Jury Finds Former NFT Marketplace Manager Guilty of ‘Insider Trading’ Wire Fraud Scheme and Money Laundering

By John J. Carney, Teresa Goody Guillén, Veronica Reynolds, Michelle Tanney and Joanna F. Wasick on May 26, 2023 Posted in Alert

On May 3, 2023, a jury found Nathaniel Chastain, a former manager of OpenSea (a major NFT marketplace), guilty of wire fraud and money laundering in connection with his attempts to conceal his use of confidential business information for his own personal gain.

The verdict stems from an indictment brought last year by the U.S. Attorney’s Office for the Southern District of New York (USAO), which accused Chastain of engaging in (1) wire fraud based on an insider trading scheme involving misappropriated confidential information and (2) money laundering. Specifically, the USAO charged Chastain with using information about which NFTs would be displayed on the OpenSea homepage, purchasing certain NFTs before they were featured on OpenSea, and then selling them once their value spiked. He then allegedly tried to hide his conduct by using anonymous Ethereum addresses and OpenSea accounts. In whole, he received more than $50,000 in profits through the scheme. By not asserting an “insider trading” cause of action under the criminal securities fraud statute, the USAO avoided the significant burden of proving beyond a reasonable doubt that the subject NFT transactions qualified as offers or sales of securities.

Read the full alert.

Fintech Firms Pursue DeFi, CBDC Initiatives; Blockchain Integrations Announced; IRS Trains Ukraine on Crypto; FATF Voices Crypto AML Concerns

By Robert A. Musiala, Amos Kim, Christopher Lamb and Joanna F. Wasick on May 22, 2023 Posted in Blockchain

In this issue:

• Product Integrations and Data Indicate Increased Interest in DeFi
• Fintech Firms and BIS Pursue CBDC Initiatives
• Blockchain Applications Announced for DAO Voting, Oracles and Data Security
• SEC Brings Crypto Fraud Charges, IRS Trains Ukraine on Crypto Investigations
• FATF Chief Urges End to ‘Lawless Crypto Space’

Product Integrations and Data Indicate Increased Interest in DeFi

By Amos Kim

MetaMask, a web3 Ethereum Network cryptocurrency wallet, recently announced a new integration with a major U.S. payments and fintech firm. According to a blog post, the new integration will allow MetaMask users to use their balance held with their account at the fintech firm, or their bank account or debit card linked to their account at the fintech firm, to purchase and add ETH directly to their MetaMask wallet. The integration also allows the transfer of ETH from their crypto account with the fintech firm to their MetaMask wallet. According to reports, the fintech firm recently disclosed that as of March 31, 2023, it held $943 million in crypto assets on behalf of its customers.

According to a recent report by CCData, a digital asset data and index provider, the trading volume on the largest decentralized exchange was higher than the trading volume on one of the largest centralized U.S. exchanges for four consecutive months. According to CCData, factors for the increased trading volume on the decentralized exchange include the depegging of the USDC stablecoin from the U.S. dollar as a result of recent bank failures, and increased regulatory focus on centralized exchanges. In a related development, a recent survey conducted by the largest decentralized exchange found that “many U.S.-based CeFi users are interested in experimenting with DeFi” but are hesitant due to complexity, lack of understanding, and cost.

For more information, please refer to the following links:

Fintech Firms and BIS Pursue CBDC Initiatives

By Robert A. Musiala Jr.

According to a recent press release, a major U.S. fintech firm has announced the launch of its Central Bank Digital Currency (CBDC) platform, which is described as “a frictionless end-to-end solution for central banks, governments, and financial institutions to issue their own central bank digital currency.” The same fintech firm recently acquired a cryptocurrency custody startup for $250 million, according to reports.

In related news, Swiss-based fintech firm Temenos recently announced “that it has proven integration of its leading banking platform with multiple DLT-based Central Bank Digital Currency (CBDC) technology stacks, successfully executing end-to-end retail CBDC use cases for commercial bank touch points.” According to a press release, Tenemos leveraged the R3 Corda blockchain platform in one integration project and leveraged the Hyperledger Besu Ethereum client in another project.

As part of “Project Polaris,” the Bank for International Settlements (BIS) recently published its “Handbook for offline payments with CBDC.” According to a BIS press release, “[t]he handbook provides a comprehensive overview of the key aspects of offline payments with CBDC and is intended to serve as a guide for central banks considering implementing offline payments capabilities.” Through the handbook, BIS intends to help central banks understand CBDCs and the available technologies and security measures; the main threats, risks and risk management measures; privacy issues, inclusion needs and resilience options; design and architecture principles; and potential operational and change management issues.

For more information, please refer to the following links:

Blockchain Applications Announced for DAO Voting, Oracles and Data Security

By Robert A. Musiala Jr.

A major U.S. cryptocurrency custody and infrastructure provider recently announced that it will integrate Snapshot, a token-based voting and governance tool, to allow its users to participate in protocol governance proposals with tokens custodied on its platform. According to reports, users will be able to vote on governance proposals using the public key associated with their custody account without having to transfer any cryptocurrency tokens off the custody platform.

According to reports, a major U.S. cryptocurrency exchange recently onboarded its cloud service as a node operator for the Chainlink oracle network. The move will reportedly improve the security and reliability of Chainlink’s decentralized price feeds and other Chainlink data oracles.

In a final notable item, the U.S. Department of Defense (DOD) recently finalized a Phase III contract with blockchain startup Constellation, which provides blockchain infrastructure to support decentralized marketplaces and maintain data provenance and integrity. According to reports, Constellation recently completed a Phase II DOD contract that led to a “well-defined deliverable prototype” focused on modernizing the cybersecurity of DOD systems to provide “a secure way to effectively and efficiently transfer confidential data across [DOD] Defense Transportation System commercial airlift partners without sacrificing cost or speed.” The Phase III contract will reportedly focus on commercialization of the Phase II prototype.

