Blockchain Developments: Government, Wine, Journalism, Asset-Backed Tokens, SEC Enforcement and More

In this issue:

U.S. and International Governments Address Smart Ports, Smart Cities, and Cryptocurrencies

Blockchain Enterprise Developments in Wine, Journalism, Real Estate and Mining

Blockchain Tokens Backed by Real-World Assets Appear to Grow in Popularity

SEC Enforcement Actions Announced, New Data on Cryptocurrency Hacks Published

U.S. and International Governments Address Smart Ports, Smart Cities, and Cryptocurrencies

By: Taylor Thompson

According to reports, in an Oct. 3 meeting, representatives of U.S. Customs and Border Protection (CBP) claimed that the agency is testing a blockchain-based supply chain management system to evaluate whether blockchain can contribute to CBP’s efforts to track and verify shipments under the newly negotiated United States-Mexico-Canada Agreement, the intended replacement for the North American Free Trade Agreement (NAFTA). In Spain, officials recently announced an initiative to turn the Port of Valencia into a “smart port” using blockchain and big data, joining Aragon and Catalonia as Spanish municipalities attempting to leverage blockchain for government applications.

According to a recently published report, the European Securities and Markets Authority (ESMA), an EU financial watchdog agency, has budgeted over 1 million euros for its efforts to supervise and regulate new fintech, including cryptocurrencies, with the goal of achieving a coordinated approach to regulation. This milestone in the EU’s attempt to monitor cryptocurrencies and related technologies came as the EU Parliament weighed a wide-ranging resolution to examine and promote blockchain technologies on the continent. The resolution passed on Oct. 4 and recommends that member states take steps to incorporate cryptocurrencies into European payment systems, develop educational and legal frameworks for distributed ledger technologies, and evaluate blockchain-based voting, among other recommendations. In debates over the resolution, some EU officials raised concerns over potential conflicts between the adoption of blockchain and compliance with the General Data Protection Regulation (GDPR), a wide-ranging EU digital privacy law.

CoinDesk reported recently that Rain Financial, a cryptocurrency exchange backed by the Central Bank of Bahrain, expects to launch early next year. Rain’s founders claim that the exchange could encourage new flows of Middle Eastern capital into crypto markets without running afoul of know-your-customer and anti-money-laundering standards applied by Western cryptocurrency exchanges. Earlier this week, Reuters reported that the UAE’s securities and commodities regulator plans to roll out regulations allowing companies to raise capital through initial coin offerings (ICOs) in the first half of next year.

Park Won-Soon, the mayor of Seoul, announced in Zurich recently that his five-year plan to integrate blockchain into public services and turn Seoul into a “smart city” will have a budget of 123.3 billion won ($108 million). Park claimed that services covering everything from welfare to motor vehicles to employment insurance to voting will adopt blockchain. The mayor campaigned on the issue of blockchain adoption and incubation, which the South Korean national government has also made a priority.

Meanwhile, in Latin America, Bloomberg reported that Venezuela’s government will soon require its citizens to pay for passports using Petro, a state-issued, oil- and mineral-backed token. Widely seen as an effort to stem the flow of refugees out of Venezuela, the move will make it even harder for Venezuelans to leave that country. Once the new cryptocurrency comes online, a passport will cost approximately eight times the national monthly minimum wage.

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

Blockchain Enterprise Developments in Wine, Journalism, Real Estate and Mining

By: Simone O. Otenaike

A major online retailer’s blockchain fund added VinX, a blockchain-based wine venture, to its portfolio last week. VinX plans to develop a token-based digital wine futures platform based on the Bordeaux futures model. Given the importance of grape and barrel provenance, the industry is ripe for a more efficient and transparent way to track ingredients. The platform will seek to use blockchain technology to link wine consumers directly with wineries and develop a validation system that will reduce the rate of fraud in the wine industry – experts estimate that 20 percent of all wine in the world is counterfeit. In a recent report, a technology research company predicts that blockchain enterprise solutions in the global agriculture and food supply chain market will be worth over $400 million in the next five years. According to the report, the sector is currently worth $60.8 million and is predicted to grow at a compound annual growth rate of 47.8 percent to $429.7 million by 2023. The report predicts that to drive implementation, blockchain solutions will need to address difficulties like food fraud, which costs the global food industry roughly $49 billion annually.

Earlier this week, a business media giant announced plans to move its content to a distributed ledger-based platform provided by Civil, a blockchain-based journalism company. Through the partnership, both companies aim to provide audiences with an unprecedented level of transparency in news content and expand their influence to a broader audience. As part of the partnership, Civil will permanently archive the media company’s existing content to Civil’s decentralized platform, where the content can’t be removed or altered. Also this week, Meridio, a blockchain-based real estate company, launched its first real estate leasing product, reLease. The product allows anyone to rent workspace for the day through a reservation platform built on top of blockchain smart contract and payment systems. Typically, residential and commercial leasing transactions involve rental applications, paper legal contracts, security deposits, and wire transfers – reLease seeks to eliminate this onerous and time-consuming process by using blockchain technology to digitize the contract and payment processes.

On the international front, a Chinese energy company announced plans to develop a cryptocurrency mining farm that can produce up to 300 megawatts (MW) of photovoltaic power for mining – for comparison, the Bitcoin network consumes roughly 200 MW of energy per day for mining. A recent report shows that crypto-mining is gradually becoming less profitable as electricity prices are steadily increasing. While miners saw a $1.4 billion increase in profits during the first three quarters of 2018 compared to the profits in all of 2017, mining is only becoming profitable for the larger players that can afford to continue opening new pools. An ex-employee of the mining giant Bitmain has launched a new crypto-mining chip company, MicroBT, claiming better power efficiencies than Bitmain’s. According to estimates by a consulting firm, the crypto-mining market is anticipated to grow to $17 billion by 2022.

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

Blockchain Tokens Backed by Real-World Assets Appear to Grow in Popularity

By: Robert A. Musiala Jr.

This week brought more announcements related to stablecoins, with a major Japanese technology firm announcing plans to launch a yen-pegged cryptocurrency in 2019. Additionally, in a recent press release, a Big Four accounting and consulting firm announced a joint business relationship with startup Cred, seeking to “provide valuable perspective on how standards can be enhanced to facilitate a more transparent set of reserve functions, stablecoins and deposit and yield products.” According to Reuters, “Tiberius Technology Ventures has called a temporary halt to sales of its metals-backed digital currency and will refund $1 million to investors.”

Recently, an asset management company successfully closed an $18 million tokenized real estate offering made through Templum Markets, an SEC-registered alternative trading system (ATS). In a similar development, Propellr Securities, a FINRA-registered broker-dealer, recently assisted in a Reg D offering of tokenized securities on Ethereum for a luxury Manhattan condo development. And blockchain firm Circle signed an agreement to acquire an SEC-registered broker-dealer to move forward with intentions to launch a regulated token marketplace. New research was released this week on ICOs, citing a total of $20 billion raised in ICOs since the start of 2017. Among other statistics, the study reported that 20 percent of ICOs involved fraud and more than 50 percent failed to raise funds.

In Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) recently issued Switzerland’s first cryptocurrency asset management license, which allows the recipient firm to offer blockchain-based asset management services to institutional clients, similar to a traditional asset manager. According to a recent Bloomberg report, bitcoin’s price volatility has hit a 17-month low, while a recent report from bitcoin analytics firm Chainalysis found that contrary to some claims, the trading activity of the largest bitcoin holders has contributed to price stability, rather than exacerbating it.

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

SEC Enforcement Actions Announced, New Data on Cryptocurrency Hacks Published

By: Marc D. Powers

On Oct. 9, 2018, the Securities and Exchange Commission (SEC) filed a subpoena enforcement action in California against an investment trust that failed to respond to an investigative subpoena issued by the staff. The investigation focused on a claim by a penny stock, Cherubim, that it had allegedly executed a $100 million financing commitment to launch an ICO. In another SEC action reported on Oct. 11, 2018, the SEC obtained a court order preventing an ICO that falsely claimed it was approved by the SEC and that a related cryptocurrency fund was “ licensed and regulated” by the agency. Also, a newly unsealed federal indictment charges seven alleged Russian intelligence agents with using cryptocurrencies as part of a broad “influence and disinformation” scheme. And the CFTC has posted a rise in fines in the past fiscal year ending Sept. 30, of approximately $900 million, buoyed by cryptocurrency cases, spoofing cases and settlements dating back to the financial crisis.

According to a recent Reuters article citing a report from CipherTrace, in the first nine months of 2018, hackers stole $927 million in cryptocurrencies from exchanges and trading platforms. A recently released report from bitcoin analytics firm Elliptic provided details on the hack of a South Korean cryptocurrency exchange and demonstrated how the cryptocurrency funds stolen in the attack may have been laundered.

