are NFT marketplaces where consumers can buy, sell, auction and bid on NFTs.

Bitcoin continues to be an attractive marketing hook, with a corporate restaurant chain offering $100,000 in free bitcoin giveaways this week. The restaurant chain launched the campaign as a game, requiring participants to guess the correct six-digit code, which, if guessed correctly, would give them a chance to win free bitcoins. The campaign was announced in partnership with Stefan Thomas, a programmer who gained notoriety when he became unable to access a digital wallet containing over 7,000 bitcoins due to his failure to remember a password that would allow him access to an encrypted device. Sports fans, too, gained exposure to bitcoin this week, with a major-league baseball team selling tickets in exchange for bitcoins for the first time ever.

A recent article published in Forbes and a recent report from a Big Four accounting and consulting firm address the potential impact of blockchain and cryptocurrencies on the digital advertising industry. Among other things, the publications discuss blockchain-and cryptocurrency-based applications and their potential to reduce costs, enable new reward campaigns, reduce fraud and secure data in the ad industry.

For more information, please refer to the following links:

US Crypto Exchange Acquires Broker Dealer, SEC Action Targets Token Sales

By: Joanna F. Wasick

Earlier this week, a major U.S. cryptocurrency exchange announced that the Financial Industry Regulatory Authority (FINRA) approved its acquisition of a U.S. broker-dealer. The acquisition will reportedly make the exchange one of the first cryptocurrency firms to own a broker-dealer approved to offer equities on an omnibus basis to U.S. retail investors. According to a press release, the exchange plans to launch fractional equities in the U.S. later this year and will provide seamless trading between cryptocurrencies, U.S. stocks, precious metals, carbon credits, FX products and other assets, all with one interface.

This week the U.S. Securities and Exchange Commission (SEC) filed a complaint charging LBRY Inc., a blockchain-based publishing platform and video-sharing company, with “conducting an unregistered offering of digital asset securities” related to the company’s “LBRY Credits,” which were sold between 2016 and 2020 to institutional investors and other platform users. LBRY issued a detailed statement responding to the SEC’s complaint. According to LBRY, the SEC refused offers to settle, despite the fact that LBRY did not conduct an initial coin offering and despite the absence of any alleged fraud. LBRY asserts that the SEC’s stance “would make almost all blockchain tokens securities,” thereby creating “a bureaucratic nightmare for United States residents and businesses operating in the U.S.”

According to reports, while answering questions at last week’s virtual Security Token Summit 2021, SEC Commissioner Hester Peirce warned that fractionalized non-fungible tokens (NFTs) could be considered securities, and therefore selling or otherwise issuing them could be subject to U.S. securities laws. Commissioner Peirce reportedly criticized the Howey Test, which is the standard means for determining what constitutes a security, stating the test “hasn’t worked that well” for cryptocurrencies and other digital assets. The commissioner also reportedly said that she hopes to develop a “safe harbor plan,” which would reduce regulatory scrutiny of emerging blockchain networks.

For more information, please refer to the following links:

US Enforcement Actions Target Cryptocurrency Darknet Activities and Fraud

By: Keith R. Murphy

According to a recent press release from the U.S. Department of Justice (DOJ), the chief executive officer of a communications network and service provider and a former distributor of the company’s devices have been indicted on charges that they intentionally participated in a criminal enterprise that facilitated the international distribution of illegal drugs through the use of the company’s encrypted communications devices. The DOJ indictment charges that company employees utilized cryptocurrencies including bitcoin to facilitate illegal transactions on the company’s website, to retain the anonymity of the customers and to launder their customers’ ill-gotten gains.

According to another DOJ press release, an Israeli national pleaded guilty this week to operating a website that enabled users to access darknet marketplaces in order to purchase illegal drugs and firearms as well as malware and hacking tools. The defendant and co-defendant who operated the website allegedly received kickbacks in the form of cryptocurrency, including more than 8,000 bitcoins, for providing the links. The defendant allegedly attempted to conceal the kickbacks by transferring funds from the company’s bitcoin wallet to other bitcoin accounts and bank accounts in the name of shell companies he controlled.

A default judgment was entered last week against an individual in connection with his involvement in a 2017 fraud scheme where he and his company solicited bitcoins valued at more than $22 million from customers under the false premise of providing them with guaranteed returns, according to a press release from the Commodity Futures Trading Commission (CFTC). The press release notes that the default judgment requires the defendant to pay more than $500 million in restitution and civil monetary penalties and enjoins him from trading in any CFTC-regulated markets.

For more information, please refer to the following links:

DOJ and IRS Actions Target Crypto Tax Evaders, UK Addresses Staking Taxation

By: Keith R. Murphy and Robert A. Musiala Jr.

According to a recent press release from the U.S. Department of Justice (DOJ), a Massachusetts federal court has entered an order authorizing the Internal Revenue Service (IRS) to serve a “John Doe” summons on a major U.S. cryptocurrency exchange and its affiliates. According to the press release, the IRS is “seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.” In a separate development, the DOJ Division of Tax has reportedly filed a “John Doe” subpoena in the Northern District of California seeking to obtain information from another major U.S. cryptocurrency exchange regarding U.S. taxpayers who held cryptocurrency assets with the exchange.

An IRS press release last week highlighted an event called “The Challenge” that recently took place among members of the Joint Chiefs of Global Tax Enforcement (J5). According to the press release, the focus of this year’s event was fintech companies, and the participating countries brought datasets for teams of technology experts and investigators to work through in order to generate leads and to locate tax offenders who are using cryptocurrency. The chief of the IRS Criminal Division is quoted in the release as stating that the Challenges jump-start investigations and end up in real enforcement actions.