For more information, please refer to the following links:

SEC Brings Crypto Fraud Charges, IRS Trains Ukraine on Crypto Investigations

By Christopher Lamb

According to a recent litigation release by the U.S. Securities and Exchange Commission (SEC), the SEC issued a complaint against defendants that allegedly “conducted fraudulent offerings of securities, including crypto asset mining pools, through dozens of websites,” including GA-Investors.org. These websites offered “exorbitant returns – in some cases as high as 61.9% in 24 hours – for investments in securities.” According to the complaint, the GA Investor’s website “offered guaranteed daily returns ranging from 2% to 4.5%” and “investors were directed to purchase crypto assets from a separate crypto asset trading platform and transfer those crypto assets to a GA Investors wallet address.” When investors sought to make withdrawals from their accounts, “the defendants froze investor accounts and misappropriated the investor funds.”

In other recent news, according to a press release by the Internal Revenue Service (IRS), the IRS Criminal Investigation (IRS-CI) and private sector are “delivering blockchain analysis tools and cyber training to Ukrainian law enforcement agencies in April and May.” According to the press release, these trainings and license deliveries are made in an effort to “identify all Russian assets on the territory of Ukraine.” As part of the delivery, IRS-CI donated licenses for Chainalysis Reactor, a cryptocurrency investigative platform, and will provide advanced training for Ukrainian investigators that includes “hands-on instruction in blockchain and cryptocurrency tracing, as well as instruction on developing operational leads.”

For more information, please refer to the following links:

FATF Chief Urges End to ‘Lawless Crypto Space’

By Joanna F. Wasick

The Financial Action Task Force (FATF), a global financial crimes watchdog, recently issued a letter, “An end to the lawless crypto space,” urging G-7 members to “lead by example” in implementing the FATF Recommendations — global standards on combating money laundering, terror financing and proliferation financing. As its title suggests, the letter emphasizes the supervision of “crypto assets,” which FATF states “continue[s] to operate in a virtually lawless global environment,” thereby empowering criminals, terrorists and rogue states. Specifically, FATF urges countries to implement and enforce its “travel rule” on the cryptocurrency sector, which requires virtual asset service providers (VASPs) to identify the sender and receiver of cryptocurrency transactions. “Around the globe, countries have made progress in implementing most of the standards; however, progress on implementing FATF’s updated requirements on crypto assets has been relatively poor,” FATF states, adding that 73% of countries are still fully or partially noncompliant with the watchdog’s standards with respect to virtual assets and VASPs.

For more information, please refer to the following links:

NYS DFS Focuses on Cybersecurity Violations and Increasing Crypto Resources

By George Stamboulidis, Teresa Goody Guillén, Michelle Tanney, Jonathan A. Forman, Robert A. Musiala and Sydney Park on May 17, 2023 Posted in Alert

On May 1, 2023, the New York State Department of Financial Services (DFS or Department) issued a consent order (Consent Order), imposing a $1.2 million fine on bitFlyer USA, a cryptocurrency trading platform and custodial wallet service provider. The Consent Order described various alleged failures by bitFlyer USA to establish and maintain an effective cybersecurity program, as required by the DFS’s Virtual Currency and Cybersecurity Regulations. This marks the third DFS consent order involving a crypto market actor. While the previous two focused on alleged anti-money laundering failures, the bitFlyer USA consent order is significant because it focused exclusively on cybersecurity violations, which remain a DFS priority.

Read the full alert.

ETH Staking Data Published; Blockchain Solutions Launch; NY AG Proposes Crypto Legislation; UK Targets Crypto ATMs; Crypto Hack Schemes Reported

By Robert A. Musiala, Christopher Lamb, Amos Kim, Keith R. Murphy and Christina Gotsis on May 15, 2023 Posted in Blockchain

In this issue:

• ETH Staking Data Published, Blockchain Solutions Launch for Financial Services
• New York Attorney General Proposes New Legislation for Crypto Industry
• UK Authorities Target Illegal Crypto ATMs
• Reports Detail Crypto Malware, Phishing and Hacked Exchange Accounts

ETH Staking Data Published, Blockchain Solutions Launch for Financial Services

By Christopher Lamb

According to a recent report, Ethereum’s ether (ETH) staking rewards “hit a record 8.6% post-Merge, with validators earning $46 million in the first week of May.” Validators reportedly earned 24,997 ETH in the first week of May, representing a 40 percent increase over the previous week. The report notes that the increase in rewards may have been caused by a “trading craze” of new memecoins.

A recent press release announced the planned launch of the Canton Network, described as the “industry’s first privacy-enabled interoperable blockchain network designed for institutional assets and built to responsibly unlock the potential of synchronized financial markets.” The press release lists multiple major financial and technology firms as participants in the Canton Network. According to the press release, the Canton Network will provide “decentralized infrastructure that connects independent applications” built with the smart contract language Daml. The press release further describes the Canton Network as “a ‘network of networks,’ allowing previously siloed systems in financial markets to interoperate with the appropriate governance, privacy, permissioning and controls required for highly regulated industries.”

In another recent press release, a multinational professional services company announced beta availability of a new ESG focused product developed on the Ethereum Network and made available through the company’s blockchain SaaS platform. According to the press release, the new solution “will provide a single, verifiable view of CO2 emissions (C02e) to address the needs of enterprises that struggle to accurately measure and track their carbon footprint.”