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

Global Blockchain Developments in Enforcement, Payments, ICOs and Enterprise

In this issue:

Cryptocurrency Enforcement Actions Continue Across the Globe

Multiple Blockchain Announcements for Asset-Backed Tokens, Payments and Exchanges

Lawmakers Seek Clarity on ICOs as New Research Is Published

Enterprise Developments: Blockchain Interoperability, Supply Chain, Identity and More

Cryptocurrency Enforcement Actions Continue Across the Globe

By: Panida A. Pollawit 

On Friday, Sept. 27, the SEC and CFTC charged 1pool Ltd. aka 1Broker and its CEO with offenses related to its actions to solicit U.S. investors to purchase swaps and commodity transactions, allow investors to open trading accounts by providing only a username and email address, and require customers to fund their accounts using bitcoin. According to the complaint, 1Broker’s actions violated federal securities laws requiring broker-dealer registration and customer identity verification.

A Colorado judge recently sentenced 25-year-old Filip Lucian Simion, leader of the drug trafficking group ItalianMafiaBrussels, to 11 years in prison for selling MDMA (known as Ecstasy) on the Darknet and using cryptocurrencies to launder the proceeds. In a DOJ press release, the U.S. Attorney for Colorado warned, “Let there be no mistake. As the internet has grown, so has the long arm of the law.” In France, authorities recently arrested a French intelligence agent who was selling state secrets in exchange for bitcoin.

A recent Wall Street Journal investigation identified almost $90 million laundered through 46 cryptocurrency exchanges since 2016. By following the assets from those who had reported hacks, blackmail schemes and other stolen cryptocurrencies, the investigators were able to pinpoint where the cryptocurrencies became untraceable after entering an exchange. And a new report from ICORating analyzing 100 crypto exchanges trading for more than $1 million concluded that approximately $1.3 billion had been hacked from 31 of these exchanges.

In Brazil, antitrust regulators recently sent questionnaires to 10 crypto exchanges whose bank accounts were closed to investigate potential violations of bank account reporting requirements. In Australia, DigitalX, an ICO investment advisory firm, is being sued by investors who purchased ICOs on DigitalX’s advice. According to DigitalX, the investors are asking for $1.833 million plus damages.

In legislative developments, the U.S. House of Representatives recently approved a bill to establish a task force that would develop tools and programs to detect terrorists and their use of cryptocurrencies. The bill, which is currently being considered by the Senate, also proposes to award up to $450,000 to people with information on this subject.

For more information on the above, please see the following links:

Multiple Blockchain Announcements for Asset-Backed Tokens, Payments and Exchanges 

By: Robert A. Musiala Jr.

A Swiss asset manager and commodities trader recently announced the launch of a blockchain-based token that will be backed by a basket of copper, aluminum, nickel, cobalt, tin, gold and platinum. In a similar move, startup Abra has announced plans to launch the Bit10 token, which will be priced based on a basket of the top 10 cryptocurrencies by market capitalization. In Austria, the government recently announced that it intends to auction off 1.5 billion euros in bonds that will be issued on the Ethereum blockchain. And in Italy, the Italian Banking Association recently announced that it successfully completed the first phase of testing a new blockchain-based interbank payment system.

In the payments space, this week Ripple announced that it has integrated its technology with a cross-border payments application of a major global bank based in Europe, and that three additional financial services firms have integrated its technology. Ripple also announced that a remittance application built in partnership with several Asian banks has now gone live. The blockchain payments startup also recently announced a $100 million social giving campaign and the launch of a Washington, D.C.-based lobbying group.

In developments related to cryptocurrency exchanges, Gemini announced that it has secured insurance coverage for cryptocurrency assets held in its custody through a global consortium of industry-leading insurers. And a new cryptocurrency exchange platform, ErisX, has been announced, which will be backed by leading institutional trading firms. The ErisX exchange intends to let investors trade bitcoin, ether, bitcoin cash, litecoin and cryptocurrency futures. This news comes as a recent Bloomberg article reported that hedge funds have now replaced high net worth individuals as the biggest participants in high-value cryptocurrency transactions conducted through private sales. In related news, an article published this week in the Wall Street Journal described concerns over software bots running on cryptocurrency exchanges that may be manipulating the price of bitcoin.

For more information on this post, please see the following:

Lawmakers Seek Clarity on ICOs as New Research Is Published

By: Njeri S. Chasseau

Recently, a group of 15 U.S. lawmakers requested clarification from the Securities and Exchange Commission (SEC) about its position on Initial Coin Offerings (ICOs), specifically with regard to when ICOs should be considered securities sales. The lawmakers’ letter expresses concern that the lack of clarity about the SEC’s position could drive ICO business out of the U.S. The letter arrives in the wake of a recent report finding that ICOs still appear to be lucrative ventures. According to the report, companies that have conducted ICOs “appear to have already sold as much Ethereum as they raised (in USD terms).” The report also found that ICOs that successfully closed in 2017 generated nearly $727 million in net profits.

Another recently released report found that German ICO investors have suffered losses of nearly 90 percent of their capital – resulting in losses of value even greater than Bitcoin and Ethereum. In South Korea, the chairman of South Korea’s National Policy Committee has called for his country’s legalization of ICOs and the development of a regulatory framework. The chairman’s position is in sharp contrast with efforts of South Korean regulatory bodies that have thus far opposed the legalization of ICOs.

In a recent report on venture capital funding of blockchain projects, research group Diar found that the number of deals involving cryptocurrency startups has nearly doubled since last year and that these startups have raised nearly $3.9 billion as a result of venture capital investment. The report suggests that the surge in deals and venture capital fundraising could be due to the major fluctuations in token values that have occurred over the past year.

For more information about the state of ICOs and startup funding, see the following links:

Enterprise Developments: Blockchain Interoperability, Supply Chain, Identity and More

By: Simone O. Otenaike

On Oct. 1, two of the three largest enterprise blockchain communities, the Hyperledger Project (Hyperledger) and the Enterprise Ethereum Alliance, announced plans to join forces. The alliance between the two communities aims to build common standards and data formats between the two platforms that will serve as a basis for all other implementations and corresponding customizations. If implemented effectively, this could be a major step toward interoperability between the Ethereum and Hyperledger blockchains.

The world’s largest telecom firm recently announced plans to launch a blockchain-as-a-service platform that will track the movement of goods from production to consumption. The platform boasts use cases across industries including manufacturing, retail and healthcare and can also be paired with other blockchain platforms and “internet of things” tools to enhance automation and monitoring capabilities.

Another global software company recently announced new services that will promote the integration of blockchain platforms into existing business infrastructures. The company plans to launch two new consortia that aim to spur blockchain innovation between customers and partners by identifying industry-spanning blockchain use cases, areas for cross-industry collaboration and further benefits of blockchain networks. One consortium will focus exclusively on the pharmaceuticals and life sciences industries while the other will focus on the agribusiness, consumer products and retail industries.

According to a major national bank, blockchain will eventually be a multibillion-dollar opportunity for technology companies that plan to pair blockchain with existing cloud computing operations to improve supply chain operations. The bank’s analysis is based on the assumption that 2 percent of servers will be used to run blockchain, at $5,500 per server, per year. In another recent report, a technology research company predicts that blockchain technology in the United States manufacturing sector will grow significantly from 2020 to 2025. According to the report, the market for blockchain technology in the manufacturing industry is expected to be worth $30 million by 2020 and grow at a compound annual rate of 80 percent to $566 million by 2025.

In international developments, the ID2020 Alliance recently launched two pilot programs that will explore the use of digital identities as a means to provide resources to vulnerable populations. One pilot enables access to better healthcare outcomes by linking electronic medical records to individual users through iris recognition. The other pilot facilitates the transfer of liquid petroleum gas subsidies through a biometrically validated digital wallet, thus modernizing the delivery of resources to users who may not have access to a mobile device. In Sierra Leone, the United Nations and microlending nonprofit Kiva are seeking to build a blockchain-based identity and credit-score system. With 80 percent of the country’s citizens lacking identity documents and a mechanism to prove their creditworthiness, modernizing Sierra Leone’s Credit Reference Bureau through this blockchain-based system could transform the country’s financial inclusion landscape and accelerate economic development. And in the U.K., the national property register is moving into the second phase of its research project on the use of blockchain and distributed ledgers for land registration and the purchase and sale of property.

