Crypto Market Data Published; Digital Assets RFI Issued; BIS Addresses DeFi; NY DFS Issues Crypto Guidance; SEC Brings Crypto Actions; FBI Addresses Hacks

Blockchain

In this issue:

Reports Address Crypto Ownership, Stablecoins and Dapp Adoption

By Amos Kim

Recent reports provide new data on various areas of the digital asset market. In one report, a survey published by a cryptocurrency trading platform found “a significant rise in crypto ownership among young women.” Among other things, the survey found that cryptocurrency ownership “increased from 29% in the third quarter of 2022 to 34% for women aged 18-34 in the last quarter.” More generally, the survey found “investors owning crypto rose from 36% to 39% on a quarter-on-quarter basis.” The survey also found that “when asked what impact the bear market has had on their mindset, two- thirds [of respondents] (67%) are either positive or ambivalent, while the remainder (33%) say their investing appetite has been dented to some extent.”

In another recent report, a global cryptocurrency market data provider addressed the crash of Terra USD (UST) and the resulting drop in market share of algorithmic stablecoins. According to the report, “[The market capitalisation of algorithmic stablecoin is currently at $2.33bn, recording a market share of 1.71% from an all-time high of 12.4% in April 2022 with TerraUSD accounting for 79.8% of the market share.” Among other things, the report found that currently, “Tether, USD Coin, and Binance USD remain the leaders in the stablecoin market, with USDT accounting for 48.7% of the market share[.]”

A third report by DappRadar addressed “Dapp Adoption” in 2022. Among other things, the report provided the following key takeaways: (1) BNB Chain led all blockchains for dapps integrated into DappRadar in 2022 with 2,163, decreasing by 7 percent from the previous year, and Polygon and Ethereum followed; (2) a new trend in developer activity might be emerging as modular blockchains, including Polkadot and Cosmos, saw their developer activity grow by 16 percent and 131.7 percent, respectively, year-over-year; (3) Ethereum surpassed 21.2 million NFT sales in 2022, processing the most trades across all networks, while Wax and Flow followed with 14.5 and 11.9 million sales, respectively; (4) Ethereum stands out as the network with the highest intrinsic NFT value, surpassing $300 per NFT transaction, while Polygon and Solana come next with average NFT transactions of $104 and $88; and (5) Optimism and Arbitrum processed 18 million and 6 million transactions, respectively, while IMX surpassed 9.7 million NFT trades.

For more information, please refer to the following links:

RFI Seeks Comment on Digital Assets Research and Development Agenda

By Veronica Reynolds

This week, in a furtherance of President Joe Biden’s National Digital Assets Research and Development Agenda (Agenda), the White House Office of Science and Technology Policy issued a request for information (RFI) seeking “public comments to help identify priorities for research and development related to digital assets, including various underlying technologies such as blockchain, distributed ledgers, decentralized finance, smart contracts, and related issues such as cybersecurity and privacy (e.g., cryptographic foundations and quantum resistance), programmability, and sustainability.” The Agenda is considered one of the results of the President’s March 2022 Executive Order on Ensuring Responsible Development of Digital Assets, and its goal is to prioritize research that explores both the risks and benefits associated with the burgeoning asset class.

The RFI seeks information “on specific R&D opportunities related to the following topics”: (1) goals, sectors or applications that could be improved with digital assets and related technologies; (2) goals, sectors or applications where digital assets introduce risks or harms; (3) federal research opportunities that could be introduced or modified to support efforts to mitigate risks from digital assets; (4) R&D that should be prioritized for digital assets; (5) opportunities to advance responsible innovation in the broader digital assets ecosystem; and (6) other information that should inform the R&D Agenda. Comments are due on or before 5 p.m. ET on March 3.

For more information, please refer to the following links:

Bank for International Settlements Releases Paper on DeFi Technology

By Lauren Bass

This week, the Bank for International Settlements (BIS) released a working paper titled The Technology of Decentralized Finance, which, according to a press release, aims to “provide a comprehensive overview and classification” of decentralized finance (DeFi). The paper dissects the technology upon which the DeFi system is built, explains the architectural structure of the DeFi system, and explores the functionalities of its various protocols, including the deployment of smart contracts to offer services such as trading, lending, investing and exchanging of crypto assets. The paper further discusses the applicability of DeFi within the traditional financial industry and potential sources of systemic risk, and proposes an agenda for additional research on the topic.

For more information, please refer to the following links:

NY DFS Issues Crypto Custody Guidance; Digital Assets on CFTC Meeting Agenda

By Christopher Lamb

This week, the New York Department of Financial Services (NY DFS) issued an industry letter titled Guidance on Custodial Structures for Consumer Protection in the Event of Insolvency (Guidance). The purpose of the Guidance is to “emphasize sound custody and disclosure practices to better protect customers in the event of an insolvency or similar proceeding.” The Guidance notes that as “stewards of others’ assets, virtual currency entities (‘VCEs’) that act as custodians (‘VCE Custodians’) play an important role in the financial system” and a robust framework that protects consumers is necessary. The Guidance focuses on four important consumer protection goals, including (1) segregation of and separate accounting for customer virtual currency, (2) VCE Custodians’ limited interest in and use of customer virtual currency; (3) sub-custody agreements, and (4) customer disclosure.

In a recent press release, the Commodity Futures Trading Commission (CFTC) announced that the Global Markets Advisory Committee (GMAC) will hold a public meeting on Feb. 13 from 9:30 a.m. to 3 p.m. at the CFTC’s Washington, D.C., headquarters to discuss GMAC’s structure, formation of subcommittees, and topics related to global market structure and digital asset markets. According to a blog post by the Stellar Foundation, with the inclusion of digital asset markets in GMAC’s discussion, the Stellar Development Foundation will be included as one of the only “crypto-focused organizations – and the only one representing blockchain.” The meeting is open to the public with first-come first-served seating and will be broadcast for remote viewing. Members of the public can submit written statements in connection with the meeting by Feb. 20. Comments can be submitted at cftc.gov.

For more information, please refer to the following links:

SEC Commissioner Offers “Lessons” and “Guiding Principles” for Digital Assets

By Robert A. Musiala Jr.

On Jan. 20, U.S. Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce delivered a speech addressing digital assets. In her speech, Commissioner Peirce offered the following six “lessons for the industry”: (1) “[P]eople who believe in crypto’s future … should not wait for regulators” to fix the industry’s problems and “can act themselves to root out harmful practices”; (2) “[D]igital assets need to trade … but trading markets are not the ultimate point” and “at its core, crypto is about solving a trust problem”; (3) “[E]ach crypto asset, blockchain, and project needs to be assessed on its own merits; (4) “[P]roblems in the design of a protocol or at a centralized infrastructure provider can have sweeping, disastrous consequences”; (5) “[A]lthough crypto enables reduced reliance on centralized intermediaries, as long as companies are actively involved in crypto, people should take the same precautions as they would when dealing with any other company”; and (6) “[M]any other lessons from traditional finance are equally applicable in crypto,” including risks related to risk/return correlation, counterparty exposure, collateral, leverage, conflicts of interest, buying motives, trade controls and market concentration.

Among other things, Commissioner Peirce noted that “the SEC should conduct some form of notice and comment process to resolve the thorniest crypto-related policy issues.” According to Commissioner Peirce, “[d]isclosure under current regulations … is not well-suited to elicit the most useful and appropriate information for token purchasers” and “a more tailored crypto disclosure regime would be good for investors and crypto companies.” Commissioner Peirce added that “decisions about allocating regulatory authority belong to Congress, but regulators can lay the groundwork for Congress to craft a workable approach.” According to Commissioner Peirce, “[t]he ideal framework would reduce regulatory anxiety for would-be innovators and increase the difficulty for would-be fraudsters.”