For more information, please refer to the following links:

New York Attorney General Proposes New Legislation for Crypto Industry

By Amos Kim

In a recent press release, the New York Attorney General announced new proposed legislation that would increase oversight of the cryptocurrency industry. The Crypto Regulation, Protection, Transparency, and Oversight Act (CRPTO Act) “seeks to protect New York investors by bringing regulations and oversight that are applied to other financial services to the cryptocurrency industry” as well as address other issues unique to the industry. The press release notes that the CRPTO Act would codify the New York Department of Financial Services’ authority to oversee the state’s digital asset licensing regime. According to the press release, among other things, the CRPTO Act seeks to (1) stop conflicts of interest by placing certain prohibitions on specific industry players such as marketplaces, issuers and brokers; (2) require public reporting of financial statements by cryptocurrency companies; and (3) bolster investor protections by enacting “know-your-customer” provisions and “banning the use of the term ‘stablecoin’” unless a digital asset is backed 1:1 with U.S. currency or other high-quality assets as defined by federal regulations.

For more information, please refer to the following links:

UK Authorities Target Illegal Crypto ATMs

By Keith R. Murphy

A recent press release by the Financial Conduct Authority (FCA) of the United Kingdom announced that the FCA has conducted inspections in multiple cities suspected of hosting illegally operated cryptocurrency ATMs. The press release notes that the inspections are part of a joint effort by police and crime unit representatives to disrupt these unregistered and illegal businesses. An enforcement official quoted in the press release said crypto ATMs “are a key component in the facilitation of money laundering and the movement of funds acquired through criminal activity.” The press release further notes that there are no crypto ATM operators currently registered with the FCA.

For more information, please refer to the following links:

FCA continues action against unregistered crypto ATMs across the UK

Reports Detail Crypto Malware, Phishing and Hacked Exchange Accounts

By Christina O. Gotsis

According to recent reports, in April, threat actors introduced malware designed to steal information from the macOS operating system. The Atomic macOS Stealer (“The Atomic”) was reportedly posted for sale on Telegram for $1,000 per month and it is capable of stealing information such as Keychain passwords, complete system information, files from the desktop and documents folders, and even the macOS password. The malware can also extract data from web browsers and cryptocurrency wallets like Atomic, Binance, Coinomi, Electrum and Exodus, and it comes with a ready-to-use web panel for managing victims. The malware reportedly poses as an unsigned disk image that, when executed, requires the victim to enter his/her password. After harvesting the victim’s data, the malware sends it to a remote sever and then to preconfigured Telegram channels.

According to another recent report, scammers have used internet ads to steal more than $4 million from unsuspecting users in phishing schemes. When ads are clicked, users are directed to URLs with slight name changes that make it difficult to detect that the links are malicious.

A final recent report noted that cybercriminals have been selling hacked, verified cryptocurrency exchange accounts on the darknet for as low as $30 and as high as $1,170 apiece. According to the report, hacked cryptocurrency exchange accounts are the highest-priced financial account information on the dark web.

For more information, please refer to the following links:

New Crypto Payment and Web3 Products Launch; UK Seeks Input on DeFi Taxation; OFAC Fines Crypto Exchange; SEC, DOJ, CFTC Continue Enforcement

By Robert A. Musiala, Keith R. Murphy and Lauren Bass on May 8, 2023 Posted in Blockchain

In this issue:

• Multiple Financial Services Firms Announce New Crypto Products
• Mutual Fund Integrates with Polygon, US Exchanges Launch Offshore Platforms
• Web3 Initiatives Launch for NFT Ticketing, Protocol Infrastructure
• UK Seeks Input on Proposed Modifications to Tax Rules Applicable to DeFi
• OFAC Announces $7.6 Million Settlement with Crypto Exchange
• SEC and State Securities Regulators Continue Crypto Enforcement Actions
• DOJ Shuts Down Nine Crypto Exchanges; DOJ, CFTC Prosecute Crypto Fraud

Multiple Financial Services Firms Announce New Crypto Products

By Robert A. Musiala Jr.

A major U.S. financial services firm recently launched its Crypto Credential product, “a set of common standards and infrastructure that will help verify interactions among consumers and businesses using blockchain networks.” According to a press release, among other things, the product will provide “easy to remember, straightforward aliases to help consumers share wallet addresses”; bring “richer information to blockchain transactions through metadata”; and “help verify addresses and support Travel Rule compliance for cross border transactions.”

In related news, several other payment firms have announced new cryptocurrency initiatives. A major U.S. mobile payments provider announced that its mobile payments app will now offer additional capabilities for transferring cryptocurrencies both within and external to the app. Another U.S. financial services firm introduced its Connect product, which will enable its customers to more seamlessly fund self-custodial crypto wallets “without the need to leave … dApps.” In a third development, DeFi protocol Curve Finance recently deployed its native stablecoin, crvUSD, on the Ethereum Blockchain.

For more information, please refer to the following links:

Mutual Fund Integrates with Polygon, US Exchanges Launch Offshore Platforms

By Keith R. Murphy

A recent press release by a global investment firm announced that the firm’s OnChain US Government Money Fund (Fund) is now supported on the Polygon network. The press release states that the Fund is the “first U.S.-registered mutual fund to use a public blockchain to process transactions and record share ownership.”

In other news, two major U.S. cryptocurrency exchanges recently announced the launch of non-U.S. trading platforms. One of the exchanges has launched a non-U.S. crypto derivatives platform available to customers in many jurisdictions but excluding the United States, the European Union and the United Kingdom. The other exchange announced the launch of its International Exchange, which is licensed by the Bermuda Monetary Authority and will be available to institutional users in certain jurisdictions outside the United States to trade perpetual crypto futures.

According to a recently published survey conducted over the period from July 2022 to January 2023, 46% of millennials own cryptocurrencies, compared to 25% of Gen X, 21% of Gen Z and 8% of baby boomers. Another recent report found that the U.S. government reportedly holds more than 205,000 bitcoin worth approximately $6 billion. The government reportedly obtained the bitcoin through seizures, including in connection with the shutdown of Silk Road and the 2016 hack on Bitfinex.