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

Blockchain Applications for Enterprise and Payments Evolve, New Legislation Proposed, Mining Malware Surges and a Bitcoin Bug Is Fixed

In this issue:

Blockchain Initiatives Pursue Solutions for Refugees, Voting, Smart Cities, Defense and Food Safety

Cryptocurrency Legal Developments: Tax, Proposed Legislation, AML and CFTC

Enforcement Actions Continue, Cryptomining Malware Surges, Token Values Fall

Blockchain Payments Products Advance, Investments Continue and a Bitcoin Bug Is Fixed

Blockchain Initiatives Pursue Solutions for Refugees, Voting, Smart Cities, Defense and Food Safety

By: Brian P. Bartish and Diana Stern

The World Food Programme (WFP) and UN Women announced last week that they are collaborating in an initiative to use blockchain to aid Syrian refugee women participating in the UN Women’s cash-for-work program. Building off WFP’s existing Building Blocks project, which utilizes a blockchain-based system to provide cash transfers to more than 106,000 Syrian refugees in Jordan, the new system will allow refugee women to request cash back, or pay for purchases directly, at WFP-contracted supermarkets by undergoing an iris scan that links their identity to their blockchain account. The WFP and UN Women will also partner on an initiative that seeks to educate Syrian women participating in the cash-for-work program on how to manage their personal data and control third-party access to it. WFP also plans to experiment with blockchain technology for tracking food delivery through its operations in East Africa.

In the U.S., West Virginia became the first state to utilize blockchain-enabled voting last Friday, as absentee voters overseas can now use a mobile phone app secured by blockchain encryption to cast votes in the upcoming midterm elections (the app has a number of detractors due to security concerns). And the Naval Air Systems Command (NAVAIR) is looking to blockchain to replace manual systems for tracking aviation parts. Using the SIMBA Chain, a DARPA-led public/private project initially used for tracking secure messages, the project aims to develop a conceptual framework for improving visibility and security while supporting the Naval Air mission through improved safety and reduced costs.

In Dubai, the Dubai Department of Finance and the Smart Dubai Office released a “Payment Reconciliation and Settlement” platform on Sept. 23. The platform aims to enable real-time payments, increase transparency and improve accuracy by and between government entities such as the Dubai transport, police and health authorities. The Smart Dubai Office is part of the Smart City project, a public-private UAE initiative with the goal of leveraging technology to enhance city services. In China, U.S. tech company Ideanomics and the Asia-Pacific Model E-port Network (APMEN) recently formed a joint venture to launch a solution for APMEN ports – starting with the world’s busiest port in Shanghai. The end-to-end platform seeks to leverage both blockchain technology and artificial intelligence to streamline port clearance and shipping handling, as well as provide risk control services for business and regulatory bodies.

This week, Walmart and a major U.S. retail warehouse club issued an open letter with a new business requirement for their suppliers of leafy greens to participate in the Walmart Food Traceability Initiative, a blockchain-enabled solution to advance food safety by improving farm-to-table traceability for produce. Similarly, in a recent press release, the Dairy Farmers of America announced a project with startup ripe.io to track milk products with blockchain. And a major global technology company recently was awarded a patent for a system that increases automation in distributed networks of devices using a blockchain protocol. According to reports, the system could use a peer-to-peer consensus mechanism to diagnose issues so that the devices could be “self-servicing.”

For more information on this week’s post, please see:

Cryptocurrency Legal Developments: Tax, Proposed Legislation, AML and CFTC

By: Heather K. P. Fincher

This week in a letter to IRS acting commissioner David Kautter, Senator Kevin Brady, R-Texas, chairman of the Committee on Ways and Means, and other lawmakers strongly urged the IRS to issue updated, robust guidance regarding the taxation of virtual currency. Brady’s letter expressed concern over increased IRS enforcement actions in the face of inadequate guidance over the past four years since the IRS’s preliminary notice. The lawmakers urgently requested a written response from the IRS outlining where the IRS is in its efforts, what the IRS intends to cover and a timeline for the release of such guidance. The lawmakers also stated they intend to ask the Government Accountability Office to undertake an audit on the matter.

Two days after Brady’s letter to the IRS, Congressman Tom Emmer, R-Minn., announced three bills in support of blockchain technology and digital currencies. Recently named co-chair of the Congressional Blockchain Caucus, Rep. Emmer declared the United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth. The proposed legislation includes the following:

  • A resolution expressing support for the blockchain technology industry and development of these technologies in the United States.
  • A bill that would provide a safe harbor protecting software developers and providers of blockchain services that do not control consumer funds from certain licensing and registration requirements.
  • A safe harbor applicable to taxpayers who received forked convertible virtual currency that would protect such taxpayers from certain penalties and additions to tax until Treasury issues regulations or guidance on the tax treatment of hard forks.

On the international stage, the Financial Action Task Force (FATF) is reportedly getting closer to the establishment of a global set of anti-money laundering standards for cryptocurrencies to resolve what some have described as a “patchwork quilt” of current AML standards. And in a case brought by the Commodity Futures Trading Commission, a Massachusetts District Court recently ruled that virtual currency is a commodity subject to the Commodity Exchange Act.

For more information on this week’s post, please see:

Enforcement Actions Continue, Cryptomining Malware Surges, Token Values Fall

By: Jaime B. Petenko

After shutting down PlexCorps in December for alleged securities fraud in relation to the PlexCoin Initial Coin Offering (ICO), the U.S. Securities and Exchange Commission (SEC) submitted a letter to the court this week seeking sanctions and a default judgment against PlexCorps’ founders for ignoring court orders concerning accounting and repatriation of digital assets and evidence discovery. The SEC is currently seeking these actions in order to prevent further dissipation of investors’ assets because it believes a large portion of the funds raised in the ICO are still being held in cryptocurrency wallets controlled by the PlexCorps founders. According to the SEC, the founders have “blatantly and without any justification disregarded the Court’s multiple equivocal orders” and the SEC does not believe that the founders intend to follow court instructions.

In a report this week on cyberthreats for the second quarter of 2018, one of the leading device-to-cloud cybersecurity companies reported a surge in cryptomining malware. The numbers it reports are staggering; after increasing in the fourth quarter of 2017, new cryptomining malware samples increased 629 percent to more than 2.9 million in the first quarter of 2018, and then by another 2.5 million new samples in the second quarter of 2018. The report specifically identifies threats around older malware being retooled with mining capabilities and malware targeting devices other than personal computers.

This week, the Diar, a cryptocurrency research publication, reported that U.S. government agencies have entered into contracts and purchase orders valued at $5.7 million with blockchain analysis companies, triple the amount in 2017. The Internal Revenue Service reportedly accounts for 38 percent of this spending with nine contracts, followed next by U.S. Immigration and Customs Enforcement with nine contracts, and the Federal Bureau of Investigation with  12 contracts. Together, the Diar reports, the three agencies account for 85 percent of the total spending. The Diar also reported this week that ICOs have doubled the amount raised to date in 2018 compared to 2017, but the popularity of ICOs has fallen. Not accounting for the top 100 cryptocurrencies, 70 percent of tokens have seen their value fall below the token value at the time of the ICO. The Diar also reported that of the tokens that completed an ICO in 2017-2018, over one-third of those tokens, having raised more than $2.3 billion, have not yet listed their tokens on any exchange.

Last week, the Australian Securities & Investments Commission (ASIC) announced that it will be increasing its scrutiny of ICOs due to persistent problems associated with the offerings, including the use of “misleading or deceptive” statements in sales and marketing materials and offerors not holding Australian financial services licenses. The ASIC is reportedly concerned that these misleading ICOs could impact investor confidence. Since April, the ASIC reports that it has stopped five ICOs and is currently taking regulatory action against a completed ICO. Of the ICOs that were halted, the ASIC shared that some are being restructured so as to carry out the offering within the confines of the law.

To read more about the topics in this week’s post on crime and enforcement, please see the following:

Blockchain Payments Products Advance, Investments Continue and a Bitcoin Bug Is Fixed

By: Robert A. Musiala Jr.

Three major global banks based in the U.S., Canada and Australia recently announced that they are expanding their blockchain-based interbank payments project to include 75 more banks from around the globe. The project, named the Interbank Information Network (IIN), leverages the Quorum blockchain and seeks to compete with other emerging blockchain payment networks. In Japan this week, a major money transmitter announced a partnership with BitPesa to launch a remittance service that will allow customers to send money to Africa using the Bitcoin blockchain. The service intends to bypass banks that would typically convert yen into dollars or euros before finally converting to African currencies. Also this week, a joint venture between a Japanese firm and a U.S.-based blockchain firm announced that it received a key government registration that will allow it to continue its plans to implement a blockchain-based money transfer application.

U.S. firm Circle has announced that it is releasing “USD Coin” (USDC), a cryptocurrency pegged to the U.S. dollar and backed by U.S. dollar reserves. According to reports, dollar reserves backing the so-called “stablecoin” will be verified by a major U.S. audit firm. According to another announcement this week, the recently launched stablecoin, the Paxos Standard Token (PAX), will soon be listed on Binance, the world’s largest cryptocurrency exchange by volume.

In Switzerland, startup SEBA Crypto AG reportedly has raised 100 million Swiss francs to build a bank that will offer traditional bank accounts for cryptocurrency and blockchain firms, while also offering certain cryptocurrency services to businesses and investors. The Zug-based startup is currently seeking a license from FINMA, the Swiss financial regulator. And the China-based company Bitmain, the world’s largest operator and supplier of bitcoin mining equipment, recently announced that it intends to pursue an initial public offering in Hong Kong.