Commissioner Peirce offered the following five “guiding principles” for developing a digital assets framework: (1) “[T]ake a nuanced approach that recognizes differences across blockchains, distinctions between Layer 1 blockchains and the chains and applications built on top of them, and differences among crypto assets”; (2) “[B]e extremely careful when deciding what areas of crypto to regulate on a federal level”; (3) “[B]e clear that government regulation is not the same as government endorsement”; (4) “[S]caring traditional entities away from crypto is neither realistic nor protective of investors”; and (5) “[E]ven though driving regulated entities away from crypto is not wise, preserving the core of crypto—decentralization—is so important” and “[d]ecentralization can help support the resilience of the financial system.”

For more information, please refer to the following links:

SEC Brings Charges For Crypto Market Manipulation and Unregistered Securities

By Teresa Goody Guillén

The U.S. Securities and Exchange Commission (SEC) recently charged Avraham Eisenberg with securities fraud and market manipulation for an alleged scheme of manipulating the price of MNGO tokens. According to an SEC press release, Eisenberg sold futures of MNGO tokens and used a separate account to buy those same futures, thereby artificially increasing the price. He then used this position of increased value of his MNGO futures to borrow and withdraw approximately $116 million worth of crypto assets from the Mango Markets crypto asset trading platform. Eisenberg is also facing parallel criminal and civil charges brought by the U.S. Department of Justice and the Commodity Futures Trading Commission.

The SEC also recently charged Nexo Capital Inc. for failing to register the offer and sale of its retail crypto asset lending product, the Earn Interest Product (EIP), which the SEC alleges is a security. According to the SEC’s order, Nexo offered EIP, which allowed investors to tender their crypto assets to Nexo in exchange for Nexo’s agreement to pay interest. The order further alleges that Nexo exercised its discretion to use investors’ crypto assets in a variety of ways to generate income for its business and to pay interest to investors. Nexo settled the SEC’s charges without admitting or denying wrongdoing and agreed to pay a $22.5 million penalty and not conduct any unregistered offer and sale of EIP to U.S. investors. Nexo also reportedly agreed to pay an additional $22.5 million in fines to settle similar charges by state regulators.

For more information, please refer to the following links:

FBI Provides Details on Harmony Bridge Hack; Bitzlato Management Arrested

By Joanna F. Wasick

On Monday, the U.S. Federal Bureau of Investigation (FBI) issued a statement confirming that the Lazarus Group, cyber criminals associated with North Korea (officially, the Democratic People’s Republic of Korea (DPRK)), was responsible for the June 2022 attack on Harmony’s Horizon Bridge, a service enabling crypto assets to be traded between the Harmony blockchain and other blockchains, which was drained of $100 million in ether (ETH), tether (USDT) and wrapped bitcoin. The FBI statement noted that the hackers relied on a malware campaign known as “TraderTraitor” in the attack. The statement further details that two weeks ago, Railgun, a privacy protocol, was used to launder more than $60 million in ETH stolen during last year’s theft. A portion of it was sent to other service providers and converted to bitcoin. Some of the funds were frozen, and others were moved to addresses identified in the FBI’s statement. The FBI also stated that it will “continue to identify and disrupt North Korea’s theft and laundering of virtual currency, which is used to support North Korea’s ballistic missile and Weapons of Mass Destruction programs.”

This week, the European Union Agency for Law Enforcement Cooperation (Europol) announced that European law enforcement authorities had detained four senior managers of Bitzlato, the Hong Kong-registered crypto exchange that U.S. authorities recently identified as a “primary money laundering concern” in connection with Russian illicit finance. U.S. authorities had also announced the arrest in Miami of Bitzlato’s co-founder and majority owner, Anatoly Legkodymov, a Russian national residing in China, believed to be Bitzlato’s main administrator. According to the Europol announcement, those involved in the European arrests include Bitzlato’s CEO, financial director and marketing director, who were arrested in Spain, and another individual who was arrested in Cyprus. 

For more information, please refer to the following links:

US Crypto Exchange Consents to $100M DFS Settlement for AML Compliance Failures

On January 4, 2023, the New York State Department of Financial Services (“DFS”) announced that Coinbase, Inc., a major U.S. cryptocurrency exchange, will pay a $50 million penalty and invest an additional $50 million in its compliance function over the next two years to remediate significant violations of the New York Banking Law and the DFS virtual currency, money transmitter, transaction monitoring, and cybersecurity regulations. DFS published a Consent Order describing the alleged violations of the New York Banking Law and DFS regulations, as well as the terms of the settlement. This is the second consent order published by DFS involving a cryptocurrency market actor.

Read more.

Paper Touts DeFi FX Benefits; New Stablecoin Launched; DAO Toolkit Published; BIS Addresses Crypto Risk; SEC, FinCEN, and DOJ Bring Enforcement Actions

In this issue:
Paper Explores Benefits of DeFi for FX; Australian Bank Launches Stablecoin
World Economic Forum Publishes DAO Toolkit; ETH Staking Continues to Grow
New BIS Bulletin and Thailand SEC Regulations Address Digital Asset Risks
SEC Charges U.S. Crypto Lender and Exchange with Securities Law Violations
FinCEN and DOJ Bring Parallel Actions Against Foreign-Based Crypto Exchange
Court Orders $17M in Restitution Be Paid to Crypto Fraud Victims

Paper Explores Benefits of DeFi for FX; Australian Bank Launches Stablecoin

By Teresa Goody Guillén

A recent industry paper found that DeFi can reduce costs and enhance transparency in foreign exchange (FX) markets. The paper concludes that on-chain FX, along with improved fiat-to-stablecoin conversion and improved user-friendly interfaces, enables faster and less costly transfers. The paper reportedly estimated that DeFi rails could reduce international money transfer costs by up to 80 percent. According to the paper, additional benefits of on-chain FX exchange and settlement include (1) eliminating settlement risk when one side of the transaction settles without the other; (2) reducing risks of benchmark rigging and market manipulation; (3) facilitating liquidity and market depth, and reducing risk of flash crashes; and (4) improving payments with nearly instantaneous and low-cost cross-border settlements.

In other news, this week the National Australia Bank announced that it will launch a stablecoin to be backed by the Australian dollar on the Ethereum and Algorand blockchain networks. This is reportedly the country’s second major financial institution to launch a stablecoin, after Australia and New Zealand Bank minted A$DC last year. The stablecoin is expected to allow customers to settle transactions in real time on the blockchain using Australian dollars. Australia reportedly pledged to “modernize the country’s financial system and update its regulatory framework to crypto and other innovations” under Prime Minister Anthony Albanese, and the country’s central bank is anticipating its pilot central bank digital currency (CBDC) project to be completed by mid-2023. 

For more information, please refer to the following links:

World Economic Forum Publishes DAO Toolkit; ETH Staking Continues to Grow

By Christopher Lamb

The World Economic Forum (WEF) recently published a new toolkit for Decentralized Autonomous Organization (DAO) participants with participation from over 100 experts. According to reports, the WEF described the DAO toolkit as “a set of adaptable resources for key stakeholders to help realize the full potential of this emerging form.” The toolkit gives answers to the question “What are DAOs?” with information on DAO operations, governance and more, as well as recommendations for each included. According to the toolkit, it provides “a set of insights and resources for developers and policy-makers”; it states that “DAOs offer a significant new mechanism for managing and allocating capital or other valuable digital assets.” The toolkit also notes that DAOs are an “organizational development the impact of which may be felt across many sectors of business and social activity worldwide.”

According to a recent report, the Ethereum Network has passed a major milestone, with the number of staked ether (ETH) passing 16 million ETH. Network validators stake ETH for a chance to write and authenticate transactions, which grants them “interest” on the amount of ETH the validator has staked. The 16 million staked ETH represents more than 13 percent of the total ETH supply and nearly $22 billion, using an ETH price of $1,375. Over 25 percent of the currently staked ETH comes from a community-driven validator collective. ETH shifted to a proof-of-stake network (from its previous proof-of-work network) four months ago. According to the report, “a larger amount of staked ETH should theoretically make it more difficult for an individual actor to sabotage the Ethereum chain,” but “the bulk of Ethereum’s stake currently belongs to a handful of large actors.”

