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

In this issue:

Price Manipulation Suspicions and Hacks Drive Market Volatility

Tax Implications of Initial Coin Offering Events May Be Enormous

Enterprise-backedBlockchain Rollouts Continue to Gain Steam

Foreign Regulatory and Market Environment Continues to Evolve Rapidly

Price Manipulation Suspicions and Hacks Drive Market Volatility

By Stephanie N. Malaska

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

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

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

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

Tax Implications of Initial Coin Offering Events May Be Enormous

By Heather K.P. Fincher

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

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

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

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

Enterprise-backed Blockchain Rollouts Continue to Gain Steam

By Brian P. Bartish

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

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

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

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

Foreign Regulatory and Market Environment Continues to Evolve Rapidly

By Robert A. Musiala Jr.

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

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

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

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

Five Things Blockchain Firms Need to Know About the GDPR

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


Governments, Ad Industry Explore Use Cases; Blockchain Firms Seek Financial Licenses

In this issue:

Governments Experiment With Blockchain for Elections, Banking and Visa Applications

Advertising, Entertainment Industries Continue Investment in Blockchain

Changing Approaches to Crypto Regulatory Licensing

Governments Experiment With Blockchain for Elections, Banking, and Visa Applications

By: Panida A. Pollawit

Governments around the world are seeking to harness blockchain to improve the delivery of public services. In May, a few dozen deployed military service members and their families used blockchain to cast their votes in West Virginia’s primary election. Voters verified their identities using biometric tools and then voted using their mobile devices on a blockchain application. If the program can be successfully implemented on a wider scale, voting through the internet would eliminate the hassle of submitting and counting paper ballots, and provide for a faster tallying of votes. Another U.S.-based initiative is underway in Berkeley, California, where city officials are seeking to offer municipal bonds in the form of blockchain-based assets. The states of Delaware and Illinois have also organized initiatives to explore how blockchain can be used to improve the way that government works.

Outside the United States, examples of countries that are seeking to implement blockchain solutions for government systems include Switzerland, Sweden, Georgia, Estonia, Malta, Bermuda, Chile and Singapore. One of the more ambitious initiatives is taking place in Dubai, which has announced plans to move Dubai’s visa applications, bill payments and license renewals to the blockchain by 2020. Dubai estimates that these activities currently generate 100 million documents annually, and that migration to the blockchain could save 5.5 billion dirham, or approximately $1.5 billion, annually.

On May 21, 2018, mayors from around the world convened in Italy to discuss how technologies like blockchain can improve civic functions. According to a New America post, the event generated recommendations for how cities can prepare for blockchain solutions by doing the following: ensuring that the data they feed into the blockchain is accurate and organized, forming consortia to lower costs and promote efficiencies, and gaining a greater understanding of how blockchain converges with other emerging technologies like artificial intelligence and the internet of things.

To read more about what governments are doing with blockchain, see the following:

Advertising, Entertainment Industries Continue Investment in Blockchain

By: Njeri S. Chasseau

In an effort to take advantage of the immutable nature of blockchain technology, Mastercard has submitted a patent application for a “Method and System for Authentication of Coupons via Blockchain.” With this patent, Mastercard hopes to store its customers’ coupon data on a blockchain, thereby limiting those who can access the coupons and reducing the risks associated with data manipulation.

Several players in the advertising, media and entertainment industries are exploring blockchain’s potential to combat fraud and improve transparency. Smart contracts, programs that can exist on a blockchain and facilitate transactions and other agreements, may be promising in this regard. For example, a new company, Atayan Inc., is currently developing a smart contract (the Smart Advertisement Transaction Token, or SaTT) that will include an advertiser’s specific campaign criteria and serve as a digital “checklist” that ensures that publishers fulfill the applicable criteria prior to being compensated for an ad’s placement. The SaTTs will also seek to assist advertisers with measuring a campaign’s performance on social media platforms, in addition to utilizing the more traditional impression and click measurements.

According to a recent article in Harvard Business Review, “[b]lockchain can make data-driven marketing more transparent by validating and analyzing every consumer’s journey through verified ad delivery, confirming that a real person saw the ad as per the specifics of a media contract.” Other applications being explored by advertising and entertainment firms include leveraging blockchain to tokenize fundraising efforts for independently produced movies and facilitating payment between advertisers, agencies and publishers.