According to reports, the U.K. tax authority, Her Majesty’s Revenue and Customs (HMRC), recently updated its Cryptoassets Manual with new guidance on the taxation of income from participation in staking on proof-of-stake blockchain networks. The updated guidance is available on the HMRC website.

For more information, please refer to the following links:

Crypto Firm Initiatives in CBDCs and Custody, GSA Auctions Bitcoin, Marketing Campaigns Integrate Crypto, ETFs Seek Approval, Enforcement Actions Continue

In this issue:

Crypto Firms Expand CBDC and Custody Initiatives, GSA Auctions Bitcoin

Token-Focused Marketing Campaigns Signal Rising Interest in Cryptocurrencies

ETFs Seek SEC Approval as Brazil Approves First ETF, FATF Updates Guidance

CFTC, Canadian Tax Agency and DOJ Continue Crypto Enforcement Activities

Crypto Firms Expand CBDC and Custody Initiatives, GSA Auctions Bitcoin

By: Jordan R. Silversmith

Ripple Labs recently released a white paper describing its XRP cryptocurrency as a way to link different central bank digital currencies (CBDCs). The white paper argues that XRP could be a “neutral bridge” between different cryptocurrencies and enable interoperable CBDCs and cross-border payments.

A major global technology firm recently issued a press release announcing a partnership with METACO, “a provider of security-critical infrastructure that helps large banks manage digital assets,” to integrate the technology firm’s “confidential computing capabilities” and cloud computing platform. The initiative is reportedly aimed at further enabling “large financial institutions to securely integrate cryptocurrencies, tokens, and distributed ledger use-cases into their core infrastructure.”

Officials at the General Services Administration (GSA) recently placed a 0.7501 share of bitcoin for auction at a two-day bidding event, and bidders for the bitcoin ran prices up well above market rate. At the close of the auction, the highest bidder won the bitcoin share at a price of $53,104, about 21 percent higher than market value. According to a GSA press release, the agency intends to hold another bitcoin auction from March 29 to 31, when it will sell a total of 6.79 bitcoin, with 10 lots up for bid.

A recent survey polled U.S. adults seeking their opinions on cryptocurrency. Among other results, 39 percent of respondents said they “don’t know anything about cryptocurrency,” while 38 percent believe “cryptocurrency is the future of money.”

For more information, please refer to the following links:

Token-Focused Marketing Campaigns Signal Rising Interest in Cryptocurrencies

By: Veronica Reynolds

Decrypt, a cryptocurrency-focused publication, launched its “Reader Token” (DCPT) to the public last week, allowing readers to accrue tokens in return for content consumption. The program provides a fresh take on the traditional advertising model, with Decrypt releasing a limited supply of Decrypt Tokens in periods called “seasons,” in partnership with sponsors, to be redeemed by consumers for digital rewards. The program’s first sponsor is Protocol Lab’s Filecoin, with 21 million tokens available during its first season.

In bitcoin news, a well-known alcoholic beverage company recently offered social media users who participate in its online marketing campaign the opportunity to receive bitcoin in exchange for a tweet. Consumers who participate will be entered in a sweepstakes for a chance to win one bitcoin.

For more information, please refer to the following links:

ETFs Seek SEC Approval as Brazil Approves First ETF, FATF Updates Guidance

By: Teresa Goody Guillén

An affiliate of a large American multinational financial services corporation sought approval from the U.S. Securities and Exchange Commission (SEC) this week to offer a bitcoin exchange-traded fund (ETF) in the U.S. market. The fund, Wise Origin Bitcoin Trust, would reportedly track the performance of the financial services corporation’s bitcoin index. A New York-based investment firm also recently filed for a bitcoin ETF with the SEC. The filing reportedly states that the ETF will seek to list its shares on the New York Stock Exchange Arca. Meanwhile, the Brazilian Securities and Exchange Commission announced that it has approved a plan for Latin America’s first bitcoin ETF. According to the announcement, Brazil’s B3 is the second exchange in the world to have a fully bitcoin-based ETF, after Canada’s Toronto Stock Exchange.

The Financial Action Task Force (FATF) is updating its Guidance on the risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The revised Guidance focuses on six main areas in order to (1) clarify the definitions of VA and VASP to make clear that these definitions are expansive, (2) provide guidance on how the FATF Standards apply to so-called stablecoins, (3) provide additional guidance on the risks and potential risk mitigants for peer-to-peer transactions, (4) provide updated guidance on the licensing and registration of VASPs, (5) provide additional guidance for the public and private sectors on the implementation of the Travel Rule, and (6) include Principles of Information-Sharing and Co-operation Amongst VASP Supervisors. FATF is consulting private-sector stakeholders before finalizing the revisions to the Guidance and welcomes feedback, to be submitted by April 20, 2021.

For more information, please refer to the following links:

CFTC, Canadian Tax Agency and DOJ Continue Crypto Enforcement Activities

By: Joanna F. Wasick

Late last week, the Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against a major California-based cryptocurrency exchange. Charges included reckless, false, misleading or inaccurate reporting and “wash trading” (using transactions to give the appearance that purchases and sales were made, without incurring market risk or changing the trader’s market position), which created the misleading appearance of liquidity and trading interest in a particular cryptocurrency. The order requires the exchange to pay a civil monetary penalty of $6.5 million and cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations. The CFTC stated that its order exemplifies the CFTC’s commitment to safeguarding the integrity and transparency of digital asset pricing.

Also last week, a Canadian federal court authorized the Canadian Minister of National Revenue to seek certain documents and information from Coinsquare, a Canadian cryptocurrency exchange. Requested information includes a list of all customer accounts, identifying information of account holders, transfer data and other trading activity. The action is similar to that of the United States Internal Revenue Service (IRS) against a U.S. exchange, which began five years ago to aid the IRS in recovering taxes from account holders.