For more information, please refer to the following links:

New BIS Bulletin and Thailand SEC Regulations Address Digital Asset Risks

By Amos Kim

Last week, the Bank for International Settlements (BIS) published a bulletin addressing the risks associated with cryptocurrency in light of “the recent high-profile failures of FTX and other crypto firms. …” Among other things, the bulletin notes the following key takeaways: (1) recent high-profile failures have reignited the debate on the appropriate policy response to address crypto risks, including through regulation; (2) the “shadow functions” enabled by crypto markets share many of the vulnerabilities of traditional finance, and these risks are exacerbated by specific features of crypto; (3) authorities may consider different – not mutually exclusive – lines of action to tackle crypto risks, including containment, regulation or an outright ban; and (4) central banks and public authorities could work to make “TradFi” more attractive, including through innovation with central bank digital currencies (CBDCs).

In other news, the Securities and Exchange Commission (SEC) of Thailand recently issued new regulations requiring digital asset businesses that provide custodial services of clients’ digital assets “to establish a digital wallet management system to accommodate efficient custody of digital assets and keys and ensure safety of clients’ assets.” These new regulations affect the policy and guidelines surrounding digital wallets and include requirements for a “contingency plan in case of occurrence of any event that may affect the management of digital wallets and keys.” The new regulations took effect on January 16, 2023.

For more information, please refer to the following links:

SEC Charges U.S. Crypto Lender and Exchange with Securities Law Violations

By Keith R. Murphy

The U.S. Securities and Exchange Commission (SEC) recently charged a major U.S. digital asset lender (Lender), and a major U.S. digital asset exchange and custodian (Exchange), with the unregistered offer and sale of securities to retail investors through a crypto-asset lending program offered by the Exchange. According to a press release from the SEC, the companies purportedly raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors, with customers of the Exchange being offered the opportunity to loan their crypto assets to the Lender in exchange for the Lender’s promise to pay interest. According to the SEC press release, the Lender “exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest.” The press release notes that withdrawals by investors from the program have been halted since November 2022 due to lack of liquidity and further notes that as of November 2022, the Lender “held approximately $900 million in investor assets from 340,000 … investors.”

The interest-based program, which began in February 2021, had the Exchange acting as agent for the Lender in order to facilitate transactions, and the Exchange purportedly deducted an agent fee from returns paid by the Lender to the customers, according to the SEC press release. Regarding the charges, SEC Chair Gary Gensler stated, “We allege that [the defendant firms] offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” and that the charges “build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.” Relief sought in the complaint includes permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.

For more information, please refer to the following links:

FinCEN and DOJ Bring Parallel Actions Against Foreign-Based Crypto Exchange

By Joanna F. Wasick

On Wednesday, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced that it had issued an order against Bitzlato Limited, a Hong Kong-registered cryptocurrency exchange, identifying it as a “primary money laundering concern” in connection with Russian illicit finance. Specifically, the order states that Bitzlato laundered proceeds from ransomware attacks, facilitated darknet markets and scams, and engaged in significant volume of Russian illicit finance transactions. “Bitzlato poses a global threat by allowing Russian cybercriminals and ransomware actors to launder the proceeds of their theft. … We will continue to leverage the full range of our authorities to prohibit these institutions from gaining access to the U.S. financial system and using it to support Russian illicit finance,” said the FinCEN Acting Director. In the announcement, FinCEN also noted that the order was the first order issued pursuant to section 9714(a) of the Combating Russian Money Laundering Act, and that it highlights the serious threat that business operations that support Russian illicit finance pose to U.S. security and the U.S. financial sector. According to the FinCEN announcement, “As described in the order, effective February 1, 2023, covered financial institutions are prohibited from engaging in a transmittal of funds from or to Bitzlato, or from or to any account or CVC address administered by or on behalf of Bitzlato.”

On the same day, the U.S. Department of Justice (DOJ) published a press release announcing the unsealing of a complaint charging Bitzlato’s founder and majority shareholder in connection with Bitzlato’s illicit activity. According to the press release, Bitzlato’s founder was arrested in Miami. Concurrent with his arrest, French authorities, working with Europol and partners in Spain, Portugal and Cyprus, dismantled Bitzlato’s digital infrastructure and also took enforcement actions. Among other things, the DOJ press release notes that Bitzlato “marketed itself as requiring minimal identification from its users”; “received more than $15 million in ransomware proceeds”; and had as its largest counterparty “Hydra Market … the largest and longest running darknet market in the world.” According to the DOJ press release, “although Bitzlato claimed not to accept users from the United States, it did substantial business with U.S.-based customers, and its customer service representatives repeatedly advised users that they could transfer funds from U.S. financial institutions.”

For more information, please refer to the following links:

Court Orders $17M in Restitution Be Paid to Crypto Fraud Victims

By Robert A. Musiala Jr.

According to a recent press release from the U.S. Department of Justice (DOJ), a federal district court has “ordered … that over $17 million in restitution be distributed to approximately 800 victims from over 40 different countries due to their investment losses in BitConnect, a massive cryptocurrency investment scheme, which defrauded thousands of investors worldwide.” The founder of BitConnect was previously indicted for his role in the multimillion-dollar fraud, and its top U.S.-based promoter has pleaded guilty to conspiracy to commit wire fraud.

In a final notable enforcement action, the European Union Agency for Criminal Justice Cooperation (Eurojust) recently published a press release announcing a coordinated action with Europol that “has led to the dismantling of a cryptocurrency fraud network operating from Bulgaria, Cyprus and Serbia.” According to the press release, “[t]he network operated professionally to set up call centres, which defrauded numerous victims in Germany, Switzerland, Austria, Australia and Canada for at least tens of millions of euros.” The press release notes that as part of the action, enforcement agencies seized “over 150 computers, various electronic equipment and data back-ups, three cars, two luxury apartments and one million US dollars in cryptocurrencies and 50 000 EUR in cash.”

For more information, please refer to the following links:

Data Published on Crypto Exchange Volume, NFT Royalties, Crypto Crime; Crypto Adoption Continues; DOJ and CFTC Bring Multiple Enforcement Actions

In this issue:
New Data Published on 2022 Crypto Exchange Trading Volume, NFT Royalties
Blockchain Development Firm Integrates Avalanche with Major Cloud Provider
Governments of El Salvador and Nigeria Take Steps Toward Crypto Adoption
DOJ Enforcement: NFT Rug Pull, Insider Trading, Crypto Fraud and Theft
CFTC Action Alleges Digital Asset Market Manipulation on DeFi Exchange
New Data Released on Crypto Crime Threats; Wallet Provider Warns of New Scam

New Data Published on 2022 Crypto Exchange Trading Volume, NFT Royalties

By Amos Kim

According to recent reports, Binance, currently the world’s largest cryptocurrency exchange by trading volume, controlled 92 percent of global bitcoin trading volume at the end of 2022, as compared to 45 percent at the beginning of last year. The increase in bitcoin trading volume on Binance is reportedly attributable to its move to eliminate trading fees in the beginning of the summer and the collapse of the cryptocurrency exchange FTX.

According to reports, cryptocurrency newsletter MilkRoadDaily recently shared data on the total royalty income earned by various non-fungible token (NFT) projects. Yuga Labs had total royalty income of $107.8 million from three non-fungible token (NFT) projects, including $49.9 million from its Otherdeed for Otherside project. Yuga Labs’ first NFT collection, BAYC, reportedly earned $32.3 million, while its MAYC collection earned $25.6 million. Other NFT collections that reportedly topped the list of royalty income earned include Azuki ($41.5M), CloneX ($27.7M), Moonbirds ($27M), Doodles ($17.1M), RTFKT MNLTH ($16.5 million), NFT Worlds ($12.8 million), and Beanz ($11.2 million).