To read more about advertising, entertainment and blockchain, see the following:

Changing Approaches to Crypto Regulatory Licensing

By: Jonathan D. Blattmachr and Michelle N. Tanney

On June 6, 2018, exchange-traded fund (ETF) providers Van Eck Associates Corp. and SolidX Partners Inc. (the “ETF Providers”) filed a request with the Securities and Exchange Commission (SEC) to list a bitcoin-linked exchange-traded product (ETP). The ETF Providers say the fund will hold bitcoin in cold storage and, importantly, the bitcoin will be insured against loss or theft. This move comes after the Winklevoss Bitcoin Trust ETF’s failure to garner the SEC’s approval due to worries over potential market manipulation. The ETF Providers are hoping to avoid certain pitfalls that have befallen other firms, by addressing regulators’ concerns such as high volatility and lack of market depth. They responded to those concerns by suggesting that ETP prices be based on an index that tracks over-the-counter trading by U.S. institutions regulated by the Commodity Futures Trading Commission. Linking the ETP prices to an index could allay those fears, because ETF indices generally have lower volatility. If approved, the new ETF will trade on the Chicago Board Options Exchange’s BZX Exchange.

Foreign crypto trading platforms have had more success in this space, where Chinese trading venue Huobi Pro launched a crypto-based ETF targeted at retail investors on June 1, and rival OKEx rolled out its own product just this week. OKEx’s platform was launched by OKCoin, previously one of the top exchanges in China. Both Huobi and OKEx’s platforms are available to Chinese investors but have put in place restrictions to exclude users from the United States and Hong Kong.

Other firms are taking an alternative route, instead seeking bank licensing or registering as broker-dealers. In a strategic move, startup firm Circle, a Goldman Sachs-backed venture, is looking to register as a federally licensed U.S. bank to trade crypto tokens considered securities while circumventing registration as a cryptocurrency firm in all 50 states. Meanwhile, on June 6, cryptocurrency exchange Coinbase announced that it is “on track to operate a regulated broker-dealer, pending approval by federal authorities.” Coinbase hopes to include real-time settlement and 24/7 trading as part of the exchange’s benefits. These moves may raise the hopes of the blockchain industry that the SEC will begin to approve so-called securitized token offerings as well as cryptocurrency funds linked to financial instruments trading on traditional exchanges.

To read more about crypto regulatory licensing, see the following:

ICOs Avoiding US Citizens Not Immune To Lawsuits In US

Last summer, the Securities and Exchange Commission (SEC) issued its 21(a) report concluding that, according to the U.S. Supreme Court decision in SEC v. W.J. Howey Co., the DAO token qualified as a “security” under the federal securities laws and thus, its offering had to either be registered with the SEC or subject to a valid exemption from registration. While many commentators have focused on the implications of Howey on initial coin offerings (ICOs), few have focused on the efforts by the SEC and class action plaintiffs to go after ICOs intended for foreign shores and investors. In an article published by BlockTribune this month, Partner Marc Powers, Counsel Jonathan Forman and Associate Tiffany Miao focus on important jurisdictional issues emerging in these litigations. The article discusses the SEC v. PlexCorps case filed in the E.D.N.Y., in which the SEC has sued a Canadian issuer and residents who took pains to avoid sales of  their ICO to U.S. investors. The authors discuss the way the SEC is seeking discovery to prove the U.S. court has subject matter jurisdiction over the securities violations alleged, and that the court has personal jurisdiction over the foreign defendants. The case and article are meant to highlight that, contrary to popular belief, a good number of foreign ICOs may not be immune to potential suit in the United States.

Maersk Pilot Goes Live, Cyberthefts and Enforcement Actions Continue Across Globe

In this issue:

• New Waters Charted for Blockchain in Marine Insurance

Cyber-hacks Continue to Plague Cryptocurrency Industry

• New Enforcement Actions in the U.S. and Abroad

New Waters Charted for Blockchain in Marine Insurance

By: John C. McIlwee

In a first-of-its-kind blockchain-enabled solution for the marine hull insurance industry, Insurwave promises to automate manual processes and alleviate inefficiencies for the world’s largest shipping company, A.P. Møller-Maersk. The platform was created as a joint venture between consultant EY and blockchain developer Guardtime. It is hosted on the Microsoft Azure cloud infrastructure and is driven largely by Maersk’s collaboration with broker Willis Towers Watson, specialty insurers XL Catlin and MS Amlin, and ACORD, a nonprofit that provides global insurance industry standards. Following a 20-week proof-of-concept, Insurwave is now available for commercial use. According to an EY news release, Insurwave will support more than half a million transactions and service over 1,000 commercial vessels in its first year. Among its many benefits, Insurwave convenes all stakeholders in the insurance value chain on a single technology platform to provide real-time asset information, standardized data, and an immutable audit trail that reduces friction and inefficiencies in current systems.