The United States Department of Justice (DOJ) recently released a statement that a Russian national, Egor Kriuchkov, pleaded guilty of conspiring to travel to the U.S. to recruit an employee of a Nevada company into a criminal hacking scheme that involved installing malware on the company’s computer network. Kriuchkov allegedly met with the employee and offered him a payout in bitcoin in return for abetting the hack. However, the employee reported the meeting to his employer company, the FBI was promptly contacted and the hack was thwarted. The DOJ stated, “This case highlights the importance of companies coming forward to law enforcement, and the positive results when they do so.”

For more information, please refer to the following links:

US Firms Launch Bitcoin Products, Seek Approvals; Federal and State Agencies Take Enforcement Actions Against Cryptocurrency Industry Firms

In this issue:

US Firms Launch Bitcoin Products, Seek Approvals, Advocate for Crypto Rules

Multiple Federal and State Agencies Take Actions Against Crypto Industry Firms

US Firms Launch Bitcoin Products, Seek Approvals, Advocate for Crypto Rules

By: Joanna F. Wasick

According to reports, in an internal memorandum issued earlier this week, a major U.S. investment bank informed its financial advisers that it is launching access to three funds that enable bitcoin ownership. Clients with at least $2 million in assets held by the firm will be able to access the three funds.

The 45-day window has begun for a decision by the U.S. Securities and Exchange Commission (SEC) on the VanEck exchange-traded fund (ETF) filing. During this time, the SEC must approve, decline or extend the review period. As reported previously, the Chicago Board Options Exchange filed to list the ETF in January. The SEC officially published the company’s submission on March 15. The public also has a three-week period to submit comments on the SEC website.

On Monday, Coin Center, an independent nonprofit research and advocacy center focused on cryptocurrency-related public policy issues, published its third comment letter regarding a proposed rule from the Financial Crimes Enforcement Network (FinCEN) that would impose new requirements on certain cryptocurrency transactions involving cryptocurrencies. The letter focused on the proposed rule’s customer counterparty identification requirements and the creation of currency transaction report obligations for cryptocurrency transactions over $2,000. Coin Center criticized the rule as hampering innovation and infringing privacy rights. As reported previously, FinCEN published a notice in January extending the comment period for the proposed rule to March 29, 2021.

Ant Group, the financial technology affiliate of e-commerce giant Alibaba, retained its position as the largest holder of blockchain patents in 2020, according to a report recently published by International Asset Management, which cited data from Clarivate’s Derwent World Patents Index. Ant Group now has 2,298 blockchain patents, having added 586 in 2020. A major U.S. technology firm came in fourth, with 647 blockchain patent filings.

For more information, please refer to the following links:

Multiple Federal and State Agencies Take Actions Against Crypto Industry Firms

By: Keith R. Murphy

The Securities and Exchange Commission recently obtained a temporary restraining order and asset freeze against an individual alleged to have falsely represented himself as an investment advisor who misappropriated funds from over 450 investors through a Ponzi-like scheme, according to a recent SEC litigation release. The defendant purportedly told investors that their money would be pooled into a fund investing in digital assets, but instead utilized the assets for personal expenses. The SEC is also seeking disgorgement from several entities and an individual related to the defendant.

A recent publication by the Federal Bureau of Investigation highlights the alleged sustained hacking activity of North Korean government-linked cyber criminals and related theft of cryptocurrencies, noting that federal charges against three North Korean hackers were unsealed in February. The story notes that the likely targets of the malicious cryptocurrency applications were employees of virtual currency exchanges.

According to a recent report, the Commodity Futures Trading Commission (CFTC) is investigating a large cryptocurrency exchange that is not registered with the CFTC, to determine whether it allowed U.S. residents to buy and sell derivatives that are policed by the regulator. The report notes that the CFTC views virtual currencies such as Bitcoin and Ether as commodities, and asserts jurisdiction over their futures and other derivatives. The report further notes that the company has not been accused of misconduct.

The Texas State Securities Board has issued emergency cease and desist orders against three unregistered cryptocurrency and alternative asset platforms, according to a news release this week. One of the companies targeted is alleged to advertise cryptocurrency investments in plans with exorbitant guaranteed returns, while the other two companies are promoting plans with similar guaranteed returns tied to investments including precious metals, oil and gas, and forex. All the offerings are deemed to be fraudulent, according to the news release.

For more information, please refer to the following links:

NFT Sales Launch, Fintech Firms Launch Crypto Initiatives, NY DFS Approves Crypto Firms, CFTC and IRS Target Crypto Crimes, DeFi Project Hacked

In this issue:

NFTs Make Headlines, Global Payments Firm Launches Cryptocurrency Unit

Cryptocurrency Payment Options Expand Across the Globe

Cryptocurrency Firms Achieve NY DFS Approvals, IRS Launches Crypto Initiative

CFTC Action Targets Crypto Market Manipulation, DeFi Hacked for $31 Million

NFTs Make Headlines, Global Payments Firm Launches Cryptocurrency Unit

By: Veronica Reynolds

Nonfungible tokens (NFTs) rule the blockchain world this week, with numerous high-profile campaigns making headlines. Digital artist Beeple sold a JPG file for almost $70 million through Christie’s auction house, reportedly making the piece “the third most-expensive work sold by a living artist at auction.” The National Basketball Association (NBA) partnered with Dapper Labs, based in Canada, to create NBA “top shots” – NFTs sold as collectible highlight videos. A LeBron James top shot has reportedly sold for $200,000. Finally, the band Kings of Leon will reportedly be the first to release an album as an NFT. Three types of NFTs will be offered by the band – a special album package; a live show package, which includes perks such as a lifetime’s worth of front-row seats; and an exclusive audiovisual art package. NFTs operate as digital certificates of ownership that are nonduplicable for assigned digital assets, providing buyers proof of ownership and authenticity.