According to reports published this week, the Bitcoin Core developers recently fixed a bug in the Bitcoin code protocol that, if exploited, could have allowed an attacker to create new bitcoin above the 21 million cap programmed into the code. According to reports, once the bug was identified, the core developer team kept it a secret until it was fixed.

For more information on this week’s post, please see the following:

Hard for ICOs to Avoid US Courts: Personal Jurisdiction Found in Two Recent Securities Cases Over Foreign ICO Defendants

Over the past year, the plaintiffs’ bar and Securities and the Exchange Commission (SEC) have brought class and enforcement action proceedings, respectively, against those involved with the issuance and marketing of initial coin offerings (ICOs), including those located outside the United States. The proceedings involving foreign defendants present the interesting and threshold issue in these litigations of whether personal jurisdiction in U.S. courts exists over these defendants. Until recently it was unclear how courts would apply traditional jurisdictional analysis to these token-offering participants.

Continue Reading

Blockchain Developments: NY AG Issues Report, Major Japanese Exchange Hacked, Global Attitudes Diverge and Use Cases for Social Good Emerge

In this issue:

New York Attorney General Issues Virtual Markets Integrity Initiative Report

Major Hack of Japanese Exchange, Multiple U.S. Enforcement Actions

Blockchain Capital Markets Solutions Advance, Global Regulations Diverge

Blockchain Use Cases for the Environment, Digital Identity and State Initiatives

New York Attorney General Issues Virtual Markets Integrity Initiative Report

By: Diana J. Stern

On Sept. 18, 2018, the New York Attorney General’s Office released its Virtual Markets Integrity Initiative Report. The report addressed 10 major virtual currency trading platforms. Key takeaways include the following:

  • Many of the trading platforms that participated in the report lack safeguards to effectively prevent conflicts between customer and insider interests. Items of particular concern include employee trading practices and the manner in which platform operators trade on their own venues.
  • Only a minority of platforms have formal market manipulation policies and restrict, let alone monitor, automated algorithmic trading. There is no mechanism for analyzing suspicious trading strategies across platforms.
  • Consumer funds are at risk because of data security vulnerabilities and an absence of industry standards for insurance and auditing virtual assets.
  • The report concludes with a list of questions customers should ask before participating on virtual currency trading platforms.

Three platforms declined to participate in the report, claiming that they did not operate in New York. However, the Attorney General found otherwise and referred those entities to the New York State Department of Financial Services.

For more information on the report, please see the following:

Major Hack of Japanese Exchange, Multiple U.S. Enforcement Actions

By: Diana J. Stern and Robert A. Musiala Jr.

On Sept. 20, 2018, various news outlets reported that Zaif, a licensed Japanese cryptocurrency exchange, had been hacked, with cyber-thieves stealing approximately $60 million of bitcoin, bitcoin cash and MonaCoin. This news came amid reports that in the first six months of 2018, hackers stole a total of approximately $540 million worth of cryptocurrency from Japanese exchanges and individual wallets. Additionally, according to a recently issued report by the Cyber Threat Alliance, thus far in 2018 there has been an “enormous increase” in illicit cryptocurrency mining activity, with “a 459 percent increase in illicit cryptocurrency mining malware detections since 2017.” And earlier this week, it was reported that a hacker stole approximately $24,250 by manipulating smart contracts run by a betting company that operated on the EOS blockchain.

In enforcement actions, the U.S. District Court for the Eastern District of California ruled in favor of the government to seize the late operator of AlphaBay’s assets, which included a Lamborghini, bitcoin and several beachfront vacation resorts. Also, the founder of cryptocurrency mining companies GAW Miners and ZenMiner was sentenced to 21 months in prison after pleading guilty to charges of wire fraud brought by the U.S. Attorney for the District of Connecticut. And the Texas Securities Commission entered emergency cease and desist orders against three cryptocurrency schemes. One of the targets was a cryptocurrency investment promotor based in Russia that was targeting Texas residents by masquerading as an established U.S. platform. Another offered investors both shares of the company and units of its token in order to fund what the company claimed to be an unhackable cryptocurrency wallet for anonymous, untraceable transactions. Per the order, such investments are securities regulated by Texas law. The company is based in Belize.

In other recent news, the FinCEN Improvement Act (H.R. 6411) recently passed in the House. The bill proposes new language to FinCEN’s authorizing statute that requires the regulator to work with international financial intelligence bodies and tribal law enforcement groups on cryptocurrency matters. While some see the bill as superfluous, reasoning that there was no question as to FinCEN’s authority, it nevertheless underscores FinCEN’s role in regulating virtual currencies and the importance of enforcement coordination worldwide.

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

Blockchain Capital Markets Solutions Advance, Global Regulations Diverge

By: Simone O. Otenaike

Global banks and traders recently announced plans to launch the first blockchain-based platform to finance commodity trading. According to reports, a Switzerland-based venture will run the platform and develop it in partnership with a leading blockchain technology company. The platform is set to go live later this year for the energy industry and then expand into agriculture and metals by early next year. Also this week, one of Wall Street’s largest banks announced that it is moving forward with plans to offer a trading desk that will support various derivatives tied to digital assets, while another major Wall Street bank said it is exploring bitcoin derivatives products.

On Sept. 19, 2018, a top 10 national bank joined a blockchain network that offers real-time cross-border payments. The network includes some of the world’s leading financial institutions and now has more than 100 clients across the globe, and is currently operating in 40 countries. And the South Dakota Division of Banking has approved the world’s largest processor of on-chain bitcoin transactions, as a public South Dakota Trust Company − thus allowing the company to offer digital asset custodial services to institutional investors in the United States. The California-based company processes 15 percent of all global bitcoin transactions and processes $15 billion per month across all digital assets. As a qualified custodian, the company can deliver the highest levels of security and regulatory compliance for institutional investors.

On the regulatory front, the chief accountant for the U.S. Securities and Exchange Commission made a statement earlier this week that the emergence of blockchain technology does not erase the fundamental responsibility of firms to maintain appropriate books and records. Overseas, the U.K.’s Treasury Committee published a substantive report promoting thoughtful regulation of the blockchain industry to improve consumer outcomes, promote sustainable growth and position the U.K. to become the global center for digital asset activity. On the other hand, a recent EU report found no rush to regulate the market, citing concerns related to stifling innovation, with one policymaker commenting that the EU may decide to test different national solutions before implementing a more harmonized approach for the collective EU nations. Coincidentally, earlier this week, France announced that it will now issue licenses to companies that want to raise funds through ICOs in an attempt to attract more digital asset investors into the country.

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

Blockchain Use Cases for the Environment, Digital Identity and State Initiatives

By: John C. McIlwee

In collaboration with a “Big Four” accounting firm and Stanford Woods Institute for the Environment, the World Economic Forum (WEF) recently issued a press release reporting on 65 blockchain use cases for solving the world’s “most pressing” environmental challenges. The nonprofit organization, built on shaping policy for the public good, stated its belief that blockchain will advance environmental protection efforts by offering new financing models for environmental outcomes, realizing nonfinancial assets (such as natural capital), and enabling clean, decentralized and efficient systems. The WEF identified eight categories of blockchain use cases that it deems “game changers” for environmental protection, among them a “see-through” supply chain that promotes transparency and traceability.

Several new pilots also took flight this week focusing on digital identity. Blokusign has developed an app for Gmail that allows users to easily maintain, manage and authenticate documents digitally signed by them without any reliance on third parties. Gemalto, a digital security leader, has partnered with R3, using its Corda platform, to create a blockchain-powered mobile app to protect digital identifiers. Users download the app, control personal data shared therein and then manage information shared with service providers via a consent function.

Poland’s largest bank has also adopted a blockchain-backed system for managing bank records for nearly 5 million of its account holders. In this new initiative, bank documents will utilize a 64-character hash code to permit users to easily verify the documents’ authenticity and to create a decentralized log of activity − even after accounts are closed. And in Austin, Texas, the city and local medical service providers have teamed up to create a blockchain-powered ID system to track services provided to those without conventional forms of identification, such as homeless persons. The pilot links digital copies of records to cellphone numbers and email addresses, which permits a traceable record for those served in the community that could not be established through the paper ID that many lack.

In other developments, South Korea recently announced a blockchain initiative for its customs authority, built on Nexledger. A memorandum of understanding that details the new customs platform includes the signatures of 48 domestic entities and public agencies that look to blockchain technology to curtail forgery and increase export efficiency. Meanwhile, across the Pacific, Oregon Blockchain Venture Studio has launched a campaign to make Oregon the center of the blockchain universe. The incubator-like program, with the backing of at least two U.S.-based multinational corporations and support from the state of Oregon, hopes to accomplish this goal by offering investment capital to promising blockchain startups if they agree to set up shop in the Beaver State.