For more information, please refer to the following links:

Web3 Initiatives Launch for NFT Ticketing, Protocol Infrastructure

By Lauren Bass

A recent press release announced the launch of a new Web3-based, self-service NFT event management and ticketing marketplace powered by the Polygon blockchain. The new NFT ticketing platform was launched through a partnership between a major U.S. sports magazine and ConsenSys, a blockchain development company. According to the press release, the platform allows creators not only to sell tickets to sports, concerts and theater events but to better “connect” with their audience using NFT Super Tickets, which will reportedly provide event attendees with unique perks such as collectibles, video highlights, exclusive offers and loyalty benefits.

In similar news, Polygon Labs has reportedly teamed with a multinational technology company to provide enterprise infrastructure and initiatives that will reduce onboarding time and hosting costs to Web3 developers, including through a managed node hosting service for Polygon PoS nodes. According to reports, the move is designed to incentivize Web3 developers to build, launch and grow their decentralized apps (dApps) on Polygon protocols.

For more information, please refer to the following links:

UK Seeks Input on Proposed Modifications to Tax Rules Applicable to DeFi

By Robert A. Musiala Jr.

The United Kingdom’s HM Revenue & Customs agency recently published an “open consultation” on cryptocurrencies “seeking views on modifying the tax treatment of decentralised finance (DeFi) lending and staking.” The consultation “explores a legislative change to the tax treatment of DeFi lending and staking” whereby “the use of cryptoassets in DeFi transactions would no longer be treated as giving rise to a disposal for tax purposes … [i]nstead, a tax disposal would arise when the cryptoassets are economically disposed of in a non-DeFi transaction.” The proposed framework would also apply to the lending and staking of crypto through an intermediary. Responses to the consultation are due by June 22.

For more information, please refer to the following links:

UK HM Revenue & Customs: Open consultation The taxation of decentralised finance (DeFi) involving the lending and staking of cryptoassets

OFAC Announces $7.6 Million Settlement with Crypto Exchange

By Robert A. Musiala Jr.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently published an Enforcement Release announcing a $7,591,630 settlement with the cryptocurrency exchange Poloniex for “65,942 apparent violations of multiple sanctions programs.” According to the Enforcement Release, between January 2014 and November 2019, Poloniex “allowed customers apparently located in sanctioned jurisdictions to engage in online digital asset-related transactions … with a combined value of $15,335,349, despite having reason to know their location based on both Know Your Customer information and internet protocol address data.” The Enforcement Release noted that the settlement amount reflects OFAC’s determination that Poloniex’s apparent violations were not voluntarily self-disclosed and were not egregious. Among other things, the Enforcement Release highlighted the requirement for digital asset companies to develop a tailored, risk-based sanctions compliance program consistent with OFAC’s Sanctions Compliance for the Virtual Currency Industry and Framework for OFAC Compliance Commitments.

For more information, please refer to the following links:

OFAC Settles with Poloniex, LLC for $7,591,630 Related to Apparent Violations of Multiple Sanctions Programs

SEC and State Securities Regulators Continue Crypto Enforcement Actions

By Robert A. Musiala Jr.

A recent press release from the U.S. Securities and Exchange Commission (SEC) announced that the SEC has settled charges against a Seattle-based company and its CEO “for conducting unregistered offers and sales of securities in the form of a crypto asset” and for making false and misleading statements concerning the demand for the crypto asset and the amount raised in the offering. According to the press release, the companies agreed to pay penalties of $3,520,000 and $250,000, and the CEO agreed to pay a penalty of $150,000 and has been barred for three years from acting as an officer or director of a public company.

In a state securities enforcement action, the Texas State Securities Board issued a press release announcing an emergency cease and desist order to stop a fraudulent investment scheme purportedly powered by artificial intelligence and cryptocurrencies. According to the press release, “The Texas State Securities Board led a group of regulators that include the Alabama Securities Commission, the Montana State Auditor, the Kentucky Department of Financial Institutions, and the New Jersey Securities Bureau in bringing coordinated actions against Horatiu Charlie Caragaceanu and his organizations, The Shark of Wall Street and Hedge4.ai.” The state securities regulators allege Caragaceanu is “promoting TruthGPT Coin, a cryptocurrency that purportedly uses an artificial intelligence model … to analyze various cryptocurrencies, predict future digital asset prices and differentiate profitable investments from scams.” Among other things, the press release alleges that the scheme uses fraudulent endorsements by multiple well-known figures in the cryptocurrency industry.

For more information, please refer to the following links:

DOJ Shuts Down Nine Crypto Exchanges; DOJ, CFTC Prosecute Crypto Fraud

By Robert A. Musiala Jr.

A recent press release from the U.S. Department of Justice (DOJ) announced that DOJ and other U.S. and international law enforcement agencies have seized domain names and shut down servers related to nine virtual currency exchange services. According to the press release, the nine exchanges “allegedly offered virtual currency exchange services to individuals for illegal activities” and “[b]y providing these services, the virtual currency exchanges knowingly support the criminal activities of their clients and become co-conspirators in criminal schemes.”

Another DOJ press release announced the guilty plea of a defendant for “participating in a scheme to steal millions of dollars’ worth of cryptocurrency and trick U.S. banks into refunding the millions used to purchase that cryptocurrency, in part by using personal identifying information stolen from other people.” According to the press release, the scheme was carried out in part by the defendants opening front accounts at a cryptocurrency exchange using photos of fake identification documents.

A recent press release from the U.S. Commodity Futures Trading Commission (CFTC) announced that the U.S. District Court for the Western District of Texas has entered an order of default judgment and permanent injunction requiring a defendant to pay $1,733,838,372 in restitution to defrauded victims and a $1,733,838,372 civil monetary penalty related to “an international fraudulent multilevel marketing scheme to solicit Bitcoin from members of the public for participation in an unregistered commodity pool.” According to the press release, the defendant accepted and misappropriated “at least 29,421 Bitcoin … from at least 23,000 individuals in the U.S., and even more throughout the world,” to participate in the unregistered commodity pool.