In other news, a global digital payments platform announced plans this month to launch a business division dedicated to cryptocurrency, with a mission to “advance the utility of digital currencies.” As part of this initiative, the payments platform announced an agreement to purchase a cloud-based digital asset security infrastructure provider in order to “accelerate and expand its initiatives to support cryptocurrencies and digital assets.”

For more information, please refer to the following links:

Cryptocurrency Payment Options Expand Across the Globe

By: Robert A. Musiala Jr.

According to a recent press release, a U.S.-based luxury hotel group has partnered with BitPay, a cryptocurrency payment processor, to begin accepting bitcoin, ether and other cryptocurrencies as payment for its hotel services, making it the first U.S. luxury hotel group to accept cryptocurrency.

Another recent press release announced that U.K.-based fintech firm Wirex, in partnership with a major U.S. financial services firm, has launched a debit card that will allow users to make online and point-of-sale purchases with cryptocurrencies.

In a development from Switzerland, the country’s largest department store chain will reportedly begin selling bitcoin gift cards beginning April 1. The “Cryptonow” gift cards will be offered in partnership with the subsidiary of Bitcoin Suisse, a major Swiss cryptocurrency exchange.

And in news from New Zealand, fintech firm Techemynt has launched $NZDs, the first New Zealand dollar stablecoin. Each $NZDs is backed 1-to-1 by the New Zealand dollar. According to a press release, “$NZDs was deployed on the Ethereum blockchain by Blockchain Labs, using the robust FiatToken framework developed by Centre.”

For more information, please refer to the following links:

Cryptocurrency Firms Achieve NY DFS Approvals, IRS Launches Crypto Initiative

By: Keith R. Murphy

A major U.S. cryptocurrency services company, BitGo, recently obtained a New York Trust license authorizing it to operate as a regulated qualified custodian under New York State Banking Law, according to a recent news release. The newly issued charter from the New York State Department of Financial Services (NY DFS) enables the company to provide digital asset custodial services to New York clients. According to another recent announcement from NY DFS, Bakkt Marketplace LLC has been awarded a BitLicense, which allows the company to offer New York customers the ability to buy and sell cryptocurrencies.

According to recent reports, the Internal Revenue Service has commenced “Operation Hidden Treasure,” a new initiative to discover, track and pursue cryptocurrency tax evaders. The joint operation consists of agents from the civil Fraud Enforcement Office and from the Criminal Division who are trained in cryptocurrency and virtual currency tracking. The agents, along with specialist vendors, will reportedly analyze blockchain and crypto transactions to identify and hold would-be tax evaders liable for failing to report cryptocurrency income on their tax returns.

For more information, please refer to the following links:

CFTC Action Targets Crypto Market Manipulation, DeFi Hacked for $31 Million

New York federal court charging a businessman and computer programmer, and his former employee, with engaging in a cryptocurrency “pump-and-dump” scheme, in which they allegedly accumulated positions in cryptocurrencies, deceptively promoted them through social media as valuable long-term investments and then sold their holdings as prices sharply rose, resulting in profits in excess of $2 million. The CFTC’s acting director stated: “Manipulative and fraudulent schemes, like that alleged in this case, undermine the integrity and development of digital assets and cheat innocent people out of their hard-earned money…. Financial innovation is constantly breaking new ground, and the CFTC’s enforcement efforts must keep up.” The enforcement action is the first brought by the CFTC for a manipulative scheme involving digital assets.

Late last week, Swedish citizen Roger Nils-Jonas Karlsson pleaded guilty in a California federal court to securities fraud, wire fraud and money laundering in connection with a cryptocurrency scheme that defrauded more than 3,500 victims of over $16 million. According to the July 2019 indictment, Karlsson used a website to lure potential investors to purchase $100 shares of an investment plan, instructed them to send funds to a virtual currency exchange and falsely promised an eventual payout of gold. Karlsson later admitted that he had no way to pay off the investors; the funds were transferred to his personal bank accounts and used to purchase expensive homes and a resort in Thailand.

Only one day after launching on the Binance Smart Chain, Meerkat Finance, a decentralized finance (DeFi) project, announced late last week that it was the victim of a hack in which a smart contract vault was compromised and $31 million in cryptocurrency was taken. The funds were further transferred to multiple new blockchain addresses. On-chain data reportedly shows that the hacker(s) drained the funds by altering Meerkat’s smart contract that contains the project’s vault business logic by using the original Meerkat deployer’s accounts.

For more information, please refer to the following links:

Crypto Financial Products Announced, MIT Seeks to Improve Bitcoin Codebase, SEC Addresses Digital Assets, DeFi Hacks Continue, Crypto Theft Data Published

In this issue:

Crypto Firms Launch New Services, MIT Seeks to Improve Bitcoin Codebase

Institutional Cryptocurrency Investment Products Advance, New Data Published

SEC Focuses on Digital Assets, DeFi Hacked, Crypto Theft Data Published

Crypto Firms Launch New Services, MIT Seeks to Improve Bitcoin Codebase

By Keith R. Murphy

A San Francisco-based cryptocurrency custody firm successfully completed an $80 million funding round, following its recent procurement of a federal banking charter from the Office of the Comptroller of Currency (OCC). According to the recent news update, the company is the first crypto native to obtain a charter from the OCC, making it the first national “digital asset bank” in the country.

According to a recent press release, a leading Swiss private bank has added cryptocurrency to its client offerings, incorporating Sygnum’s B2B banking platform. The new offering was reportedly driven by increasing client demand and is intended to allow clients to buy, hold and trade multiple cryptocurrencies, including bitcoin, ether, Bitcoin Cash and Tezos.