In other news, a major U.S. financial services firm recently announced an accelerator program that “will harness Web3 technologies on the Polygon blockchain, forging new territory by connecting artists with mentors and fans in an exclusive development program.” According to a press release, the program will begin in the spring of 2023 by preparing five artists to “build (and own) their brand through Web3 experiences like minting NFTs, representing themselves in virtual worlds and establishing an engaged community.” The announcement was made alongside the blockchain application development company Polygon Studios.

For more information, please refer to the following links:

Blockchain Development Firm Integrates Avalanche with Major Cloud Provider

By Robert A. Musiala Jr.

According to a recent press release, blockchain development firm Ava Labs has launched “new infrastructure features” on a major cloud provider, “including validator tools for compliance use cases.” The press release notes that the cloud provider “supports Avalanche’s infrastructure and dApp ecosystem, including one-click node deployment” and “Avalanche node operators can run in … GovCloud for FedRAMP compliance use cases — a vital capability and a pre-requisite for enterprises and governments.” The press release further notes that the cooperation between Ava Labs and the cloud provider “makes it easier for more people to launch and manage nodes on Avalanche, giving the network even more strength and flexibility for developers.”

For more information, please refer to the following links:

Governments of El Salvador and Nigeria Take Steps Toward Crypto Adoption

By Joanna F. Wasick

According to reports, this week El Salvador, which became the first country to use bitcoin as legal tender in 2021, passed legislation providing the framework for a bitcoin-backed bond called the “Volcano Bond” that reportedly will be used to pay down sovereign debt, create bitcoin mining infrastructure, and fund the construction of a proposed “Bitcoin City,” a renewable crypto-mining hub powered by hydrothermal energy from the nearby Conchugua volcano. The bonds have been targeted to raise $1 billion for the country, with half of it going into building the special economic zone. The bill also includes a legal framework for non-bitcoin digital assets and creates a new regulatory agency that will be in charge of applying securities laws and providing protection from bad actors. 

The “Nigeria Payments System Vision 2025” report was recently published by the Central Bank of Nigeria (CBN). In it, the CBN declares Nigeria’s readiness to accept private stablecoins, says that stablecoins are likely to become a successful payment mechanism in the country, and considers the development of a regulatory framework for stablecoin use. The report also addresses the regulation of initial coin offerings (ICOs) and, while acknowledging the current absence of ICO regulation and related investor losses, notes the potential for responsible ICO fundraising, peer-to-peer lending and crowdfunding.

For more information, please refer to the following links:

DOJ Enforcement: NFT Rug Pull, Insider Trading, Crypto Fraud and Theft

By Teresa Goody Guillén

The U.S. Department of Justice (DOJ) published four recent press releases related to cryptocurrency enforcement actions. According to one of the press releases, the developer of “Mutant Ape Planet” NFTs, who is a French national residing in the United Arab Emirates, has been charged with a $2.9 million fraud scheme. The press release alleges that the developer executed a “rug pull,” which is similar to a “pump and dump” scheme in which the developer made false representations of the benefits of the NFTs and, once all the NFTs were bought, stopped communicating with purchasers, withdrew the purchasers’ funds from the company’s cryptocurrency wallets, and used the funds for his personal use. 

A second DOJ press release announced conspiracy, wire fraud, and money laundering charges against additional cryptocurrency Ponzi scheme promoters related to U.S. v. Francisley da Silva et al., 22 Cr. 622 (AT) (SDNY). The first promoter is alleged to have tried to conceal the fraud by laundering defrauded funds through shell companies and making large personal purchases. The second promoter is alleged to have presented himself as the company’s CEO but was in reality a paid actor. The second promoter is a Spanish national and the U.S. government is seeking his extradition. 

A third DOJ press release announced that Nikhil Wahi has been sentenced in the first criminal action brought alleging a cryptocurrency insider trading scheme. Wahi was sentenced to 10 months in prison and ordered to pay $892,500 in forfeiture after he pleaded guilty to one count of conspiracy to commit wire fraud. Wahi allegedly obtained from his brother, who was an employee of Coinbase, confidential information regarding which assets would be listed in advance of the listings, used the information to purchase cryptocurrency that was soon to be listed on the exchange, and at times sold the crypto after listing for a profit.

A fourth DOJ press release announced that Gary Harmon pleaded guilty to wire fraud and obstruction of justice for unlawfully taking over 712 bitcoin that had been seized by law enforcement pending criminal forfeiture. The press release states that Harmon knew the government was trying to recover bitcoin stored on his brother’s device for forfeiture and that he used his brother’s credentials to recreate the bitcoin wallets that were stored on the device and transferred approximately $4.8 million worth of bitcoin to his wallets and through online mixers.

For more information, please refer to the following links:

CFTC Action Alleges Digital Asset Market Manipulation on DeFi Exchange

By Christopher Lamb

In a recent press release, the Commodity Futures Trading Commission (CFTC) announced a civil enforcement action charging an individual with a fraudulent and manipulative scheme to unlawfully obtain over $110 million in digital assets from a decentralized digital asset (DeFi) exchange, marking the first enforcement action against an exchange of this type. The CFTC alleges that the individual used “oracle manipulation” to misappropriate over $110 million in digital assets by creating two anonymous accounts on the DeFi exchange to artificially pump the price of the DeFi exchange’s underlying token, MNGO. According to the press release, the individual rapidly purchased substantial quantities of MNGO on three separate exchanges that were “oracles” (oracles provide decentralized exchanges with a data feed to determine the value of assets based off a larger input of data). As a result, the price of MNGO jumped thirteen times its previous value for a short period of time, resulting in an artificial inflation of value, at which time the individual then sold MNGO. The individual has also been charged by the U.S. Department of Justice.

According to a recent report, a novel method of service has been used by the court-appointed liquidators in a major cryptocurrency hedge fund case; they tweeted subpoenas to the founders “requesting that they produce documents and information for the recovery of assets as part of bankruptcy proceedings in New York and the British Virgin Islands.” Lack of cooperation from the founders has made it difficult for the court to engage them in the bankruptcy proceedings, but the report notes that they “frequently post on Twitter and occasionally make media appearances.” The U.S. Bankruptcy Judge approved the service of the subpoenas through email and a redacted version on Twitter given the lack of cooperation in the case.

For more information, please refer to the following links:

New Data Released on Crypto Crime Threats; Wallet Provider Warns of New Scam

By Robert A. Musiala Jr.

Blockchain analytics firm Chainalysis published two recent blog posts providing details on cryptocurrency crime trends. According to one of the blog posts, in 2022, “illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.1 billion” with 44 percent of illicit transaction volume in 2022 coming from activity associated with sanctioned entities. Among other things, the blog post notes the following: “[t]ransaction volumes fell across all of the other, more conventional categories of cryptocurrency-related crime, with the exception of stolen funds, which rose 7% year-over-year”; “[o]verall, the share of all cryptocurrency activity associated with illicit activity has risen for the first time since 2019, from 0.12% in 2021 to 0.24% in 2022”; and “illicit activity in cryptocurrency remains a small share of overall volume at less than 1%.”

A second Chainalysis blog post discusses “how the U.S. government’s crypto-related sanctions strategy has evolved over time, examine[s] the types of entities that it has sanctioned so far, and analyze[s] the impact of those sanctions on the entities themselves and the wider crypto crime ecosystem.” Among other things, the blog post provides a table that displays “the individuals and entities with cryptocurrency nexuses sanctioned in the U.S. in 2022, along with the reason OFAC sanctioned them.”

According to recent reports, the provider of MetaMask, a popular Ethereum self-custodial wallet provider, recently issued a warning to MetaMask users of an “‘address poisoning scam,’ where attackers ‘poison’ transaction histories by sending users tokens worth $0 to their wallets.” The scammers reportedly use wallet addresses that match the first and last characters of the victim’s wallet address to lure victims into sending cryptocurrencies to the wrong “copycat” address. The scam apparently targets MetaMask users who have gotten into the habit of copying their wallet address from their transaction history. MetaMask users are reportedly cautioned to check every single character of wallet addresses before initiating transactions.