For more information, please refer to the following links:

Get Ready For IRS Criminal Crackdown On Crypto

By Carlos Ortiz, Christina Gotsis and Kayley Sullivan on May 3, 2023 Posted in Cryptocurrency

Carlos Ortiz, Christina Gotsis and Kayley Sullivan co-authored the article “Get Ready For IRS Criminal Crackdown On Crypto,” in Law360.

After years of warnings, the time for a significant increase in IRS criminal enforcement against those using digital assets to evade tax liabilities is here.

The 2022 IRS Criminal Investigation annual report, and the agency’s Inflation Reduction Act Strategic Operating Plan for fiscal years 2023-2031, identified digital assets as an area of top priority going forward.

Read the article here.

ETH Staking Data Published; USDC Transfer Protocol Launches; OFAC Adds Public Keys to SDN List; DOJ Targets Crypto Market Manipulation

By Robert A. Musiala, Joanna F. Wasick, Christopher Lamb and Amos Kim on May 1, 2023 Posted in Blockchain

In this issue:

• ETH Staking Data Published, USDC Cross-Chain Transfer Protocol Launches
• IRS Modifies 2014 Virtual Currency Guidance
• OFAC Adds 20 Cryptocurrency Public Keys to SDN List
• DOJ Actions Target Crypto Market Manipulation and Money Laundering

ETH Staking Data Published, USDC Cross-Chain Transfer Protocol Launches

By Joanna F. Wasick

New data reflects that the recent amount of staking withdrawals on Ethereum has been balanced by a roughly equal amount of deposits. According to reports, Ethereum staking withdrawals started ramping up for the third time/round on April 24, with a major U.S. crypto exchange making the largest share of these withdrawals. The last large batch on April 24 reportedly totaled 61,608 ETH in principal and rewards. However, data also reflects that there were 63,009 ETH in ETH deposits around that same time. Such activity reportedly alleviates concerns over a mass exodus of staked ETH following the Shapella upgrade – the hard fork upgrade that occurred earlier this month, marking the completion of Ethereum’s multiyear transition from a proof of work consensus mechanism to proof of stake.

In other recent news, Circle, a global fintech company and founder of the USDC stablecoin, recently announced the launch of its Cross-Chain Transfer Protocol (CCTP), a permissionless on-chain utility that reportedly eliminates the need to use a conventional “lock-and-mint” bridge, which locks native USDC on the source chain (incurring a potential security risk) and then mints a synthetic/bridged version of USDC on the destination chain (resulting in fragmentation of liquidity and poor user experience). Instead, CCTP is exposed through smart contracts, which are designed to allow composability of additional functionality beyond just burning and minting native USDC. CCTP reportedly can burn native USDC on a source chain and mint native USDC of the same amount on a destination chain. Developers can embed CCTP into their apps to provide users with what Circle calls “the most capital-efficient way to transfer USDC across chains, setting the stage for a united and mainstream Web3.” CCTP is available on mainnet for Ethereum and Avalanche, as well as on Goerli testnet for Ethereum and Fuji testnet for Avalanche.

For more information, please refer to the following links:

IRS Modifies 2014 Virtual Currency Guidance

By Robert A. Musiala Jr.

The U.S. Internal Revenue Service (IRS) recently issued Notice 2023-34, which modifies the IRS’ first Notice addressing virtual currencies, Notice 2014-21. Notice 2023-34 “modifies Notice 2014-21 by revising a sentence in the Background section of that Notice to remove the statement that virtual currency does not have legal tender status in any jurisdiction and to make other changes.” According to Notice 2023-34, the IRS is aware that certain foreign jurisdictions have enacted laws that characterize bitcoin as legal tender, and therefore, “the sentence in the Background section of Notice 2014-21 stating that virtual currency does not have legal tender status in any jurisdiction is no longer accurate as to [b]itcoin.” The revision to the Background section of Notice 2014-21 does not affect the answers to the frequently asked questions (FAQs) set forth in Section 4 of Notice 2014-21.

For more information, please refer to the following link:

IRS Notice 2023-34

OFAC Adds 20 Cryptocurrency Public Keys to SDN List

By Christopher Lamb

According to a press release issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), pursuant to Executive Orders (E.O.) 13722 and 13382, OFAC has designated three individuals for engaging in malicious cyber activity and illicit access to the international financial system, including providing access to the financial system to previously designated entities by setting up shell companies and managing surreptitious bank accounts to move and disguise illicit funds and finance the Democratic People’s Republic of Korea (DPRK). As part of the action, OFAC has added one Ethereum (ETH) address, one Arbitrum (ARB) address, one Binance Smart Chain (BSC) address, and 17 XBT (BTC) addresses to the Specially Designated Nationals List (SDN).

For more information, please refer to the following links:

DOJ Actions Target Crypto Market Manipulation and Money Laundering

By Amos Kim

A recent press release by the U.S. Department of Justice (DOJ) announced that the DOJ has charged two U.S. citizens and a South African national with conspiring to manipulate the market for HYDRO, an Ethereum Network token created by the Hydrogen Technology Corporation. The DOJ also charged two other individuals for their role in the scheme. According to the press release, “[t]he defendants allegedly used a trading bot to place thousands of orders that they did not intend to execute, or ‘spoof orders,’ and thousands of orders where the bot bought and sold tokens to itself through the same account, or ‘wash trades.’” In doing so, the defendants allegedly created “the false appearance of supply and demand,” inducing other investors to trade HYDRO “at artificially inflated prices.” The co-conspirators allegedly made $2 million in profit through the scheme.