Ripple recently announced that it is piloting a private version of the public XRP Ledger to provide a secure solution for the issuance and management of central bank digital currencies (CBDCs). According to a blog post, the CBDC Private Ledger will be built for payments and will be able to handle the large volume and speed of transactions that central banks require. In a separate development, according to reports, a major Japanese e-commerce company is now allowing users to shop at Japanese merchants using various cryptocurrencies, including bitcoin, ether and Bitcoin Cash.

According to recent reports, the MIT Media Lab’s Digital Currency Initiative has raised $4 million from prominent backers to fund bitcoin research and development. Among other goals, the new program, called the Bitcoin Software and Security Effort, will dedicate resources to the development of Bitcoin Core, which is the underlying codebase of the open-source financial network, to harden the bitcoin network and to shore up vulnerabilities.

For more information, please refer to the following links:

Institutional Cryptocurrency Investment Products Advance, New Data Published

By Joanna F. Wasick

This week, a major Boston-based financial services and bank holding company announced that it was appointed as the fund administrator and transfer agent of the VanEck Bitcoin Trust (the Trust), a bitcoin exchange-traded fund (ETF) that is pending approval by the Securities and Exchange Commission (SEC). The Trust’s investment objective is to reflect the performance of a bitcoin’s hourly price reflected in U.S. dollars, minus the expenses of the Trust’s operations.

A major New York-based multinational investment bank and financial services firm has reportedly restarted its cryptocurrency trading desk and will begin dealing in bitcoin futures and non-deliverable forwards for its clients. The bank first set up a cryptocurrency desk in 2018, but interest dropped as bitcoin’s price sharply fell.

A financial services and mobile payment company based in San Francisco announced last week that it bought another $170 million worth of bitcoin, calling bitcoin the “native currency” of the Internet. The company has been involved with cryptocurrency for years, having launched a payments app allowing users to trade in bitcoin in 2018.

A survey conducted by a major U.S. investment bank was released this week, finding that 78 percent of institutional investors have no plans to invest in cryptocurrency. Nevertheless, 58 percent said that cryptocurrencies are “here to stay.” The survey consists of roughly 3,400 investors representing 1,500 institutions around the globe. CaseBitcoin, an on-chain monitoring resource, recently reported on its findings that bitcoin’s compound annual growth rate (CAGR) is a whopping 196.7 percent, meaning that bitcoin has returned almost 200 percent every year for 10 years on a compound basis.

For more information, please refer to the following links:

SEC Focuses on Digital Assets, DeFi Hacked, Crypto Theft Data Published

By Teresa Goody Guillén

The SEC’s Division of Examinations (Division) recently issued a risk alert announcing its continued focus on digital asset securities. Specifically, the Division stated that in its experience, some activities related to the offer, sale and trading of digital asset securities present unique risks to investors. The SEC staff provided observations from their examinations of investment advisers, broker-dealers and transfer agents regarding digital asset securities that may assist firms in developing and enhancing their compliance practices. The Division also issued its annual 2021 examination priorities, which are intended to provide insights into its risk-based approach and include the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. The 2021 priorities include a focus on attendant risks relating to fintech, and they preview what examinations of market participants engaged with digital assets will assess: (1) whether investments are in the best interests of investors, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of representatives’ outside business activities.

A decentralized finance (DeFi) application that allows users to bundle orders on various DeFi protocols and send them in one transaction reportedly lost $14 million after a fake contract was used to trick the app into thinking it was an Aave Protocol V2 update. It is believed that the contract transferred approved tokens to the bad actor’s address and that the attack also resulted in a $1.1 million loss from another DeFi protocol’s treasury funds.

Crystal Blockchain recently issued a Report on Security Breaches and Fraud Involving Crypto 2011-2021, which analyzed cryptocurrency transactions made by “crypto-criminals” after thefts between 2015 and 2020, with a focus on fund flow patterns made using the stolen cryptocurrency. The report provided the following key findings:

  • In 2020, crypto-criminals attempted to withdraw stolen and scam-sourced assets 13 times faster than in 2015.
  • Fifty-three percent of funds stolen by crypto criminals in 2015 were transferred to exchanges with verification requirements; this figure dropped to 8 percent in 2020.
  • Mixers and exchanges without verification requirements were the main destinations in 2020 for crypto-criminal fund withdrawals.
  • Crypto criminals usually attempt to send stolen funds to known entities using additional transactions with unknown intermediate addresses.
  • Between 2015 and 2020, about 81 percent of all withdrawal transfers from crypto criminals to known entities were made with nine hops in between.
  • Blockchain analytics tools are compelling crypto criminals to change their withdrawal patterns to remain uncovered (anonymous).

For more information, please refer to the following links:

Bahamas CBDC Prepaid Card, Ether Investment Products and Travel Rule Solutions Launch, Crypto Enforcement Settlements by OFAC and NYAG

In this issue:

Bahamas CBDC Integrates with Prepaid Card, Bitcoin Donation Data Published

Ether Investment Products Launch, New Publications Detail Crypto Adoption

Travel Rule Solutions Launch, DeFi Market Dissolves Following SEC Inquiry

Federal and State Agencies Pursue Multiple Cryptocurrency Offenders

Bahamas CBDC Integrates with Prepaid Card, Bitcoin Donation Data Published

By: Jordan R. Silversmith

A major U.S. financial services firm recently announced a collaboration with the Central Bank of The Bahamas to launch a new prepaid card to facilitate use of the Sand Dollar, a digital currency issued by the Central Bank of The Bahamas and treated the same as a traditional Bahamian dollar. The Sand Dollar became the first fully deployed digital version of a country’s fiat currency in October 2020; with the new prepaid card, Bahamians will be able to use the Sand Dollar wherever credit cards are accepted, whether in the Bahamas or around the world.

According to reports, the State Bank of India recently joined a major U.S. bank’s blockchain-based payment network. Officials hope joining the network will reduce transaction costs and payment settlement time.