To read more about this week’s articles on enterprise blockchain use cases, see the following:

Stablecoins Launch in US Amid Multiple Securities Enforcement Actions and Bid to Repurpose DoD Data Center for Cryptocurrency Mining

In this issue:

Stablecoins Launch in US as New Data Cites Drop in ICO Funding

SEC and FINRA Issue First-of-Their-Kind Enforcement Actions

Blockchain Enterprise Developments: Mining, Digital Identities and Food Supply Chain

Cryptocurrencies Continue to Enter Traditional Areas of Financial Crimes 

Stablecoins Launch in US as New Data Cites Drop in ICO Funding

By: Robert A. Musiala Jr. and Brian P. Bartish

On Monday, Sept. 10, 2018, the New York Department of Financial Services (DFS) announced that it has authorized both Paxos Trust Company LLC and Gemini Trust Company LLC to offer price-stable cryptocurrencies pegged to the U.S. dollar, commonly known as “stablecoins.” According to a DFS press release, the approvals of these new financial products came after rigorous review and will be subject to ongoing examinations to ensure compliance with BSA/AML and OFAC regulations; adherence to cybersecurity standards; prevention of market manipulation; maintenance of proper information reporting and consumer protection; and assurances that the stablecoins are fully exchangeable for the U.S. dollar. Paxos Standard is built on the Ethereum blockchain and is backed by U.S. dollar deposits held in segregated accounts at multiple FDIC-insured U.S. banks, with the account balances verified by independent audit firms. All Paxos Standard tokens in circulation will be backed by U.S. dollars, and upon redemption for dollars, the Paxos Standard tokens will be immediately destroyed. The Gemini Dollar also runs on the Ethereum blockchain, with each Ethereum-based token backed by a U.S. dollar. The dollars backing the Gemini Coin will be held at a major U.S. bank in an FDIC-insured account, with monthly audits to be performed on the account by a public accounting firm.

Also on Sept. 10, various news outlets reported that a major U.S. bank is planning to begin acting as an agent issuing so-called digital asset receipts (DARs) that would effectively allow parties to trade in bitcoin without having to take actual ownership of bitcoin. According to reports, the DARs would function similar to American depository receipts (ADRs), which enable parties to trade baskets of foreign stocks that do not trade on U.S. exchanges. In the same way that an ADR is held by a bank that issues a depository receipt, with a DAR the bitcoin will be held by a custodian, with a receipt issued by the bank. In a separate report this week, another major U.S. investment bank announced that it is working on a bitcoin derivative product that would be settled in U.S. dollars. And on Sept. 12, startup Seed CX announced a $15 million Series B funding round that it will use to expand its offerings of institutional trading and settlement for cryptocurrency spot markets and CFTC-regulated cryptocurrency futures. These developments come amid the announcement of the Blockchain Association, the first ever D.C. lobbying group dedicated to the blockchain industry.

As institutional products evolve, according to new data published by Autonomous Research, nearly half of all ICOs since 2017 have failed to raise any funds. According to the new research, the month of August 2018 saw the lowest rates of return on startup ICOs since May 2017, with such efforts raising only $326 million compared with the $3 billion-per-month average observed during the first three months of the year. The report also found that roughly 40 percent of the ICOs examined raised more than $1 million each, and found that the number of hedge funds specifically focused on cryptocurrency has increased significantly. The move away from ICOs to so-called securitized token offerings appears to be further illustrated by recent news that the Malta Stock Exchange’s fintech and digital asset subsidiary, MSX PLC, recently signed a Memorandum of Understanding with cryptocurrency exchange Binance to jointly launch a new security token digital exchange that seeks to take advantage of the island-nation’s pro-crypto regulatory stance.

According to joint research from the World Economic Forum and Bain & Company, small and medium-sized enterprises (SMEs), particularly in the developing world, could stand to become some of the biggest beneficiaries of blockchain financing, as global businesses could reduce the supply-demand gap in trade financing and generate roughly $1.1 trillion in new trade volume through effective blockchain deployments. In China, the “Guangdong, Hong Kong and Macao Dawan District Trade Finance Blockchain Platform” has begun pilot operations with the backing of the People’s Bank of China that aim to facilitate cross-border trading across provinces and reduce trade financing costs from 7-8 percent to less than 6 percent for SMEs.

To read more about the above developments, please see the following:

SEC and FINRA Issue First-of-Their-Kind Enforcement Actions

By: Jaime B. Petenko

This week, the U.S. Securities and Exchange Commission (SEC) issued two first-of-their-kind enforcement actions in the blockchain industry. In one action, TokenLot LLC and its owners agreed to pay more than $500,000 in penalties to settle charges that they acted as unregistered broker-dealers in the sale and trading of securities. TokenLot LLC, a self-described “ICO Superstore” where investors could purchase digital tokens and engage in secondary trading, handled more than 200 different digital tokens for more than 6,000 retail investors from July 2017 until February 2018. In the second action, Crypto Asset Management LP, a hedge fund, agreed to pay a $200,000 penalty to settle charges that it operated as an unregistered investment company. The fund raised more than $3.6 million over a four-month period in 2017, while falsely marketing that it had filed a registration statement with the SEC and that it was the “first regulated crypto asset fund in the United States.” In both actions the offending parties, once contacted by the SEC, ceased their activities and began refunding money to investors (in the case of TokenLot LLC) or offering buybacks to investors (in the case of Crypto Asset Management LP).

In another reported first this week, the federal judge in U.S. v. Zaslavskiy issued a ruling allowing the government to proceed with a criminal case in the U.S. District Court in Brooklyn, alleging that an initial coin offering is a security for purposes of federal criminal law. In the case, the defendant is charged with conspiracy and two counts of securities fraud for allegedly defrauding investors in two initial coin offerings for digital currencies backed by investments in real estate and diamonds that did not exist.

After trading began in the United States approximately one month ago, the SEC suspended trading through Sept. 20, 2018, of Swedish bitcoin exchange-traded notes and ether exchange-traded notes due to a “lack of current, consistent and accurate information” leading to confusion among market participants. The SEC noted that differing descriptions of the financial instruments in the broker-application materials, in public sources and in the offering materials led to confusion over the nature of the financial instruments. Because of the confusion, the SEC believes that the public interest and the protection of investors required the trading to be suspended.

Also this week, FINRA reported that it filed its first disciplinary complaint involving cryptocurrencies. FINRA charged Timothy Tilton Ayre with securities fraud and the unlawful distribution of an unregistered cryptocurrency security called HempCoin. From January 2013 through October 2016, FINRA alleges, Ayre attempted to lure public investment in his worthless public company, Rocky Mountain Ayre, Inc. (RMTN), by making material misstatements in RMTN’s public filings about its finance and business and by creating, offering and selling unregistered securities, HempCoin. RMTN publicized HempCoin as “the first minable coin backed by marketable securities.” Investors mined more than 81 million HempCoin through late 2017, and bought and sold the currency on two cryptocurrency exchanges.

To read more about these enforcement actions, please see the following:

Blockchain Enterprise Developments: Mining, Digital Identities and Food Supply Chain

By: Njeri S. Chasseau

A Nevada-based Chinese investment company has its sights set on redesigning a 55,000-square-foot U.S. Department of Defense data center into a new cryptocurrency mining center that will, once completed, contain approximately 1,300 mining machines for a variety of cryptocurrencies including Bitcoin and Zcash. The data center is ideal given the security and power requirements of crypto-mining enterprises, and can be upgraded to increase the number of mining machines required for the company’s operations.

Across the Pacific, Australia’s New South Wales government recently announced a partnership with an Australian IT firm to conduct a pilot project that will store and authenticate driver’s license data for approximately 140,000 license holders in the state. A formal launch of the program is set for 2019, and the New South Wales government hopes to eliminate the need for its residents to carry physical licenses; the program is in line with Australia’s Digital Economy Initiative promoting the widespread adoption and use of blockchain in the country. Similarly, an Icelandic automatic identity verification company last week announced the launch of a new blockchain-based identity management solution aimed at combatting the problems presented by internet “trolls” – internet users commonly associated with bullying and harassing behavior online. The new technology seeks to ensure that once trolls are banned from a particular platform, they will not be able to re-register a new account or re-enter the platform.

This week also saw new developments in blockchain solutions for the food supply chain, with a new food supply chain startup, Ripe Technology, raising nearly $2.4 million in seed funding. The startup aims to bring innovation to the food supply chain by using blockchain to increase traceability and transparency between farmers, distributors, grocers and other major stakeholders in the food industry.