Insurwave is the latest example of how blockchain establishes trust and reliability in high-volume transactions among multiple parties with a shared interest in the same data set. The benefits of blockchain technology and industry collaboration are now evident for insureds and insurers alike, and anticipated uses in commercial and specialty lines of business will only further expand the opportunities. The tech is not without risks, however. For marine insurance or any other complex insurance product, each player must understand the jurisdictions in which they operate, how data ownership is determined and what governance measures apply, in order to ensure ongoing maintenance of the shared platform.

To read more about the A.P. Møller-Maersk blockchain pilot, see the following:

Cyberhacks Continue to Plague Cryptocurrency Industry

By: Melonia A. Bennett

Cyberhacking continues to plague companies worldwide, and hackers continue to use, demand and trade in cryptocurrency. One week ago, the Anti-Phishing Working Group (APWG) published an estimate that criminals have stolen about $1.2 billion in cryptocurrencies since the beginning of 2017, including reported and unreported theft. APWG estimated that only 20 percent of this amount has been recovered.

This week it was also reported that hackers breached two Canadian banks, the Bank of Montreal and Simplii Financial of CIBC, accessing personal information from 90,000 accounts. The hackers threatened to release the information unless they received a ransom of $1 million in XRP by May 28. It is unclear if the financial institutions paid the ransom, although the Bank of Montreal publicly stated that “our practice is not to make payments to fraudsters.”

In London, police were successful in seizing $667,000 worth of bitcoin from another hacker, Grant West, 26, who had attacked companies worldwide. West obtained personal financial data, including usernames and passwords, through phishing schemes, and sold this information on the dark web. West was sentenced to 10 years and eight months in prison.

To read more about cryptocurrency and cyberhacking, see the following:

New Enforcement Actions in the U.S. and Abroad

By: Jonathan D. Blattmachr

As fast as the blockchain industry is moving, regulators in the U.S. and abroad are chasing close behind. In late May, the U.S. Department of Justice (DoJ) opened a criminal probe into whether some traders are manipulating crypto prices, prompted by bitcoin’s wild price fluctuations since last year. The DoJ is collaborating with the Commodity Futures and Trading Commission, which has dealt with these types of schemes in the futures markets, including spoofing and wash trading. Separately, on May 29, the U.S. Securities and Exchange Commission (SEC) announced it obtained a court order halting what it has deemed to be an ICO fraud perpetrated by Titanium Blockchain Infrastructure Services Inc. (Titanium) that brought in over $20 million from investors around the world. The SEC alleged that Titanium and its president, Michael Stollaire, used a “create and inflate” scheme to boost Titanium’s value before and after the ICO by falsely claiming the Federal Reserve and 30 well-known companies were Titanium’s customers.

In South Africa, authorities opened an investigation into an alleged fraud scheme involving a company named BTC Global. The company offered investments in bitcoin and is alleged to have defrauded investors of $80 million. Another recent investigation in South Africa involves kidnappers demanding a ransom of approximately $120,000 to be paid in bitcoin for the release of a teenage boy.

German news recently reported that German prosecutors seized and sold $14 million in bitcoin in connection with two Bavarian cybercrime agency investigations. German authorities appear attuned to crypto price movements; they held off ordering the sale until bitcoin rebounded from a low of about $6,000 to about $10,000. This follows the seizure and sale of bitcoin by German authorities during one of bitcoin’s all-time price highs in December 2017, netting $2.3 million. Along with the DoJ’s investigation discussed above, these events suggest that authorities appear to be becoming more focused on crypto price movements.