A major U.S. financial services firm recently announced that its charity arm raised $28 million in cryptocurrency donations in 2020. The number beat 2019’s total of $13 million but was far short of previous years’ donations. According to a recent report, a U.S. healthcare provider has also benefited from recent cryptocurrency donations, having received bitcoin donations totaling over $800,000 from a single anonymous benefactor.

A Portuguese energy trading company recently announced that it would start accepting bitcoin as payment for electricity. The company plans to instantly convert received bitcoin into euros to protect it from price fluctuations.

For more information, please refer to the following links:

Ether Investment Products Launch, New Publications Detail Crypto Adoption

By: Veronica Reynolds

This week, two foreign-based investment firms announced plans to provide investors with exposure to ether, the cryptocurrency hosted on the Ethereum blockchain. The first, CoinShares, a European “digital asset investment house,” launched CoinShares Physical Ethereum (ETHE), a new exchange-traded product with each unit reportedly backed by 0.03 ether at launch. ETHE will launch with approximately $75 million assets under management. The second, a Canadian investment management firm, announced plans to launch the first exchange-traded fund (ETF) to invest directly in ether.

In the wake of “the biggest crypto bull run since 2017,” cryptocurrency publication Decrypt highlighted nine publicly traded companies that “have adopted Bitcoin as a reserve asset, and hold direct control over their Bitcoin funds.” Such companies include a large business analytics platform that has adopted bitcoin as its primary reserve asset and a global auto manufacturer that made headlines last week upon investing $1.5 billion in cryptocurrency.

One of the world’s largest cryptocurrency exchanges, Gemini, unveiled “Cryptopedia” this week—an online repository of cryptocurrency-related information with the goal of “providing free, high-quality crypto education to the world.” Modeled after a traditional encyclopedia, Cryptopedia is a platform that provides a comprehensive educational overview of the cryptocurrency ecosystem.

For more information, please refer to the following links:

Travel Rule Solutions Launch, DeFi Market Dissolves Following SEC Inquiry

By: Joanna F. Wasick

Two solutions were recently announced to help cryptocurrency companies comply with the Travel Rule. The rule, issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and aimed at deterring and preventing money laundering, requires financial institutions to share information about the parties to transactions that are over a certain amount. CipherTrace, a blockchain analytics company, has backed TRISA, a testnet that includes a directory of virtual asset service providers and scenario testing for contact with noncompliant firms. BIGG Digital Assets Inc., owner of Blockchain Intelligence Group, has partnered with Netki, a provider of remote digital identity verification technology, to offer their Travel Rule solution, TransactID.

Earlier this month DiFi Money Market (DMM), a decentralized finance protocol, announced it would cease operations, following an inquiry into the company by the U.S. Securities and Exchange Commission (SEC). A post issued by DMM stated that it had received a subpoena from the SEC in December and had begun negotiations with the agency. However, DMM concluded “that an orderly wind-down of the project is best.” DMM published a link through which holders of DMM’s mTokens could redeem them.

Earlier this week, a U.S. federal court dismissed a private class action against Bancor, an on-chain liquidity protocol organized under Swiss law, with offices in Switzerland and Israel. Plaintiffs had brought suit in New York, alleging damages arising from Bancor’s initial coin offering. However, the court ruled that it had no jurisdiction over the foreign entity, and that plaintiffs otherwise failed to allege they suffered losses caused by Bancor. The court further found that given the circumstances, including that the plaintiffs themselves are foreigners, New York was neither a reasonable nor a convenient forum to hear this case.

For more information, please refer to the following links:

Federal and State Agencies Pursue Multiple Cryptocurrency Offenders

By: Keith R. Murphy

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently announced a $507,375 settlement with a major U.S. cryptocurrency payment processor. According to a press release, the settlement resolved potential civil liability faced by the company for more than 2,102 apparent violations of multiple U.S. sanctions programs. The gravamen of the charges was that the company allowed persons in countries subject to sanctions programs to transact with merchants in the United States and elsewhere using cryptocurrencies, despite the company having location data about the persons, including Internet Protocol addresses, prior to effecting the transactions. According to an Enforcement Release published by OFAC in connection with the settlement, the settlement amount reflects OFAC’s determination that the company’s “apparent violations were not voluntarily self-disclosed and were non-egregious.”

The Office of the New York Attorney General announced this week that two cryptocurrency trading platforms, Bitfinex and Tether, were required to end all trading activity with New Yorkers and pay an $18.5 million fine as a result of alleged false statements and efforts to hide massive financial losses from investors. The charges included that the companies falsely represented that the “tether” stablecoins issued by one of the companies were backed one to one by U.S. dollars in a reserve, and that the companies hid the movement of hundreds of millions of dollars between them in order to cover up losses of approximately $850 million involving a third-party “payment processor.” The settlement agreement includes certain mandatory reporting requirements for the companies.

A Department of Justice press release revealed the indictment this week of a Serbian man for alleged participation in a cryptocurrency fraud scheme to solicit U.S. investors through two companies purported to provide cryptocurrency mining and trading services. The indictment alleges that both companies were fraudulent, and that funds sent in by investors were laundered to a Philippines-based financial account and digital wallet.