According to another DOJ press release, a Maryland resident pled guilty to a drug distribution conspiracy and money laundering scheme that involved using bitcoin “to conceal the nature and source of the proceeds.” According to the guilty plea, the defendant purchased illegal narcotics from the United Kingdom and sold them on dark web marketplaces where customers paid in bitcoin. The defendant then laundered the proceeds by first transferring the bitcoin from the dark web marketplace to a virtual currency account at an unspecified exchange, exchanged the bitcoin for U.S. dollars a few days later, then transferred the U.S. dollars to various bank accounts the defendant controlled.

For more information, please refer to the following links:

New Crypto and DeFi Products Launch; SEC Charges Crypto Exchange; States Bring Enforcement Actions; Bitcoin Public Key Added to SDN List; Hacks Continue

By Robert A. Musiala, Lauren Bass, Christopher Lamb and Joanna F. Wasick on April 24, 2023 Posted in Uncategorized

In this issue:

• European Bank Launches Stablecoin; Financial Firms Expand Crypto Products
• Ethereum ‘Unstaking’ Data Published; New DeFi Products Launch
• SEC Charges U.S. Crypto Exchange with Multiple Securities Law Violations
• States Bring Crypto Enforcement Actions, Assess Supervisory Costs
• OFAC Adds New Bitcoin Public Key to SDN List
• DeFi Protocol Hacked for $7.4M; Wallet Attack Drains $10.5M

European Bank Launches Stablecoin; Financial Firms Expand Crypto Products

By Robert A. Musiala Jr.

A subsidiary of a major European financial services firm recently launched EUR CoinVertible (EURCV), an Ethereum ERC20 stablecoin backed 1:1 by Euros. According to a press release, among other characteristics, EURCV will feature “(i) the complete segregation of the collateral assets held to back the value of the stablecoins from the issuer, (ii) with a direct access given to token-holders on the collateral assets, and (iii) the implementation of business continuity plan mechanisms in case of a market or technological event.” The press release also notes that the smart contract code for EURCV will be published under an open-source license and access to EURCV will be limited to persons who complete onboarding through the financial services firm’s existing anti-money-laundering procedures.

Another recent press release announced that “the world’s leading derivatives marketplace … plans to expand its suite of cryptocurrency options across its standard- and micro-sized Bitcoin and Ether contracts beginning on May 22.” The press release notes that through Q1 2023, its “Bitcoin and Ether futures and options complex has achieved a record daily average notional of more than $3 billion, signifying an increase in client demand for liquid hedging tools.”

According to a recent report, a major Japanese bank has announced that it has integrated MoneyTap, a blockchain-based money transfer app underpinned by RippleNet, into three local banks in Japan. RippleNet is a product of U.S. blockchain payments firm Ripple. And in a final recent development, the Bank for International Settlements has published a white paper with findings on Project Meridian, which explores the use of distributed ledger technology to drive innovations in real-time gross settlement systems.

For more information, please refer to the following links:

Ethereum ‘Unstaking’ Data Published; New DeFi Products Launch

By Robert A. Musiala Jr.

According to recent reports, in the wake of the Ethereum Network’s “Shanghai” upgrade, which marks the completion of Ethereum’s transition to a proof-of-stake network and enables network validators to unstake ether (ETH), approximately 5 percent of validators are seeking to unstake their ETH. The report notes that requests to unstake and withdraw ETH are taking up to 17 days to complete.

According to a recent press release, decentralized finance (DeFi) infrastructure firm Maple Finance has launched its Cash Management Pool, which according to the press release is designed to provide “Non-US DAOs [decentralized autonomous organizations], Offshore Companies, Web3 Treasuries and HNWI participants” with “the most direct access to Treasury bill yields.” The release notes that the DeFi liquidity pool is designed to allow participants to invest stablecoins and “will pass the 1-month US Treasury bill rate, less fees, to Lenders.” The press release further notes that “Room40 Capital, an institutional crypto hedge fund, has established a stand-alone SPV to be the sole borrower from the pool.” The new product is reportedly available only to non-U.S. accredited investors.

A major U.S. credit rating agency recently announced that it has partnered with technology firms Spring Labs and Quadrata “to deliver off-chain credit scoring to DeFi and Web3 applications.” According to a press release, the new service will deliver off-chain credit data to DeFi applications using a patented process that maintains the privacy of consumer identity data. According to the press release, the new service “will allow for DeFi lenders to have access to this critical information when making their lending decisions … ultimately minimizing their risk and providing borrowers more opportunity for better terms.”

For more information, please refer to the following links:

SEC Charges US Crypto Exchange with Multiple Securities Law Violations

By Lauren Bass

According to a recent press release, the U.S. Securities and Exchange Commission (SEC) has filed a complaint against the U.S.-based cryptocurrency trading platform Bittrex Inc. and its former CEO, alleging the operation of an unregistered exchange, broker-dealer and clearing agency in violation of U.S. securities laws. The SEC also charged Bittrex’s foreign affiliate, Bittrex Global GmbH, “for failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex.” Among other things, the complaint alleges Bittrex and its CEO advised client token issuers to remove from public channels certain “problematic statements” that might “raise questions from the SEC” as to whether the crypto tokens and assets offered on Bittrex were securities. The complaint requests injunctive relief along with disgorgement of profits and civil penalties.

For more information, please refer to the following links:

SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency

States Bring Crypto Enforcement Actions, Assess Supervisory Costs

By Robert A. Musiala Jr.

A recent press release from the California Department of Financial Protection and Innovation (DFPI) announced that DFPI has issued “desist and refrain orders against five entities to stop fraudulent investment schemes tied to artificial intelligence (AI).” According to the press release, “[t]he orders find that the named entities and individuals violated California securities laws by offering and selling unqualified securities and making material misrepresentations and omissions to investors.” The entities allegedly “solicited funds from investors by claiming to offer high yield investment programs (HYIP) that generate incredible returns by using AI to trade crypto assets” and “used multi-level marketing schemes that reward investors for recruiting new investors.”