For more about blockchain and current enterprise-related uses, please see the following:

Cryptocurrencies Continue to Enter Traditional Areas of Financial Crimes

By: Robert A. Musiala Jr. and Melonia A. Bennett

New developments show criminals continue to abuse cryptocurrencies in the traditional areas of theft, fraud and extortion. On Sept. 5, a press release announced the guilty plea of Louis Meza for orchestrating the kidnapping and theft of more than $1.8 million in Ether. The press release quoted Manhattan District Attorney Cyrus R. Vance as saying “Louis Meza orchestrated a 21st-century stick-up … Then 21st-century investigators brought him swiftly to justice ….” In an ongoing lawsuit in Vancouver, a judge has ordered the return of a former executive’s company laptop, in an attempt to discover up to $7 million in cryptocurrency allegedly stolen by the executive from his former company. In India, a former politician was recently arrested for suspected involvement in a scheme to frame another man for the purpose of extorting $1.3 million in bitcoins. And in Japan, the trustee of the defunct bitcoin exchange Mt. Gox recently announced that corporate creditors can now enter claims as part of the civil rehabilitation to claw back their bitcoin through a newly approved process.

To read more about the above developments, please see the following:

Blockchain Developments: Payments, Capital Markets, Enterprise and Patents

In this issue:

Payments and Capital Markets Blockchain Developments Continue to Progress

• Industry and Government Continue to Champion Blockchain Pilots

Newly Released List Ranks Companies with the Most Blockchain Patent Filings

Payments and Capital Markets Blockchain Developments Continue to Progress

By: Jonathan D. Blattmachr

This week saw several blockchain-related developments in the payments and capital market spaces. In payments, a major global technology company’s newly announced remittance system claims to enable faster and less costly cross-border payments. According to the company’s website, a counterparty using the system converts its fiat currency into a digital asset that contains settlement instructions; simultaneously, the system converts the digital asset into the second counterparty’s chosen fiat currency, and all relevant transaction details are recorded onto a blockchain to complete clearing.

Startup TransferGo has announced a similar system using Ripple that allows for real-time fund transfers from Europe to India, a corridor through which billions of dollars in currency currently flow. Transfers now, including through Swift, take up to three days to complete. For those willing to wait so long, TransferGo says it will allow free transfers through a separate system. In a related announcement, startup Abra says it will now allow EU residents to transfer Euros or other fiat currencies directly to the company, which will then deposit bitcoin to users’ digital wallets. This will enable Abra users to sidestep traditional methods to fund their digital wallets. And startup CoinGate is claiming it will make bitcoin transactions faster and cheaper for some 4,000 merchants by utilizing the emerging Bitcoin Lightning Network. These developments in the payments space dovetail with recent estimates that the crypto ATM market will grow to $144.5 million by 2023, up from $16.3 million this year, reflecting a compound annual growth rate of 54.7 percent. It is expected that much of this growth will stem from two-way machines that allow users to exchange fiat currency for crypto, and vice versa, with U.S. companies leading the charge.

In capital markets, a major U.S.-based web services provider announced it will add to its platform cryptocurrency trading in bitcoin, ether, litecoin and dogecoin. Additionally, the Chicago Board Options Exchange (CBOE) announced it will begin trading ether futures by year end, with the futures’ value based on the underlying price indicated on Winkelvoss’s crypto exchange, Gemini. According to reports, bitcoin futures’ traded volume was up 93 percent between the first and second quarters this year.

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

Industry and Government Continue to Champion Blockchain Pilots

By: Brian P. Bartish

California is poised to become the latest state to implement a law clarifying the legal status of blockchain smart contracts with the passage of Assembly Bill 2658, which, if signed by Governor Jerry Brown, would provide a statutory definition for blockchain technology, expand the definitions of electronic record and electronic signature to include records and signatures secured through blockchain, add “smart contract” to the legal definition of a contract, and stipulate that information secured through blockchain is rightfully owned by the creator for purposes of interstate or foreign commerce. In Japan, the city of Tsukuba is adopting a new blockchain-based online voting system designed to prevent tampering with votes, maintain voter confidentiality and achieve better voting efficiency. And South Korea recently announced an additional six blockchain pilot projects − including use cases for livestock supply chain management and customs clearance − that will double the total number already sponsored by the government and will correspond with an additional $9 million budget increase for the year 2019.

Major industry players are also increasing investments in blockchain technology, including a major U.S. technology company and web search engine, which announced that it has added Ethereum to its BigQuery service, giving users new analytical and visualization capabilities on large-scale blockchain data sets. Another major global technology firm recently announced a new addition to its stable of self-sovereign identity products through a collaboration with Hu-manity.co to produce an enterprise version of the latter’s #My31 app – designed to engender individuals with stronger data ownership rights – with the goal of resolving the economic and informational disparities that exist between data subjects and buyers. Two more major global technology firms recently announced a joint venture for a blockchain-based supply chain proof of concept solution based on track-and-trace technology. And a “Big Four” accounting and consulting firm recently published a white paper detailing a proposed risk and controls framework to ensure blockchain deployments meet an organization’s operational, enterprise risk management and internal audit requirements.

For additional information about the topics covered in this week’s post, please see the following:

Newly Released List Ranks Companies with the Most Blockchain Patent Filings

By: Robert A. Musiala Jr.

On Aug. 31, IPR Daily published a list ranking the companies from across the globe that have filed the most blockchain-related patents. At the top of the list is one of China’s largest technology firms, with 90 filings. Several U.S. companies from various industries are on the list, including blockchain startups, banks and credit card companies, traditional technology and consulting firms, and consumer products firms. Just this week, two more blockchain patent applications were published from well-known U.S. companies. One application is by a major retail firm, and seeks to patent a blockchain system for managing product deliveries by autonomous drones, robots and similar devices. The other application is by Winklevoss IP, LLC, and seeks to patent a system for securely storing blockchain-based assets.

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

Blockchain Capital Markets Offerings and Executive Attitudes Evolve, Threats Continue

In this issue:

New Blockchain Trading Platforms and Capital Markets Offerings Announced

Blockchain Executive Surveys Released, More Pilots and Investments Announced

Update: Cryptocurrency Cybercrimes and ICO Enforcement Actions

John McAfee’s ‘Unhackable’ Cryptocurrency Wallet Hacked

New Blockchain Trading Platforms and Capital Markets Offerings Announced

By: Jaime B. Petenko

Recently, it was reported that a popular Colorado resort planned to sell “Aspen Coins” in a Reg D 506(c) offering on a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system (ATS). On Aug. 24, 2018, this offering launched through an international crowdfunding firm, with the hotel offering to sell $18 million in Aspen Coins. Aspen Coins represent, indirectly, one share of common stock in the resort.

Now other similar announcements have been made. Last week, U.S.-based registered broker-dealer Rialto Trading announced a partnership with Bittrex, a U.S.-based digital asset trading platform, to develop a new security token trading platform. Rialto Trading also intends to expand its services to include issuance advisory services, placement, trading and custody for security tokens. On Aug. 28, 2018, OpenFinance launched a regulated ATS for security tokens, reportedly enabling accredited investors to trade tokens issued under Reg D, S, A+ and CF exemptions. Retail investors reportedly also are permitted to trade certain digital securities, subject to a 12-month holding period. In other platform news, a public trust company regulated by the South Dakota Division of Banking has announced that it secured insurance for blockchain-based assets held on its qualified custody platform through the world’s leading insurance market.

In a press release this week, the World Bank announced the results of its offering of a blockchain-operated new debt instrument or bond-i. The bond-i is reportedly the world’s first bond to be created, allocated, transferred and managed over blockchain. The World Bank raised A$110 million in the offering and will pay 2.20% interest on the bonds.

Last week, the Monetary Authority of Singapore and Singapore Exchange announced a collaboration to develop Delivery versus Payment (DvP) capabilities for the settlement of tokenized digital currencies and securities across various blockchain platforms. DvP is a settlement procedure whereby cash payment and delivery of securities occur simultaneously. In another recent report, a British multinational bank and the financial arm of a German multinational manufacturing company partnered to conduct an “industry-first client pilot” for blockchain-based guarantees in trade finance, with an aim to fully digitize bank guarantee issuance from end to end using smart contracts.

For more about blockchain developments in capital markets, please read the following:

Blockchain Executive Surveys Released, More Pilots and Investments Announced

By Robert A. Musiala Jr.

This week, two “Big Four” accounting and consulting firms each published the results of blockchain market surveys collectively taken by thousands of executives from around the globe. Highlights from these two surveys include the following:

  • 84% are actively involved with blockchain;
  • 45% believe trust in blockchain technology could delay adoption;
  • 30% see China as a rising blockchain leader;
  • 28% say interoperability of systems is a key for success;
  • 84% believe blockchain is scalable and will achieve mainstream adoption;
  • 74% see a compelling business case for blockchain;
  • 69% anticipate replacing current recordkeeping systems with blockchain;
  • 68% perceive a competitive disadvantage if they do not adopt blockchain.

Meanwhile, more blockchain-based investments and pilots have been announced. The U.K. government recently launched a program to support blockchain startups seeking to launch in the country and is investigating leveraging blockchain to secure digital evidence used in court proceedings. In Japan, the government recently announced that it is developing a blockchain-based solution to streamline logistics data sharing between trade entities like shipping companies, ports, banks and insurance companies.