For more information, please refer to the following links:

Crypto Payment Options Announced, Federal Reserve Official Addresses Bitcoin, US and Foreign Actions Target Crypto Crimes, DeFi Hacks Continue

In this issue:

Crypto Payment Options Announced, Federal Reserve Official Addresses Bitcoin

Enforcement Actions Target Crypto Trading, Hacking and Money Laundering

Flash Loan Attacks Cripple DeFi, Criminal ‘Retires’ with $1Billion in Bitcoin

Crypto Payment Options Announced, Federal Reserve Official Addresses Bitcoin

By: Joanna F. Wasick

Late last week, BitPay, a leading provider of cryptocurrency payment services, announced that U.S. users of its prepaid debit card, which allows users to make purchases using cryptocurrencies, can add their card to the digital wallet of a major U.S. technology firm’s mobile payment application to enable secure in-store, app and online purchases using cryptocurrencies. A press release noted that BitPay cardholders would also soon be able to use the digital wallets provided by two other major technology firms. Also last week, a global provider of digital marketing promotions announced a new reward program that provides users with a gift card that enables the recipient to receive bitcoin. The cardholder can deposit the bitcoin in an existing cryptocurrency wallet, or set up a new one, with instructions from the provider.

Earlier this week, James Bullard, the president and CEO of the Federal Reserve Bank of St. Louis (the Fed), said in a cable news interview that bitcoin poses no serious threat to the U.S. dollar as the world’s reserve currency. Bullard likened bitcoin to pre-Civil War currencies that were privately issued and were disfavored by the public because of their lack of stability, and the public’s overall desire for one uniform currency. Bullard also stated that the dollar’s position has not been undermined by existing currency competition between fiat currencies. He compared bitcoin’s rising price to historic fluctuations in gold prices, saying neither should affect Fed policy.

For more information, please refer to the following links:

Enforcement Actions Target Crypto Trading, Hacking and Money Laundering

By: Keith R. Murphy

This week separate actions were commenced by the Securities and Exchange Commission and by the New York Attorney General against a digital asset trading company and its officers. According to reports, the actions were brought in connection with the alleged offer and sale of digital asset securities from December 2017 to May 2018, and the trading of cryptocurrencies such as bitcoin without registering as a broker-dealer. Among other claims, the allegations include that the company failed to file a registration statement relating to the offering of digital tokens and that the offering did not meet any exemption from registration, and as a result, prospective investors were not provided with the required information for such an offering. The Attorney General’s action seeks to shut the company down, alleging that investors were defrauded by hidden trading fees and the sale of “worthless” tokens.

According to a press release from the Department of Justice this week, three North Korean computer programmers were indicted in December 2020 on charges of participating in a wide-ranging conspiracy to steal cryptocurrency from financial institutions, to create malicious cryptocurrency applications, and to develop and fraudulently market a cryptocurrency platform. The indictment alleges that the programmers are part of a military intelligence agency within the Democratic People’s Republic of Korea. The press release includes a representative of the US Secret Service observing that the case is a “particularly striking example of the growing alliance between officials within some national governments and highly-sophisticated cyber-criminals.”

Citing law enforcement sources, a French radio station reported that members of a ransomware cartel were recently arrested in Ukraine. Those arrested reportedly provided support for the cartel’s bitcoin money laundering operations, which involve laundering ransom-demand profits through the Bitcoin ecosystem through bitcoin mixing services.

For more information, please refer to the following links:

Flash Loan Attacks Cripple DeFi, Criminal ‘Retires’ with $1Billion in Bitcoin

By: Veronica Reynolds

Decentralized Finance (DeFi) protocols Cream Finance and Alpha Finance were victims of one of the largest flash loan attacks yet to have occurred, with attackers absconding with approximately $37.5 million, according to recent reports. Alpha Finance confirmed that one of its products was the root cause and that the loophole had been remediated. This attack comes on the heels of the recent attack on Yearn Finance, which according to reports, drained approximately $11 million and was caused by an exploit on one of its DAI lending pools.

A large auto manufacturer recently experienced a ransomware attack, with attackers demanding $20 million in bitcoin for decryption and to prevent disclosure of stolen data. Reports indicate that the DoppelPaymer ransomware gang is the group responsible for the attack.

One of the most popular “carding” marketplaces, Joker’s Stash, shut down this month, with the founder allegedly retiring after accumulating over $1 billion in bitcoin, according to reports. Carding refers to the process of stealing credit card credentials and reselling them online, usually in exchange for bitcoin. However, the true reason for the marketplace’s closure is yet unconfirmed, with some speculating that Interpol’s and the FBI’s coordinated seizure of the site’s domains in December might have prompted its demise.

For more information, please refer to the following links:

Financial Firms Move to Integrate Cryptocurrencies, Blockchain Solutions Announced Across Markets, Agencies Target Crypto Crimes as Threats Continue

In this issue:

Payment Firms Adopt Cryptocurrencies, Company Purchases $1.5 Billion in Bitcoin

Blockchain Enterprise Initiatives Announced Across Global Markets

US and Foreign Agencies Take Action Against Cryptocurrency Fraud Schemes

Report Details North Korea Links to Crypto Hacks, Ransomware Connections

Payment Firms Adopt Cryptocurrencies, Company Purchases $1.5 Billion in Bitcoin

By: Veronica Reynolds

According to a press release, last week the Office of the Comptroller of the Currency provided conditional approval to Protego Trust Bank for a trust charter to custody digital assets. The move will enable Protego clients to “hold, trade, lend and issue digital assets.” In related news, startup MetalPay, a peer-to-peer cryptocurrency payments platform, has filed with the Office of the Comptroller of the Currency to become a U.S. national bank. The application was filed for “First Blockchain Bank and Trust, N.A.” The company reportedly plans to submit additional applications with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank of San Francisco, with the goal of accepting cash deposits (in addition to cryptocurrency deposits) that are insured by the FDIC. Such a move would reportedly make it the first FDIC-insured crypto bank.

This week, a large global financial services firm announced plans to support select cryptocurrencies on its payments network. According to its blog, the company intends to select cryptocurrencies that focus on consumer protection and compliance. Responding to other recent cryptocurrency announcements by numerous traditional payment platforms, Gartner, in a recent blog post, suggests a future where credit card brands move beyond bitcoin trading to stablecoin payments, which are less volatile than bitcoin.