According to a recent press release, “the New York State Department of Financial Services (DFS) has adopted a final regulation establishing how companies holding a DFS-issued Bitlicense will be assessed for costs of their supervision and examination.” The new regulation gives DFS authority “to collect supervisory costs from licensed virtual currency businesses, similar to other licensees regulated by DFS.”

For more information, please refer to the following links:

OFAC Adds New Bitcoin Public Key to SDN List

By Christopher Lamb

According to a press release issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), pursuant to Executive Order (E.O.) 14059, OFAC has designated two entities in the People’s Republic of China (PRC) and five individuals, based in PRC and Guatemala, for engaging in acts that contribute to “the international proliferation of illicit drugs or their means of production.” On April 4, 2023, a federal grand jury in the U.S. District Court for the Southern District of New York indicted some of these designated individuals on various conspiracy charges, including fentanyl importation and money laundering. As part of the action, OFAC added one individual’s Bitcoin public key that was “used to receive bitcoin payments for illicit drug transactions” to the Specially Designated Nationals List (SDN List).

For more information, please refer to the following links:

DeFi Protocol Hacked for $7.4M; Wallet Attack Drains $10.5M

By Joanna F. Wasick

On April 15, Hundred Finance, a Multichain lending protocol, announced it suffered a significant security breach on the Ethereum layer-2 blockchain Optimism, resulting in roughly $7.4 million in losses. Although the protocol didn’t reveal how the attack was executed, blockchain security firm CertiK said it was a flash loan attack, which involves a hacker borrowing a large amount of funds via a type of uncollateralized loan from a lending protocol. The hacker then uses these funds to manipulate the price of an asset on a decentralized finance (DeFi) platform. Hundred Finance stated that it had contacted the hacker and was working with various security teams on the incident.

Recent reports indicate that more than $10.5 million in cryptocurrencies and NFTs were taken in an unidentified wallet-draining exploit that had been happening since December 2022. MetaMask developer Taylor Monahan recently brought the issue to light on Twitter. While stating that no one knows yet exactly how the exploit works, some of its features include that it targets keys created from 2014 to 2022 and users who are more “crypto native,” i.e., those with multiple addresses and who work in the crypto/blockchain space. Because of this, the developer advised those with their assets connected to a single private key to migrate their funds, split up their assets or get a hardware wallet.

For more information, please refer to the following links:

U.S. Treasury Dept. Publishes Risk Assessment Addressing Illicit Finance Risks of DeFi

By Robert A. Musiala, Teresa Goody Guillén, Joanna F. Wasick, Kevin Edgar, Adam Gale, Jonathan A. Forman, Veronica Reynolds and Christopher Lamb on April 20, 2023 Posted in Alert

Background and Scope

The Assessment was drafted by Treasury’s Office of Terrorist Financing and Financial Crimes (“TFFC”), in consultation with multiple U.S. agencies, including the Departments of Homeland Security, Justice, and State; the Commodity Futures Trading Commission (“CFTC”); Office of the Comptroller of the Currency; and the Securities and Exchange Commission (“SEC”). The TFFC also considered over 75 responses to Treasury’s requests for comments.

The Assessment notes that it “does not alter any existing legal obligations, issue any new regulatory interpretations, or establish any new supervisory expectations.” Importantly, the Assessment “recognizes that most money laundering, terrorist financing, and proliferation financing by volume and value of transactions occurs in fiat currency or otherwise outside the virtual asset ecosystem via more traditional methods” and notes that DeFi accounts for “only a relatively small portion of total activity in virtual asset markets.”

Read full alert.

CBDC Pilot Announced; Ethereum Upgrade Completed; U.S. Treasury Department Addresses DeFi Risks; Studies Analyze Crypto Taxation, Crime; Hacks Continue

By Robert A. Musiala, Joanna F. Wasick, Keith R. Murphy, Christopher Lamb and Lauren Bass on April 17, 2023 Posted in Blockchain

In this issue:

• Montenegro Announces CBDC Pilot, BIS Compares CBDCs to Stablecoins
• Ethereum Network Completes ‘Shanghai’ Upgrade
• U.S. Treasury Publishes DeFi Risk Assessment; Banque De France Analyzes DeFi
• Study Analyzes 2022 Crypto Tax Compliance Across Various Countries
• EU Report Analyzes Cryptocurrency Use on Darknet Markets
• Hackers Drain Millions from Crypto Exchanges and DeFi Protocol

Montenegro Announces CBDC Pilot, BIS Compares CBDCs to Stablecoins

By Robert A. Musiala Jr.

According to a recent press release, “The Central Bank of Montenegro (CBCG) has agreed to collaborate with the enterprise crypto and blockchain solutions provider Ripple to develop a strategy and pilot programme to launch the country’s first digital currency in the form of a Central Bank Digital Currency (CBDC) or national stablecoin.” The press release notes that the project will analyze the benefits and risks of CBDCs, including “payment availability, security, efficiency, compliance with regulations, and most importantly, the protection of end users’ rights and privacy.”

In related news, the Bank for International Settlements (BIS) recently published a BIS Bulletin titled Stablecoins versus tokenised deposits: implications for the singleness of money. The bulletin compares asset-backed stablecoins to CBDCs with a focus on “singleness,” a key characteristic of money that “ensures that monetary exchange is not subject to fluctuating exchange rates between different forms of money” and enables “an unambiguous unit of account” that “allows money to serve its role as a coordinating device for economic activity.” The bulletin describes singleness as “[a] cornerstone of the modern monetary system.” According to the bulletin, stablecoins “may entail departures in their relative exchange values” in violation of singleness, and CBDCs or “tokenized deposits” are more conducive to singleness when compared to stablecoins. The bulletin also highlights other potential advantages of CBDCs, including “expanded functionality by building on the capacity of programmable ledgers to introduce contingent execution and composability of transactions.”