To read more about this week’s enforcement actions, see the following:

This Week in Blockchain: CFTC Guidance, SEC Enforcement, Central Bank Interest

In this issue:

CFTC Issues Guidance on Crypto Derivatives

“Operation Cryptosweep” Continues Enforcement Actions Against ICOs

Countries Exploring National/State-Backed Cryptocurrencies

CFTC Issues Guidance on Crypto Derivatives

By: Jonathan D. Blattmachr

On May 21, 2018, The Commodity Futures Trading Commission (CFTC) issued to exchanges and clearinghouses a staff advisory regarding cryptocurrency derivatives (the Advisory). The CFTC acknowledges that its guidance only “reflects staff’s current thinking based on experience with virtual currency derivatives products to date,” and that cryptocurrencies “are unlike any commodity that the CFTC has dealt with in the past.” The Advisory clarifies risks of concern to the CFTC, including that it may be difficult to get proper prices on derivatives’ underlying cryptocurrencies and obtain sufficient information about cryptocurrency spot markets to detect potential manipulation in those markets. The CFTC warns that exchanges and clearinghouses “should be proactive, flexible, and ensure proper surveillance and oversight of the trading and clearing of virtual currency contracts . . . .” The Advisory highlights that these entities should focus on, among other things, enhanced market surveillance, including requiring self-regulatory organizations (SROs) to establish and maintain oversight programs to detect and prevent manipulation and settlement disruptions.

That the CFTC admits that it is still getting its arms around this evolving problem seems a positive step forward; exchanges and clearinghouses will help shape regulation in this space. At the same time, the Advisory’s pronouncement that these players will have to take on more responsibility may leave them vulnerable to second-guessing later on. SROs and others must carefully construct their new compliance and oversight programs, and, as the Advisory also warns, closely coordinate with the CFTC’s staff. As crypto derivative trading increases, and we expect it will, regulation in this area will continue to be a hot topic.

Read the full text of the CFTC guidance.

“Operation Cryptosweep” Continues Enforcement Actions Against ICOs

By: Robert A. Musiala Jr.

The North American Securities Administrators Association (NASAA) recently announced a coordinated series of enforcement actions by U.S. and Canadian regulators to take action against illegal initial coin offerings (ICOs) and the individuals behind them. Dubbed “Operation Cryptosweep,” the enforcement initiative has so far taken place in more than 40 jurisdictions throughout North America. According to the NASAA, since May 1, 2018, Operation Cryptosweep has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies. An NASAA task force organized in April 2018 reportedly identified hundreds of ICOs in the final stages of preparation for public launch. The same task force identified approximately 30,000 crypto-related domain name registrations, a majority of which appeared in the 2017-18 time frame.

According to Coindesk, funds raised through ICOs have reached $6.3 billion in the first quarter of 2018, representing 118 percent of total funds raised via ICOs for all of 2017. At the same time, the U.S. Securities and Exchange Commission (SEC) has been clear that most − if not all − ICOs are illegal sales of unregistered securities. Operation Cryptosweep appears to be the latest in a series of recent actions enforcing this position and targeting fraud in the ICO marketplace.

To read more about Operation Cryptosweep, see the following:

Countries Exploring National/State-Backed Cryptocurrencies

By: Tiffany A. Miao

Recent publications from the Bank of England and the Central Bank of Norway appear to have reignited the debate over the utility of national central bank-backed cryptocurrencies, sometimes referred to as central bank digital currencies (CBDCs). A paper published by the Bank of England focuses on design principles and balance sheet implications, offering three models for introducing CBDCs into the economy and guiding principles for an orderly introduction of CBDCs. According to the Bank of England report, end users may be expected to use CBDCs as a substitute for commercial bank deposits. The implications of this for bank balance sheets and bank funding/credit, and the potential for “digital bank runs,” are key risks that would need to be managed. The paper from Norges Bank (the Central Bank of Norway) explores some of the reasons for and purposes of issuing a CBDC, including a decline in the use of cash and the benefits of CBDCs as credit risk-free alternatives to private bank deposits and electronic payment systems. On May 17, Reuters reported that the government of Switzerland has requested a similar report to better understand the risks and opportunities of launching a Swiss CBDC that would be known as the “e-franc.” Other central banks that have previously explored CBDCs include those from Canada, Sweden, Japan, Singapore, and the European Central Bank.

The Royal Canadian Mint was an early pioneer in CBDCs with its MintChip project that launched in 2012 and developed substantial architecture. In 2016, the Royal Canadian Mint sold all of the assets related to MintChip to a private party. Despite the cancellation of the MintChip project and the tremendous economic and legal implications, it appears CBDCs may have recaptured the imaginations of some central bankers.

To read more about CBDCs, see the following:

Blockchain Trends and Developments: Custody, Supply Chain and Governance

In this issue:

Blockchain for Supply Chain: SAP, FedEx See Opportunities

Enterprise Ethereum Alliance Presents New Blockchain Standards

Cryptocurrency Custody: Security on the Blockchain Scales Up

 Blockchain for Supply Chain: SAP, FedEx See Opportunities

By: Robert A. Musiala Jr.