A Virginia bank announced this week that its customers may now buy and redeem bitcoin at its ATMs. Such transactions will be accompanied by an 8 percent fee. And a New York bank known for being the world’s largest custodian of assets announced plans to custody cryptocurrencies, with plans to treat digital assets like any other asset. To implement the solution, the bank is working to develop “a client-facing prototype … designed to be the industry’s first multi-asset digital custody and administration platform for traditional and digital assets.”

In news that made worldwide headlines, a recent SEC filing by a global auto manufacturer made public its purchase of $1.5 billion in bitcoin, with the company confirming its plans to accept payment in bitcoin. The large purchase will likely serve as a liquidity reserve to accept bitcoin payments. Commenting on its recent filing, the company explained it bought the bitcoin in order to obtain “more flexibility to further diversify and maximize returns on [its] cash.”

For more information, please refer to the following links:

Blockchain Enterprise Initiatives Announced Across Global Markets

By: Robert A. Musiala Jr.

A recently published research paper “proposes a new and novel track and trace blockchain-enabled Medledger system that leverages the Hyperledger Fabric blockchain platform using chaincodes (smart contracts)” to improve security in the pharmaceutical supply chain. An abstract of the paper notes that implementing blockchain in the pharma supply chain enhances “efficiency and safety with high integrity, reliability, and security that reduces the likelihood of meddling with stored data.”

According to a recent press release, a major German bank has teamed up with a major German software firm to integrate the R3 Corda blockchain into the software firm’s cloud platform to promote new supply chain and trade finance solutions. In another press release from Germany, an IoT provider announced that it has deployed SECORA Blockchain near-field communication technology to help record and secure data on physical items to a blockchain database. The solution aims to help prevent counterfeiting in the consumer goods, business-to-business products, IT goods and luxury goods industries.

In the Asia-Pacific region, a Big Four accounting and consulting firm recently announced that it had joined the Financial Blockchain Shenzhen Consortium, a nonprofit organization dedicated to the use of blockchain for financial applications. According to a press release, as part of this initiative, the firm will seek to deploy its proprietary blockchain solutions for supply chain traceability and financial statement audits.

For more information, please refer to the following links:

US and Foreign Agencies Take Action Against Cryptocurrency Fraud Schemes

By: Teresa Goody Guillén

Late last week, the founder of a pair of cryptocurrency hedge funds in New York, New York, with over $100 million in investments, pleaded guilty to securities fraud. According to a press release, the defendant drained almost all the assets from the cryptocurrency fund he operated, spending investors’ money on “indulgences and speculative personal investments,” and tried to steal investor money from one fund to pay back investors in the other fund. The charge carries a maximum term of 20 years in prison.

A Serbian man has been extradited from Serbia to the United States to face allegations in Texas that he and others defrauded investors of more than $70 million in a scheme involving fraudulent investments in binary options and cryptocurrency mining. The defendant and over a dozen others were indicted by a federal grand jury on charges of conspiracy to commit wire fraud and conspiracy to commit money laundering in July 2020. If convicted, the defendants could face up to 20 years in prison.

A former phone company employee was recently charged with conspiracy to commit wire fraud for his role in a subscriber identification module (SIM) swap scam, where the defendant switched SIM cards linked to customers’ phone numbers to a different phone number in an attempt to access customers’ various personal accounts, including email accounts, bank accounts and cryptocurrency accounts as well as any other accounts that use two-factor authentication. In another alleged SIM-swapping scheme, it is reported that a criminal gang stole over $100 million in cryptocurrencies by a series of SIM-swapping attacks targeting high-profile victims in the United States. There are eight arrests reported in this international sweep, which follows a yearlong investigation jointly conducted by law enforcement authorities from the United Kingdom, the United States, Belgium, Malta and Canada, with international activity coordinated by Europol.

German prosecutors reportedly confiscated more than $60 million worth of bitcoin from an alleged fraudster, but he will not give them the password to unlock the funds. The man had been sentenced to more than two years in jail for covertly installing software on other computers to harness their power to “mine,” or produce, bitcoin.

For more information, please refer to the following links:

Report Details North Korea Links to Crypto Hacks, Ransomware Connections

By: Jordan R. Silversmith

According to a confidential UN report, hackers working on behalf of the North Korean government stole cryptocurrencies valued at more than $300 million in cyberattacks from 2019 to November 2020 and used those funds to pay for nuclear weapons. A crime syndicate working on behalf of the North Korean government, the Lazarus Group, reportedly played a major role in the thefts, having stolen around $275 million worth of cryptocurrency from an exchange in 2020, representing half of all cryptocurrency stolen in 2020. Hackers working for the North Korean government, such as the Lazarus Group, reportedly continue to launder stolen cryptocurrencies through over-the-counter brokers in China and are also reported to be exploring new money laundering techniques involving DeFi platforms.

Recent blockchain analysis has found connections between four of 2020’s largest ransomware strains. The four prominent strains – Maze, Egregor, SunCrypt and DoppelPaymer – all use the RaaS model for ransomware, meaning that affiliates perform the ransomware attacks and pay a percentage of each victim payment to administrators and creators of the strains. Researchers have pointed out that many RaaS hackers switch between different strains and that there may be major overlap between affiliates migrating back and forth between the major ransomware strains.

While physical attacks involving cryptocurrencies are rare, Hong Kong police recently reported that a gang lured a cryptocurrency trader to an office for a deal and then robbed her of HK$3.5 million (US$448,770) in cash at knifepoint. Meanwhile, cyberattacks are continuing apace in 2021, with the latest being an attack on a Yearn Finance DAI vault that resulted in a loss of $11 million of cryptocurrency value.

For more information, please refer to the following links:

LexBlog