For more information, please refer to the following links:

Crypto Products Launch; NFTs Allowed for Political Fundraising; Bank Regulators Address Crypto Risk; DOJ/SEC Target Crypto Fraud; Scams Continue

In this issue:
Crypto Apps Launch New Features, Custody Firm Achieves CCSS Certificate
NFTs Permitted for Political Fund Raising; Analysis Details NFT Wash Trading
US and International Regulators Address Crypto Risk Factors for Banks
Treasury Dept. and IRS Issue Transitional Digital Assets Guidance for Brokers
DOJ and SEC Actions Target Crypto Fraud and Unregistered Securities Offerings
Reports Provide Data on 2022 Crypto Scams; QuadrigaCX BTC Is on the Move

Crypto Apps Launch New Features, Custody Firm Achieves CCSS Certificate

By Christopher Lamb

According to recent reports, Uniswap V3 was the most used Ethereum contract in 2022, seeing over 15.5 million transactions throughout 2022 and using over 2.8 million in gas (gas fees are paid in Ethereum’s native currency, ether (ETH), and are denoted in gwei, which is a denomination of ETH with each gwei equal to 0.000000001 ETH). Reports also note that Uniswap recently enabled functionality in its Uniswap Web App that allows users to buy cryptocurrency using traditional credit cards, debit cards and bank transfers.

A major U.S. financial services firm recently published a paper that proposes a new system known as “account abstraction” that would use smart contracts to allow automatic payments to be programmed for users on the Ethereum layer 2 network StarkNet. The proposal aims to combine user accounts and smart contracts into a singular account on Ethereum, which will allow the creation of “delegable accounts” that can establish automatic programmable payments that pull from a user’s self-custodial wallet, with functionality similar to traditional auto-payments used in online banking applications.

In other news, a global crypto custody tech provider has received the first “level three” Cryptocurrency Security Standard (CCSS) certificate, the first such certificate awarded since the CCSS’s inception in 2014. The level three certification is the highest under the CCSS and has reportedly eluded startups in the space due to the stringent requirements and practices necessary for qualification.

For more information, please refer to the following links:

NFTs Permitted for Political Fund Raising; Analysis Details NFT Wash Trading

By Keith R. Murphy

The U.S. Federal Election Commission recently issued an advisory opinion allowing the use of non-fungible tokens (NFTs) for political fundraising efforts by DataVault Holdings, according to a recent report. Under the opinion, the company is permitted to provide NFTs to political campaign contributors without running afoul of rules relating to corporate contributions. As stated in the advisory opinion, “Because DataVault proposes to sell the NFTs to political committees in the ordinary course of business, at the usual and normal charge, and under the same terms and conditions as its non-political clients, the Commission concludes that the proposals would not result in prohibited in-kind contributions and are, therefore, permissible.” The advisory opinion also provides that any person involved in “any specific transaction or activity which is indistinguishable in all its material aspects from the transaction or activity with respect to which this advisory opinion is rendered” is also permitted to rely on the opinion.

According to a recent analysis, more than $30 billion of historic NFT trading volume on Ethereum is the result of “wash trades,” where the buyer and seller are either the same or are colluding together to raise prices. The analysis suggests that 58 percent of NFT trading on Ethereum during 2022 was wash trading, based on reports discussing the analysis. One of the reports notes that wash trading is illegal in the United States, and that while the amounts involved seem significant, overall they represent a small fraction of the total number of trades that have occurred on Ethereum. 

For more information, please refer to the following links:

U.S. and International Regulators Address Crypto Risk Factors for Banks

By Joanna F. Wasick

Earlier this week, the board of governors of the U.S. central bank system and other U.S. federal banking agencies (collectively, the Agencies) issued a joint statement identifying the following “crypto-asset risks” that banking organizations should note: (1) risk of fraud and scams; (2) legal uncertainties related to custody practices, redemptions and ownership rights; (3) inaccurate or misleading representations and disclosures by crypto-asset companies; (4) significant volatility in crypto-asset markets; (5) susceptibility of stablecoins to run risk; (6) contagion risk in the crypto-asset sector resulting from interconnections among certain participants, including through opaque lending, investing, funding, service and operational arrangements; (7) crypto risk management and governance practices that belie a lack of maturity and robustness; and (8) heightened risks associated with open, public and/or decentralized networks or similar systems. The Agencies also described an overall safety and soundness concern with business models that are concentrated in crypto-related activities or have concentrated exposures to the crypto-asset sector.

The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (which sets global standards for bank regulation), recently met to endorse standards for the prudential treatment of banks’ exposure to crypto-assets. In particular, the standards state that cryptocurrencies without backing and stablecoins with ineffective stabilization mechanisms will be subject to strict regulatory measures. Specifically, banks are advised to limit exposure to these assets, such that exposure does not exceed 2 percent and should generally be lower than 1 percent. GHOS members have agreed to implement the standards by Jan. 1, 2025.

For more information, please refer to the following links:

Treasury Dept. and IRS Issue Transitional Digital Assets Guidance for Brokers

By Robert A. Musiala Jr.

According to a recent press release by the U.S. Internal Revenue Service (IRS), “The Treasury Department and Internal Revenue Service announced … that brokers are not required to report additional information with respect to dispositions of digital assets until final regulations are issued under sections 6045 and 6045A.” The press release notes that this guidance is “transitional” and “applies only to information returns filed or furnished by brokers. In contrast, taxpayers are still required to report any income they receive from transactions involving digital assets.” The transitional guidance relates to the Infrastructure Investment and Jobs Act (Infrastructure Act), which was enacted in 2021 and amended provisions in sections 6045 and 6045A of the U.S. Internal Revenue Code to clarify and expand the rules regarding the reporting of information on digital assets by brokers. Further details on the transitional guidance can be found in Announcement 2023-2.

For more information, please refer to the following links:

DOJ and SEC Actions Target Crypto Fraud and Unregistered Securities Offerings

By Amos Kim

The U.S. Department of Justice (DOJ) recently announced the guilty plea of a co-founder of OneCoin, creator of the fraudulent cryptocurrency by the same name that, according to a DOJ press release, was “in fact a fraudulent pyramid scheme.” According to the DOJ allegations, the two co-founders of OneCoin “conceived of and built the OneCoin business fully intending to use it to defraud investors.” Through this scheme, “between the fourth quarter of 2014 and the fourth quarter of 2016 alone, OneCoin … earned ‘profits’ of 2.735 billion Euro.” The OneCoin co-founder pled guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering, where both counts carry a maximum potential sentence of 20 years in prison. The other co-founder of OneCoin is still at large, and the Federal Bureau of Investigation is offering a reward for information leading to an arrest.

The U.S. Securities and Exchange Commission (SEC) recently announced charges against the co-founders of Thor Technologies Inc. (Thor), a provider of identity management software, for “conducting an unregistered offering of securities through an initial coin offering.” According to an SEC press release, the defendants “offered and sold crypto assets designated as ‘Thor Tokens’ to the general public for the purpose of funding Thor’s business, which was to develop a software platform for ‘gig’ economy workers and companies.” According to the press release, the defendants “marketed the Thor Tokens as an investment opportunity by promoting the potential increase in value of the tokens and claiming that the tokens would be made available on crypto asset trading platforms.”

In another recent announcement, the SEC charged five individuals and three entities “for their involvement in a fraudulent investment scheme named CoinDeal that raised more than $45 million from sales of unregistered securities to tens of thousands of investors worldwide.” According to an SEC press release, the five individuals falsely claimed “extravagant returns by investing in a blockchain technology called CoinDeal” but “no sale of CoinDeal ever occurred and no distributions were made to CoinDeal investors” and “the defendants collectively misappropriated millions of dollars of investor funds for personal use.” The SEC complaint seeks, among other things, disgorgement plus prejudgment interest, penalties, permanent injunctions against all defendants, and officer and director bars against certain defendants.