In the U.S., a major news cooperative announced that it is partnering with blockchain startup Civil to build a blockchain-based digital content licensing and distribution platform that aims to track news to ensure the content is being licensed correctly. And a major global beer producer and distributor recently announced a partnership with startup Klip to leverage the Ethereum blockchain in a solution that intends to increase transparency in ad buying.

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

Update: Cryptocurrency Cybercrimes and ICO Enforcement Actions

By: Simone O. Otenaike

The North American Securities Administrators Association (NASAA) continues its ongoing initiative to protect investors from financial harm involving fraudulent initial coin offerings (ICOs) and cryptocurrency-related investment products. NASAA recently announced that more than 200 ICOs and cryptocurrency-related investment products are currently under active investigation. Also this week, the Colorado Securities Commissioner issued orders to investigate three cryptocurrency companies promoting unregistered ICOs in Colorado. The “ICO Task Force,” convened by the Commissioner in May, is responsible for the investigations into the three companies.

In international developments, finance ministers from the European Union plan to discuss regulation of cryptocurrency markets and digital assets during a Sept. 7 meeting in Vienna. The meeting will address the lack of transparency in the cryptocurrency markets and the potential to misuse digital assets for money laundering, tax evasion and terrorist financing. In China, five regulatory agencies – the People’s Bank of China, the Banking Regulatory Commission, the Ministry of Public Security, the Central Cyberspace Affairs Commission and the State Administration for Market Regulation – jointly issued a warning against trading activities involving cryptocurrencies. While these regulators are mostly focused on overseas projects that solicit investments from Chinese residents through mobile and internet platforms, the regulators also warn against new domestic fundraising methods like initial exchange offerings, initial fork offerings and initial miner offerings.

In the area of cybercrimes, a recent report from an IT security firm indicates that the first half of 2018 saw an increase in malicious crypto-mining attacks. The report notes that malicious crypto-mining attacks over the first six months of 2018 are up 956 percent from the attacks across a similar period in 2017.

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

John McAfee’s ‘Unhackable’ Cryptocurrency Wallet Hacked

By: Brian P. Bartish

Cryptocurrency wallet manufacturer BitFi has become the latest challenger to fail in its bid to disprove the well-established cybersecurity axiom that nothing is unhackable. A team of researchers recently published evidence that they successfully sent signed transactions with the wallet by modifying the device, connecting to the wallet’s server and transmitting sensitive data with it, conditions that would entitle the team to a $10,000 bug bounty issued by BitFi. BitFi has yet to acknowledge whether it will pay the bounty.

While this may be the first effort to successfully meet the terms of one of BitFi’s bounties, it follows a number of successful efforts to compromise the device, including one instance where a 15-year-old hacker modified the firmware to play the video game Doom, after BitFi executive chairman and one-time anti-virus pioneer John McAfee personally backed a bounty challenge of $100,000 on July 24. McAfee and BitFi balked at these earlier hacks and refused to pay the bounty, claiming that they did not match the terms of the bounty to the letter, and even sent threatening tweets aimed at the hackers – responses that earned BitFi an award for worst vendor response at DEF CON earlier this month.

Despite BitFi’s dubious claims of “fortress-like security” – McAfee later conceded that calling the wallet unhackable may have been “unwise” – the bounty program seems to have been a success at least from a marketing perspective. BitFi touts its ability to support an unlimited number of cryptocurrencies and allow users to generate a secret phrase to control the device, as opposed to a 24-word mnemonic seed. Further, BitFi touts itself as completely open source, so the user stays in control of the funds even if the manufacturer of the wallet ceases to exist.

For further reading, please see the following:

U.S. Customs Pilots Blockchain, SEC Rejects Bitcoin ETFs, Government Investments and Enforcement Actions Continue

In this issue:

U.S. Customs Pilots Blockchain for Supply Chain as Private Sector Pilots Continue

The SEC Rejects Bitcoin ETFs; New Exchanges and Services Announced Abroad

Governments Worldwide Continue to Invest in Blockchain Projects

Enforcement Actions Continue in U.S. and Abroad as Industry Begins to Self-Regulate

U.S. Customs Pilots Blockchain for Supply Chain as Private Sector Pilots Continue

By: John C. McIlwee

On Tuesday, the U.S. Customs and Border Protection (CBP) agency announced that it would begin testing a blockchain solution to verify certificates of origin for goods coming into the country under the Central America-Dominican Republic and United States Free Trade Agreement and the North American Free Trade Agreement. The agency not only seeks to become an advocate for market adoption, but it also hopes to utilize blockchain technology to collect better data on the source of goods and import/export compliance. While acknowledging the challenge of standing up a blockchain with 47 partner countries, a CBP spokesperson indicated the agency is pressing forward with integrating blockchain into trade compliance. According to American Shipper, the official said, “Really what the government’s trying to do is twofold: One is to help blockchain along in a healthy manner for increasing market adoption, and the other thing is we’re trying to prepare ourselves in a proactive way to be ready for when private industry begins to really take off with this technology.”

Last Thursday, a major U.S.-based shipping company filed a patent application for its new blockchain-enabled package-tracking concept. Meanwhile, a major global enterprise software provider recently announced a supply chain pilot with 16 farm-to-consumer produce suppliers using its cloud-based blockchain as a service (BaaS) platform. According to a Computerworld article, the pilot will seek to implement IoT sensors developed by one of its customers to gather relevant data regarding the parcels themselves, including temperature, humidity, vibration and light exposure.

The second-largest e-commerce company in China, JD.com, is also throwing its hat in the BaaS ring, with the launch of JD Blockchain Open Platform. As its first customer, China Pacific Insurance intends to use JD’s blockchain infrastructure to trace state-mandated corporate invoices, known as “fapiao.” In paper form, tracking fapiao took time when done correctly, and even more time when errors were made − which was often. China Pacific Insurance hopes that JD’s platform will eliminate the paper chase, save money and open a new line of revenue with existing customers.

To read more about this week’s articles on blockchain enterprise solutions, see the following:

The SEC Rejects Bitcoin ETFs; New Exchanges and Services Announced Abroad

By: Jaime B. Petenko

On Aug. 22, 2018, the U.S. Securities and Exchange Commission (SEC) issued three orders rejecting nine bitcoin exchange-traded fund (ETF) proposals and disapproving related rule changes. Each of the proposed ETFs was tied to the bitcoin futures market as provided by the CBOE and CME exchanges, not the spot market, which was proposed for the recently rejected Winklevoss ETF. Despite this difference, the SEC rejected the proposals, noting that the bitcoin futures market was not mature enough and that the proposals failed to protect against fraud and manipulation. Although the rule change was disapproved, the SEC emphasized in all three proposals that “the disapproval does not rest on an evaluation of whether bitcoin, or blockchain more generally, has utility or value as an innovation or investment.” According to The New York Times, the day after the rejection orders were published, the SEC announced that it would review the decisions. In a post on Twitter, SEC Commissioner Hester Pierce made the following comment about the forthcoming review: “In English: the Commission (Chairman and Commissioners) delegates some tasks to its staff. When the staff acts in such cases, it acts on behalf of the Commission. The Commission may review the staff’s action, as will now happen here.”

This week, a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system entered into an agreement with CUSIP Global Services to become the first registered broker-dealer to offer nine-digit alphanumeric codes, or CUSIPs, to so-called securitized tokenized offerings (STOs). STOs traded on the platform reportedly will be offered the same CUSIPs that are issued to stocks and bonds, allowing the tokenized securities to be integrated into the existing transactional system.

In foreign markets, several new exchanges and services were announced this week. Singaporean cryptocurrency exchange, Huobi, launched the Huobi Automated Listing platform, a service designed to streamline and increase transparency by requiring cryptocurrency projects to submit documentation and be verified before being listed on the exchange.

Binance LCX, a joint venture between Binance and the Liechtenstein Cryptoassets Exchange, announced the launch of a fiat-to-crypto exchange in Liechtenstein that will offer trading between Swiss francs and euros against major digital currency pairs. And ZB.com, one of the largest cryptocurrency exchanges in the world by traded value, announced that it will set up operations in Malta with the launch of a new exchange.

To read more about blockchain developments in capital markets, see the following:

Governments Worldwide Continue to Invest in Blockchain Projects

By: Joanna F. Wasick

The Bank of Thailand (BoT) announced on Tuesday it was creating a central bank digital currency (CBDC) on Corda, a distributed ledger technology platform developed by the R3 consortium. The project, “Project Inthanon,” is a collaborative effort by BoT and eight major private banking institutions, and seeks to create a prototype that enables domestic funds transfers within the country’s interbanking system using CBDC tokens. The first phase of the project is set for completion by the beginning of 2019, after which the BoT will seek to expand the project to include third-party funds transfers and cross-border funds transfers.