Established firms in the U.S. and abroad continue to move forward with initiatives to leverage blockchain to provide transparency, speed and security to supply chain management. Multinational software firm SAP recently announced plans to implement a blockchain solution to streamline agricultural supply chain management in support of farm-to-consumer programs. Meanwhile, FedEx is testing blockchain for use in tracking large, high-value cargo, and is working with the newly formed Blockchain in Transport Alliance toward setting industry standards for using blockchain in transportation. In a recently issued survey by Deloitte, 53 percent of respondents reported working on blockchain use cases involving supply chain.

The ability of blockchain to provide an undisputed, commonly shared and time-stamped record of products moving through complex supply chains is one of the most discussed nonfinancial use cases for the technology. In general, the supply chain and logistics industries face less regulatory hurdles than many other industries experimenting with blockchain solutions do. When combined with the relatively straightforward benefits of reducing time and money spent on disputes, freeing up working capital and enhancing consumer confidence, the supply chain and logistics industries may be among the first to realize the true benefits of blockchain.

To read more about this week’s articles on blockchain for supply chain, see the following:

Enterprise Ethereum Alliance Presents New Blockchain Standards

By: Njeri S. Chasseau

The Enterprise Ethereum Alliance (EEA) released Enterprise Ethereum Client Specification 1.0 (the Specification) during the CoinDesk Consensus 2018 conference earlier this week in New York. The Specification is the result of an 18-month-long project that involved input from a wide variety of corporations and blockchain industry players. The Specification is one of the largest and most significant products released by the EEA since its creation in 2017. The Specification aims to supply common standards and improve the collaborative development of the EEA’s Ethereum-based initiatives, which include promoting the use of smart contracts. Among its many goals for the program and others based on the Enterprise Ethereum Architecture Stack, the EEA is hoping that the Specification will make business transactions and models more efficient while cultivating trust in smart contracts developed and housed on the Ethereum blockchain.

The Specification comes at a time when the use and development of blockchain technology are moving at an extraordinarily fast pace. In light of this high-speed innovation, however, key players in the industry are recognizing the need to take note of more traditional governance techniques. Traditional governance models informed by the unique characteristics and functionality of blockchain may prove critical to realizing the technology’s true potential in the context of enterprise applications.

For more information about the EEA’s efforts and Enterprise Ethereum Client Specification 1.0, see the following articles:

Cryptocurrency Custody: Security on the Blockchain Scales Up

By: Brian Bartish

As cryptocurrencies continue to attract more-sophisticated institutional investors, custodial service providers could be in for a significant increase in demand. The security and compliance concerns of these enterprise-level investors is spurring the development of new product and service offerings capable of meeting the needs of institutions of varying risk tolerances. These development efforts now appear ready to bear fruit following major product launch announcements this week by Coinbase, one of the largest cryptocurrency exchanges, and BitGo, a Palo Alto-based startup, of custodial services aimed specifically at institutional investors. If successful, these product launches could result in further investment in custody and security services, which have generally been overlooked. Ledger, the French manufacturer of hardware cryptocurrency wallets, announced in January the development of a similar enterprise storage solution for banks and hedge funds, Ledger Vault, in a press release regarding the $75 million it raised in Series B funding.

While these announcements are significant in their own right, they may also be representative of an ongoing shift in the public perception of cryptocurrencies, which have often carried associations with the criminal underworld. When announcing the formal launch of Coinbase Custody, Coinbase reported that it would be partnering with a U.S. Securities and Exchange Commission-regulated broker-dealer to offer auditing and financial reporting validation in addition to Coinbase’s experience with secure cryptocurrency storage. Similarly, BitGo’s announcement of its enterprise offerings follows the company’s pending acquisition of Kingdom Trust, a U.S. qualified custodian of traditional financial assets. No longer relegated to the dark web, cryptocurrency technologies are scaling and adapting to meet the needs of Wall Street clientele.

To read more about cryptocurrency custody, please see the following:

SEC Investigations in the Cryptocurrency and Blockchain Industry

In the latest in a seemingly endless stream of U.S. Securities & Exchange Commission (SEC or the Commission) pronouncements on cryptocurrency and blockchain regulation and enforcement, on March 7, 2018, the Commission warned investors about investing in “potentially unlawful” digital tokens that function like securities, and stated that some platforms are assets that may be “securities” under federal securities laws. Further, “[i]f a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.”[1]

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