For more information, please refer to the following links:

Reports Provide Data on 2022 Crypto Scams; QuadrigaCX BTC Is on the Move

By Lauren Bass

According to a report recently released by blockchain risk monitoring firm Solidus Labs, crypto token scams rose 41 percent in 2022 – with an average of 350 crypto scam tokens deployed per day. One of the most popular types of scams was the “honeypot scam,” in which purchasers are lured into buying a token and then prevented from reselling it due to the smart contract programming. Per the report, the Squid Game token was the most prolific honeypot scam of 2022, bilking purchasers out of approximately $3.3 million in mere days.

In similar news, according to a study released by the U.S. National Bureau of Economic Research (NBER), 70 percent-80 percent of unregulated crypto exchange transactions involve “wash trading.” Wash trading – also referred to as round-trip trading – is an illegal practice in which investors simultaneously buy and sell the same financial asset to manipulate the market, which creates distortion in price, volume and volatility of the asset. The report further suggests that such manipulated transactions were used to inflate an unregulated exchange’s rating on sites such as CoinMarketCap and CoinGecko to help lure new users.

According to reports, in mid-December five unhosted wallets tied to the now-defunct crypto exchange QuadrigaCX moved approximately $1.7 million worth of bitcoin. Following the death of Quadriga’s founder and CEO in 2018, the wallets were believed to be inaccessible, as it was reported that he had sole responsibility for the private keys. It remains unknown who is controlling these wallets or if the transfer of funds is related to recovery efforts by the exchange’s estate.

For more information, please refer to the following links:

Podcast: 2022 DSIR Report Deeper Dive: NFTs

The Data Security Incident Response Report features insights and metrics from 1,270+ incidents that members of the firm’s DADM Practice Group helped clients manage in 2021.

This episode takes us deeper into the top NFT-related cybersecurity, phishing, hacking and other risks in 2022.

Questions & Comments: vreynolds@bakerlaw.com

Listen to the full episode.

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Disclosing Cryptocurrency Risks: SEC Comment Letter Puts Companies On Notice

The U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance (CorpFin) recently issued guidance (Guidance), including a “Dear Issuer” Sample Letter (Sample Letter) to assist companies in meeting their statutory disclosure obligations in light of the recent crypto downturn.

Read the full Alert.

Crypto Payment Products and NFT Initiatives Launch; Crypto Market Data Published; DOJ Brings Charges Alleging Cryptocurrency Ponzi Scheme

In this issue:

New Crypto Payment Products Launch, Reports Publish Crypto Market Data

By Robert A. Musiala Jr.

A recent press release announced that MetaMask, the popular Ethereum (ETH) Network crypto wallet provider, will integrate its self-custodial wallets with a major U.S. fintech firm. According to the press release, the integration will allow U.S. MetaMask users to purchase ETH from the fintech firm within the MetaMask wallet application. The press release includes instructions on how to access the new feature using the MetaMask mobile app. In other payments news, according to recent reports, Bermuda-based Jewel Bank has launched a stablecoin, Jewel USD (JUSD), that will be backed 1-to-1 by U.S. dollar reserves. JUSD reportedly will be launched on the Polygon Network.

A major U.S. bank recently published research on the “Dynamics and Demographics of U.S. Household Crypto-Asset Use.” The research reports four key findings: (1) Most crypto users made their first transactions during spikes in crypto-asset prices; (2) Usage of crypto is broader and deeper for men, Asian individuals, and younger individuals with higher incomes; (3) Crypto holdings for most individuals are relatively small, but almost 15 percent of users have net transfers of over one month’s worth of pay to crypto accounts; and (4) Most individuals who transferred money to crypto accounts did so when crypto-asset prices were significantly higher than recent levels, and those with lower incomes likely made purchases at elevated prices relative to higher earners. The research also found that approximately 13 percent of the U.S. population has held cryptocurrency at some point, up from 3 percent prior to 2020.

A major U.S. cryptocurrency exchange recently published its Transparency Report, which seeks to “provide customers with data about requests for their information that [the exchange] receive[s] from government agencies and law enforcement” and “provide some insight into law enforcement and regulatory trends around the world.” Among other things, the report cited: (1) the exchange received 12,320 total law enforcement requests during the reporting period, representing a 66 percent increase from the prior period; (2) 57 percent of requests were from foreign law enforcement agencies; (3) 80 percent of requests were from the U.S., U.K., Germany, and Spain; (4) six countries increased their number of requests by over 100 percent from the prior period; and (5) the overwhelming majority of requests received both globally and in the U.S. were from law enforcement agencies in connection with criminal enforcement matters. Separately, the same exchange announced that its prime broker platform recently completed SOC 1 Type 2 (SOC 1) and SOC 2 Type 2 (SOC 2) examinations.

For more information, please refer to the following links:

NFT Initiatives Launched by Marketplace and Watch Manufacturer

By Christopher Lamb

In a recent press release, Magic Eden, a Solana-based nonfungible token (NFT) marketplace, announced the launch of a tool allowing creators to enforce royalties on their NFT collections “in response to recent royalty enforcement changes in the NFT landscape.” According to the press release, “[t]he Open Creator Protocol (OCP) is an open source tool built on top of Solana’s SPL managed-token standard” that allows royalty enforcement for new NFT collections that opt in. The press release further notes that “Magic Eden will enforce royalties on all collections who adopt the protocol and allow creators to ban marketplaces that have not enforced royalties on their collection.”

In other NFT news, according to recent reports, owners of Bored Ape Yacht Club (BAYC) NFTs are now able to display their NFTs on a one-of-a-kind watch made by a well-known U.S. watch manufacturer. Pre-sales of the watches reportedly went live at an invite-only launch party during Art Basel in Miami and are available until December 31.

In a final notable item, a recent survey of gamers found that respondents were five times more interested in games where they could earn bitcoin versus games where they could earn NFTs. The survey found that while some gamers are against NFT integration into games, gamers overall are more likely to play “Play-to-Earn” (P2E) games where they earn bitcoin than they are to play games where they earn NFTs.

For more information, please refer to the following links:

DOJ Brings Charges Against Founders of Alleged Cryptocurrency Ponzi Scheme

By Robert A. Musiala Jr.

A recent press release from the U.S. Department of Justice announced fraud and money laundering charges “in two separate Indictments against the founders and promoters of two cryptocurrency Ponzi schemes known as IcomTech and Forcount (and later known as Weltsys).” According to the press release, “IcomTech and Forcount were both purported cryptocurrency mining and trading companies that promised to earn their respective victim-investors … profits in exchange for their purchase of purported cryptocurrency-related investment products,” but in reality, “both schemes were using [v]ictim funds to pay other [v]ictims, to further promote the schemes, and to enrich themselves.” According to the press release, “IcomTech and Forcount’s promoters siphoned off, in some cases, hundreds of thousands of dollars in [v]ictim funds, which they withdrew as cash, spent on promotional expenses for the schemes, and used for personal expenditures such as luxury goods and real estate.”

For more information, please refer to the following links:

Crypto Payment Products, DeFi Networks and Price Indices Launch; CBDC Report and NFT Royalty Data Published; FinCEN, FTC Address Crypto Regulation

Blockchain

In this issue:

Payments Firms Launch Crypto Products, New DeFi Price Indices Announced

By Shade Quailey

A U.S. fintech company recently announced the launch of a fiat-to-crypto on-ramp, which facilitates fiat-to-crypto payments using “a customizable widget that developers can embed directly into their DEX, NFT platform, wallet, or dApp.” According to a blog post, the fintech company “handles all the KYC, payments, fraud, and compliance, removing the need to integrate multiple third-party services.” The blog post notes that the fintech company has rolled out support for crypto payouts to 67 countries and has entered into partnerships with several crypto projects, including a blockchain-based music streaming platform, an NFT marketplace and a DeFi wallet provider.  