Canada is proceeding on the trajectory it set in June 2017, when the Canadian government-funded research program Industrial Research Assistance Program (IRAP) hosted a blockchain kickoff session and revealed plans to implement the technology in administering funding for innovative projects to Canada’s small and medium-sized businesses. Earlier this year, IRAP, through its National Research Council of Canada (NRC), launched Canada’s first trial of a public blockchain technology to facilitate the transparent administration of government contracts. On Monday, NRC announced that it has built an Ethereum blockchain explorer hosted on the InterPlanetary File System (IPFS) through services provided by Bitaccess, a blockchain startup. The explorer allows users to search the Ethereum blockchain for published grants and contribution data.

In the United States, researchers at the University of California-San Diego won more than $800,000 from the National Science Foundation (NSF) to develop the Open Science Chain, a distributed ledger that will serve as a living digital catalog to help researchers access and verify data from various scientific experiments. The web-based platform allows for an auditable means for researchers to provide metadata and verification information about their data sets, and update such data sets as they change and evolve.

At the local level, a prominent Ohio businessman is striving to make Cleveland the Silicon Valley of the blockchain era. Bernie Moreno, owner of numerous luxury car dealerships, is garnering support for “Blockland Cleveland,” a $150 million blockchain technology initiative that has attracted the interest of other Ohio business and civic leaders. The plan intends to feature a physical campus that, over the next four years, would grow into a 300,000-square-foot Cleveland-based incubator with 2,000 startup desks for developers, 15 spaces for young businesses, an auditorium suitable for 300 people, fiber connections to support the building and a K-8 school.

For more information, read the following:

Enforcement Actions Continue in U.S. and Abroad as Industry Begins to Self-Regulate

By: Simone O. Otenaike

A Seattle-based e-sport betting startup is facing a class action lawsuit for alleged violations of U.S. securities laws. The company’s ICO occurred in late 2017 and raised an amount worth $31 million at the time. Since then, the price of the company’s blockchain-based tokens has declined from about $2 to $0.05. The lead plaintiff alleges that the company intentionally mischaracterized the securities as tokens to avoid the reach of U.S. securities laws. In related news, last week a federal court entered a default judgement against a blockchain startup after finding that the plaintiffs were defrauded out of approximately $1 million in cryptocurrencies. The judge plans to hold a hearing this week to confirm the calculation of damages.

On Thursday, a Chinese regulator announced plans to step up efforts to block internet access to cryptocurrency trading platforms. The agency has identified and seeks to shut down more than 100 trading platforms with overseas IP addresses that are still available domestically. Chinese police are also increasing efforts to prosecute individuals for cryptocurrency cybercrimes. Last week, the police tracked down three suspects responsible for stealing about $87 million in crypto assets. In related international news, one of the promoters behind a cryptocurrency platform was arrested earlier this week in India. When the cryptocurrency platform suddenly shut down earlier this year, many investors lost their money because they were no longer able to trade their tokens or coins. The platform promoters are facing charges for extorting cryptocurrency and defrauding investors.

An international fiat and cryptocurrency exchange platform that recently initiated new Know Your Customer (KYC) checks in an effort to improve anti-money laundering practices has locked many of its users’ accounts without notice. According to reports, the platform is currently dealing with backlash from many customers who use it as a main payment option while traveling abroad, and who lack access to key identification documents required by the new KYC procedures.

Earlier this week, several global cryptocurrency exchanges announced plans to join a self-regulatory organization that will police virtual commodity marketplaces. The self-regulatory organization, The Virtual Commodity Association Working Group, plans to establish industry standards and work with regulators to prevent fraud and manipulation in the virtual commodity markets. The goal of the working group is to protect consumers while increasing the adoption of cryptocurrency trading platforms by improving transparency, accountability and security across the various platforms.

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

New Investments and Capital Markets Products, New Crimes and Enforcement Actions

In this issue:

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

Cryptocurrency Cybercrimes and Enforcement Actions Continue

Blockchain Investment Continues as Businesses Expand Operations 

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

By: Jaime B. Petenko

According to an Aug. 10, 2018, press release, the World Bank and an Australian multinational bank are partnering to issue what is reported to be the first bond globally created, allocated, transferred and managed over blockchain. The “Blockchain Offered New Debt Instrument,” or “bond-i,” will be issued over a private blockchain built on top of the Ethereum network that has been reviewed by a major global technology company for its architecture, security and resilience. The blockchain platform will be co-hosted by the World Bank in Washington, D.C., and the Australian multinational bank in Sydney, Australia.

In another first, a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system recently launched a Reg D 506(c) offering of security tokens issued by a popular Colorado resort. Accredited investors can purchase “Aspen coins,” which represent, indirectly, one share of common stock in the Colorado resort, including voting rights and rights to distributions. The Aspen coins are backed by the resort’s assets. Purchases of Aspen coins can be made with U.S. dollars, bitcoin or Ethereum. In Canada, a Canadian multinational bank and the Ontario Teachers’ Pension Plan announced the successful issuance of a fixed income transaction on blockchain. The Canadian bank sold CA$250 million of one-year floating rate deposit notes to the pension fund and mirrored the transaction on a blockchain platform.

According to reports, this week an exchange-traded note that has been trading on the Nasdaq Stockholm Exchange since 2015 is now being quoted in U.S. dollars. Trading the note will be similar to buying American depositary receipts, where investors will see a foreign-listed asset in U.S. dollars. Trades will be executed in U.S. dollars but will be settled, cleared and held in custody in Sweden.

Two foreign stock exchanges also made announcements about trading digital assets this week. The Stuttgart Stock Exchange (Gruppe Börse Stuttgart), the second-largest stock exchange in Germany, announced it is creating an end-to-end infrastructure for digital assets, to include cryptocurrency trading, initial coin offerings and a cryptocurrency custody service. And the Jamaica Stock Exchange (JSE) signed a memorandum of understanding with a Toronto-based fintech company to create a digital assets trading platform that meets regulatory compliance standards. The JSE plans to include regulatory tools on the platform, including a tool to track market manipulation. Also this week, the prominent industry organization Coin Center released a report setting forth a proposed framework for securities regulation of cryptographic assets, cryptocurrencies and tokens.

To read more about blockchain developments in capital markets, see the following:

Cryptocurrency Cybercrimes and Enforcement Actions Continue

By: Brian P. Bartish

New statistics from Kaspersky Labs show that phishing schemes exploiting ICOs to target potential investors have generated more than $2.3 million in the second quarter of 2018 alone. According to a recent survey of UK organizations, one in three respondents had been impacted by cryptojacking malware in the past month. In a recently filed lawsuit, fraudsters allegedly impersonated a victim in communications to a multinational telecommunications company to access the victim’s crypto wallets and steal $24 million in cryptocurrencies. According to another recent report, a wealthy investor was flown to Macau by a Thai group in a scheme that resulted in the theft of more than 5,500 bitcoins.

On Aug. 11, alleged stablecoin provider Tether issued new Tether tokens worth $50 million after losing roughly $300 million in market capitalization over the past 30 days. Tether has been the source of criticism for its failure to submit to a public audit to prove its claims of Tether being backed by the dollar on a one-to-one basis.

In a speech last week, FinCEN director Kenneth A. Blanco delivered a clear, stern message to crypto exchanges on their AML and CFT obligations, stating that compliance programs must be implemented long before they receive notice of an examination. Mr. Blanco stated that FinCEN’s goal is to ensure that all virtual currency money transmitters undergo such compliance examinations regularly. And in an Aug. 14 press release, the SEC announced that it had obtained permanent officer-and-director and penny stock bars against the founder of a company who perpetrated a fraudulent ICO.

For further reading:

Blockchain Investment Continues as Businesses Expand Operations

By: Simone O. Otenaike

Earlier this week, a U.S. Securities and Exchange Commission filing revealed that a leading blockchain investment company has raised more than $71 million from approximately 90 investors for its third crypto fund. The same blockchain investment company raised $13 million for its crypto fund in 2016 and $25 million for its initial coin offering fund in 2017. In related news, two portfolio companies from a major online retailer’s crypto fund made key announcements. The first portfolio company, which raised $134 million in a security token offering, revealed that a Hong Kong-based equity firm agreed to invest an additional $400 million in the company in exchange for equity. The other portfolio company, a Barbados-based blockchain startup, announced plans to partner with a Caribbean-based bank to issue a central bank-backed digital currency and test know-your-customer/anti-money laundering technology.

In Singapore, a venture capital firm announced plans to launch a $10 million crypto fund. According to The New York Times, this fund will invest in early-stage companies globally such as cryptocurrency exchanges and security providers. Meanwhile, a New York-based blockchain company recently completed a $32 million Series B funding round and announced plans to expand its user base and further develop its auditable distributed ledger-based network, data synchronization technology and Ethereum-compatible smart contracting language.

This week Coinbase announced its acquisition of a decentralized identity solution startup company. The company will join Coinbase’s identity team and intends to use blockchain technology to develop new and innovative ways of verifying and validating identity. Also this week, a leading mobile payment platform announced the expansion of its service to allow customers to buy and sell bitcoins in all 50 U.S. states.

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

LexBlog