In related news, Bitcoin payments startup Strike recently announced a partnership that will facilitate payments into Africa. The partnership will reportedly enable users to send instant, low-cost transfers to Africa by taking advantage of the Bitcoin Lightning Network, which is a layer-2 payments network built on the Bitcoin Network. According to reports, the feature currently allows U.S. customers to send money to Ghana, Kenya and Nigeria.

In a final recent development, a major U.S. derivatives marketplace and CF Benchmarks, a cryptocurrency index provider, recently announced that they will introduce three new DeFi reference rates and real-time indices for Aave, Curve and Synthetix on Dec. 19. According to a press release, the new benchmarks, “together with Uniswap launched earlier this year … will capture more than 40% of the total value locked in DeFi protocols on the Ethereum blockchain.” The new benchmarks will reportedly use pricing data from several major cryptocurrency exchanges.

For more information, please refer to the following links:

Private Financial Sector Report Criticizes CBDCs

By Joanna F. Wasick

A report released this week by Team Blockdata outlines significant developments in Central Bank Digital Currencies (CBDCs) and notably illustrates criticism of CBDCs by various stakeholders in the private financial sector. The American Banking Association (ABA), for example, reportedly believes that the issuance of digital currencies should be left to the private sector and that a CBDC issued by the United States Federal Reserve lacks “compelling use cases” and would rewire the banking system. The head of policy for stablecoin issuer Circle Internet Financial is quoted in the report as calling CBDCs a “preposterous idea.” According to the report, other concerns about CBDCs from private stakeholders relate to anonymity and privacy, interoperability, scalability, technological structure, and balance between design and central bank policies.

For more information, please refer to the following links:

NFT Royalties Surpass $1B; Record Label Introduces New Music NFT Platform

By Amos Kim

According to recent reports, NFT Marketplace OpenSea announced that NFT creators have surpassed $1 billion in royalty payments on its platform. These royalties, or “creator fees,” are a percentage of the resale of the artist’s NFT on the OpenSea platform. The royalties earned reportedly “do not include sponsorship revenue, engagement incentives or grants. …” 

In other recent NFT news, according to reports, an American multinational record label has announced a multiyear partnership with Polygon, an Ethereum sidechain network, and LGND Music, an online marketplace for NFT music. Artists signed to this record label will reportedly begin releasing music NFTs through the LGND Polygon-based marketplace, which will offer desktop and mobile applications to access the music NFTs. A report quoted Polygon Studios CEO Ryan Wyatt as stating, “The way that we own and experience music is evolving, by fully embracing decentralized technologies and collectibles.”

For more information, please refer to the following links:

DeFi Price Oracle Launches Staking; App Enables Blockchain-Verified Accounts

By Keith R. Murphy

According to reports, this week Chainlink, a provider of cryptocurrency pricing data and other data for use in smart contracts, introduced staking of its native token, LINK. Within the first 30 minutes selected holders reportedly locked 7 million tokens to secure the oracle network, and within two days the staking pool hit its predefined limit, with approximately $170 million in value staked. The staking pool is reportedly still in beta, and the pool will initially be capped at 25 million LINK, with a plan to scale up to 75 million over time. The protocol is said to be paying stakers 4.75% in annual rewards in the form of LINK tokens. According to a company co-founder, staking allows the company “to scale the system by creating incentives that allow the system to grow.”

In other news, a popular encrypted, cloud-based instant messaging service issued an update on Dec. 6 that reportedly permits users to create accounts utilizing blockchain-based anonymous numbers instead of cell phone numbers. The update also allows users to enable auto-delete timers on messages in new chats, according to a report. The anonymous numbers can reportedly be purchased from a separate, decentralized auction company started by the messaging service’s founder, but that service is not offered to citizens in the United States.

For more information, please refer to the following links:

US Regulators Indicate Enforcement of Digital Assets Is a Priority for 2023

By Veronica Reynolds

Recent remarks by Himamauli Das, Acting Director of the U.S. Financial Crimes Enforcement Network (FinCEN), at this year’s FinCEN Conference indicate that decentralized finance (DeFi) is likely to be a core focus of the agency’s enforcement efforts in 2023. Referencing the Treasury Department’s digital assets action plan, issued under President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, Director Das emphasized that FinCEN is taking “a close look” at its anti-money laundering (AML) and countering the financing of terrorism (CFT) frameworks to the extent they pertain to digital assets in order to determine whether additional regulations or guidance are necessary. In particular, Director Das stated that the agency is “looking carefully at decentralized finance and its potential to reduce or eliminate the role of financial intermediaries that play a critical role” in FinCEN’s AML/CFT efforts. In addition, Director Das’s remarks also emphasized FinCEN’s commitment to closely monitor FinTech and RegTech companies engaged in traditional depository lending activity to assess whether there is a need for additional regulation or guidance to address corresponding AML/CFT issues.

Also this week, according to remarks from a U.S. Federal Trade Commission (FTC) spokesperson, the FTC is investigating several crypto firms for potential misconduct related to deceptive or misleading advertisements. This is on the heels of recent enforcement action taken by the U.S. Securities and Exchange Commission against a reality TV star for touting digital assets on social media without disclosing the compensation received for the promotion. According to a report published by the FTC earlier this year, approximately half of all scams related to digital assets in 2021 originated from social media.

For more information, please refer to the following links:

Crypto Research Published; USPTO Seeks NFT Input; SEC and FINRA Address Digital Assets; OFAC Settles with Exchange; DOJ Enforcement Continues

In this issue:

New Research and Surveys Address CBDCs, Institutional Crypto Investment
NFTs: Government Agencies Seek Comments on NFT IP; New Marketplaces Open
Crypto DEX and Wallet Providers Reveal User Data Collection Practices
SEC Commissioner Addresses Digital Assets and Investor Protection Concerns
SEC Institutes Proceedings Against DAO; FINRA Examines Crypto Advertising
New York State and Canadian Province Set Limits on Crypto Mining
OFAC Settles with US Crypto Exchange Related to Alleged Sanctions Violations
Multiple DOJ Enforcement Actions Target Crypto Fraud and Money Laundering

New Research and Surveys Address CBDCs, Institutional Crypto Investment

By Robert A. Musiala Jr.

Staff from the board of governors of the U.S. central bank recently published a research paper addressing central bank digital currencies (CBDCs). According to a press release, the paper “provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States.” Among other things, the paper discusses the potential for a CBDC to “improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy.” The paper also addresses “noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability.”

The Bank for International Settlements (BIS) recently published two sets of materials addressing CBDCs. The first is an announcement of the launch of Project Tourbillon, a new project by the BIS Innovation Hub’s Swiss Centre that aims to explore “how to improve cyber resiliency, scalability and privacy in a prototype Central Bank Digital Currency (CBDC).” The second is a paper addressing CBDCs in Africa that is based on a survey to central banks and that “analyses the development, motivations and concerns of … [CBDCs] in Africa relative to other emerging and developing regions.”

A major U.S. cryptocurrency exchange recently published its 2022 Institutional Investor Digital Assets Outlook Survey. The survey sought “to understand how decision makers at US institutions view digital assets,” and “[a] total of 140 institutional investors in the US participated in the survey, representing assets under management of about $2.6 trillion.” Among other things, the survey results indicate that (1) institutional investors increased their allocations during the crypto winter; (2) investors’ top motivation for investing in crypto is differentiated performance, including innovative technology; (3) digital assets were seen as offering one of the most attractive opportunities to generate alpha; (4) regulatory compliance is a top criteria for selecting a crypto partner; and (5) regulatory clarity is an important catalyst for future growth.

For more information, please refer to the following links:

NFTs: Government Agencies Seek Comments on NFT IP; New Marketplaces Open

By Lauren Bass

In connection with a joint study on intellectual property (IP) issues and non-fungible tokens (NFTs), the United States Patent and Trademark Office (USPTO) and the United States Copyright Office (USCO) published a notice in the Federal Register last week seeking public comments on 13 separate questions – each related to a different aspect of IP use in NFTs. The comment period closes on Jan. 9, 2023. Additionally, in mid-January 2023, the USPTO and USCO will hold three public roundtables focused on IP issues in the NFT space. Registration for these events closes on Dec. 21, 2022.

In related news, an American toy manufacturing and entertainment company reportedly launched its own NFT marketplace. According to reports, the marketplace, built on the Flow blockchain, will allow users to purchase NFTs without the use of cryptocurrency and will support peer-to-peer trading. The first series of digital collectibles – based on one of the company’s most recognizable properties – is reportedly set to drop in mid-December.

In other marketplace news, OpenSea reportedly released an “on-chain enforcement tool” to help NFT creators enforce royalty payments on the secondary sales of their work. According to reports, the tool would allow NFT artists to “specify which addresses can make token transfers on their behalf.” This would effectively allow artists to halt resale of their work on sites that refused to honor royalty fees.

For more information, please refer to the following links:

Crypto DEX and Wallet Providers Reveal User Data Collection Practices

By Sydney Park

According to reports, in a recently released privacy policy, Uniswap Labs revealed that it collects on-chain data from its users for the purpose of making improvements to its products. The company stated that this data includes “public on-chain data and limited off-chain data like device type, browser version, etc.” but does not include personal data like names, street addresses, email addresses or IP addresses. In a blog post, Uniswap stated that it “does not share [] data with any third parties for marketing purposes” but uses data “to make data-driven decisions that improve user experiences.”

Three days after Uniswap revealed its data collection policies, the developer of the MetaMask Ethereum wallet reportedly updated its privacy policy to begin tracking users’ IP addresses and other data when they send a transaction. According to the updated privacy policy, the update applies to users who use Infura, an affiliate of ConsenSys, that functions as the default Remote Procedure Call (RPC) provider in all Metamask wallets. The privacy policy states that “when you use Infura as your default RPC provider in MetaMask, Infura will collect your IP address and your Ethereum wallet address when you send a transaction.” According to reports, social media users reacted with displeasure at the privacy policy update, stating generally that the update “invade[s] a user’s privacy – one of the core ethos of the crypto space.”

For more information, please refer to the following links:

SEC Commissioner Addresses Digital Assets and Investor Protection Concerns

By Teresa Goody Guillén

U.S. Securities and Exchange Commission (SEC) Commissioner Jaime Lizárraga recently delivered a speech focused on “putting investors first” with regard to digital assets. He cited recent surveys for the propositions that low-income communities underserved in the traditional financial markets are increasingly investing in digital assets and that a “greater share of unbanked and underbanked individuals may own digital assets than those who are fully banked.” He raised concerns of increased fraud in the digital asset market and the concentration of wealth such that “whales” who hold large positions can exert pressure and impact the market. He expressed his views that the ecosystem is predominantly centralized despite the “narrative” of decentralization; platforms that offer numerous services such as trading, custody, maintaining order books, market-making, and borrowing and lending may have conflicts of interest and may commingle customer assets with those of the platform, which poses risks to customers; the market lacks transparency and uniformity of disclosures; and digital assets are volatile and risky.

The Commissioner stated that “not every issued digital token necessarily represents a securities offering, and not every digital asset intermediary is necessarily operating as an unregistered market participant,” but he noted his agreement with Chair Gary Gensler that most digital assets are likely securities. He rebutted that the SEC is engaged in regulation by enforcement and cited well-established laws and guidance comprised of the distributed autonomous organization report, the SEC Staff Framework for an Investment Contract, multiple no-action letters, and decades of legal precedent on investment contracts and notes.

For more information, please refer to the following links:

SEC Institutes Proceedings Against DAO; FINRA Examines Crypto Advertising

By Teresa Goody Guillén

The SEC recently instituted administrative proceedings against a Wyoming-based distributed autonomous organization (DAO) seeking to stop the registration of crypto asset offerings. The Order alleges that the Form S-1 registration statement failed to include required information and contained materially misleading statements and omissions in violation of the federal securities laws, including inconsistent statements as to the status of the tokens as securities. The Order further alleges that the company failed to cooperate with the SEC’s examination of the registration statement.  

This month, the Financial Industry Regulatory Authority (FINRA) announced that it is conducting a “targeted exam of firm practices regarding retail communications concerning [c]rypto [a]sset products and services.” This sweep is reportedly examining approximately 20 brokerage firms regarding potential advertising of crypto to retail investors without properly communicating the risks associated with the assets. Specifically, the request is for the period July 1, 2022, through Sept. 30, 2022, and seeks, among other things, retail communications, whether the communications were filed with FINRA, whether a registered principal of the firm approved the communications, the firm’s written supervisory procedures related to the approval and dissemination of the communications, and compliance materials relevant to the communications.

For more information, please refer to the following links:

New York State and Canadian Province Set Limits on Crypto Mining

By Joanna F. Wasick

Last week, New York Gov. Kathy Hochul signed a two-year moratorium on new and renewed permits for proof-of-work cryptocurrency mining operators that rely on carbon-based fuel to power their activities. The legislation makes New York the first state to enact a temporary ban on new fossil fuel-powered cryptocurrency mining operations. Issuance of permits for electric energy facilities that use alternatives to carbon-based fuel, such as hydropower, are still allowed. “I will ensure that New York continues to be the center of financial innovation, while also taking important steps to prioritize the protection of our environment,” Gov. Hochul said in a message after signing the legislation into law on Nov. 22.  

In similar news, Canada’s Manitoba province recently set an 18-month moratorium on new crypto mining operations, citing the possibility of the local grid being overwhelmed by new projects, according to local media reports. The government will stop new crypto mining operations from connecting to the grid during this time; the existing 37 mining facilities will not be affected.

For more information, please refer to the following links:

OFAC Settles with US Crypto Exchange Related to Alleged Sanctions Violations

By Amos Kim

This week the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it had reached a settlement with Kraken, a U.S.-based cryptocurrency exchange. The settlement is related to apparent violations of the Iranian Transactions and Sanctions Regulations. The settlement includes an agreement by Kraken “to invest an additional $100,000 in certain sanctions compliance controls.” According to an OFAC enforcement release, the apparent violations were “due to Kraken’s failure to timely implement appropriate geolocation tools,” which permitted “users who appeared to be in Iran [to engage] in virtual currency transactions on Kraken’s platform.” OFAC’s enforcement release provides further details on the apparent violations and OFAC’s considerations and analysis.

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Multiple DOJ Enforcement Actions Target Crypto Fraud and Money Laundering

By Christopher Lamb

According to a recent press release from the U.S. Department of Justice (DOJ), two Estonian citizens were arrested in Tallinn, Estonia, for their alleged involvement in a $575 million cryptocurrency fraud and money laundering scheme. The defendants allegedly defrauded hundreds of thousands of victims through a multifaceted scheme involving a fraudulent cryptocurrency mining operation and cryptocurrency bank.

According to another recent DOJ press release, an Ohio man was arrested on criminal charges related to his alleged involvement in a cryptocurrency fraud scheme that raised at least $10 million from investors. The Ohio man allegedly misled investors by fraudulently promoting himself as a cryptocurrency trader with a specialty in derivatives and promised to make lucrative returns.

A recent press release by the U.S. Attorney’s Office for the Eastern District of Texas reported that 21 individuals have been charged for their roles in transnational cryptocurrency money laundering networks, including laundering millions of dollars stolen from U.S. fraud victims through various scams. According to the press release, the cases stemmed from a multiyear operation initiated by the U.S. Attorney’s Office for the Eastern District of Texas called “Operation Crypto Runner” that has to date disrupted over $300 million in annual money laundering transactions.

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