For more information, please refer to the following links:

Ethereum Network Completes ‘Shanghai’ Upgrade

By Joanna F. Wasick

Ethereum recently announced the completion of its “Shanghai” upgrade (also known as Shapella). This hard fork upgrade marks the completion of Ethereum’s multiyear transition from a proof of work consensus mechanism to proof of stake. Most notably, the upgrade enables network participants who had staked their ether (ETH) on the network to unstake and make withdrawals for the first time. Other technical improvements in the Shanghai upgrade are intended to improve the transactional aspects of the Ethereum network. Despite some concerns that the upgrade would cause ETH prices to drop, the price of ETH remained largely flat during the transition.

For more information, please refer to the following links:

Ethereum’s Shanghai Upgrade Is Complete, Starting New Era of Staking Withdrawals

U.S. Treasury Publishes DeFi Risk Assessment; Banque De France Analyzes DeFi

By Robert A. Musiala Jr.

The U.S. Department of the Treasury recently published its report Illicit Finance Risk Assessment of Decentralized Finance. According to a press release, the report is “the first illicit finance risk assessment conducted on decentralized finance (DeFi) in the world.” The press release notes that threat actors “like the Democratic People’s Republic of Korea (DPRK), cybercriminals, ransomware attackers, thieves, and scammers are using DeFi services to transfer and launder their illicit proceeds” and are exploiting the fact that “many DeFi services that have anti-money laundering and countering the financing of terrorism (AML/CFT) obligations fail to implement them.” According to the press release, “DeFi services engaged in covered activity under the Bank Secrecy Act have AML/CFT obligations regardless of whether the services claim that they currently are or plan to be decentralized.” The risk assessment includes “recommendations for U.S. government actions to mitigate the illicit finance risks associated with DeFi services” including strengthening U.S. AML/CFT supervision, considering additional guidance for the private sector on DeFi AML/CFT obligations, and addressing AML/CFT regulatory gaps related to DeFi services.

In a related development, the French Central Bank recently published a discussion paper addressing DeFi risks. Among other risks, the paper cites the high volatility and complexity of DeFi products and risk of user capital loss. The paper further notes that future DeFi regulation “cannot simply replicate the systems that currently govern traditional finance” and must consider “a combination between traditional financial regulations and regulations inspired by other economic sectors.” The paper explores several proposals for mitigating DeFi risks, including strengthening the security of blockchain networks and smart contracts, further defining the legal status of decentralized autonomous organizations (DAOs), and establishing frameworks for the supervision of intermediaries that facilitate access to DeFi services.

For more information, please refer to the following links:

Study Analyzes 2022 Crypto Tax Compliance Across Various Countries

By Keith R. Murphy

A recently published study conducted by a Swedish crypto tax firm estimates that globally only 0.53% of crypto investors paid taxes related to their cryptocurrency holdings in 2022. The study reportedly used a multistep methodology that analyzed “the relationship between the number of people who declared their cryptocurrency in their tax returns and the search volume for cryptocurrency tax-related keywords.” The study’s methodology used the search volume data “as a proxy to estimate the number of cryptocurrency taxpayers in each country where official figures … were not available” and considered the number of crypto holders in each country as reported by Statista’s Global Cryptocurrency Report.

Findings in the study include that Finland had the highest percentage of investors who paid taxes on their cryptocurrency holdings in 2022, at 4.09%, while the United States ranked 10th, at 1.62%. The study noted several potential reasons for differing tax payment rates among countries of the world, including variation in public awareness of tax reporting requirements, differences in government policies and enforcement that could affect tax reporting and collection, and that owning cryptocurrency does not always mean that taxes may be due. A report commenting on the study notes that tax experts have cast doubt on the study’s findings and methodologies, and further observes that the study itself acknowledges numerous limitations and assumptions upon which it is based that could undermine its conclusions.

For more information, please refer to the following links:

EU Report Analyzes Cryptocurrency Use on Darknet Markets

By Christopher Lamb

A recent report from the European Monitoring Centre for Drugs and Drug Addiction provides findings from an analysis of cryptocurrency use on darknet markets in the European Union and neighboring countries. According to the report, the darknet market (DNM) ecosystem, which “combine[s] the online anonymity-granting functions of Tor with traditional trust-building e-commerce trappings (e.g., vendor rating systems),” has grown significantly since 2011. The report utilizes Chainalysis data from 54 countries in the European Union, spanning April 1, 2019, to October 31, 2021, in reaching its conclusions. The report’s key findings include the following:

DNM expansion grows periodically but is interrupted with market volatility.
Most DNM activity clusters in one or two markets at any point in time.
Moves toward larger DNM volume or higher-priced purchases are occurring over time.
Different regions have sizable differences in total revenue engagement with the DNM.
All regions have a similar pattern showing revenue sent to the DNM is typically less than that received back.
There are notable gaps between the most- and least-engaged countries in the DNM.

The report notes that exchanges are “a common way of initially obtaining cryptocurrency to fund on-chain wallets” despite exchanges being governed by “know your customer (KYC) and anti-money laundering (AML) rules.” The report also notes that “[n]ot all countries in the sample have KYC and AML rules in place for exchanges working within their jurisdictional boundaries” and that “[s]ome national rules are inconsistent in design or application.” Of the 54 European countries included in the sample, eight have banned cryptocurrencies but continue to engage in DNM activity.

For more information, please refer to the following links:

EU Report: Cryptocurrencies and drugs: Analysis of cryptocurrency use on darknet markets in the EU and neighbouring countries

Hackers Drain Millions from Crypto Exchanges and DeFi Protocol

By Lauren Bass

According to reports, hackers recently stole nearly $13 million in cryptocurrency from a South Korean centralized exchange. The thieves reportedly siphoned 61 BTC, 350 ETH, 10M WEMIX tokens, and 220k USDT – almost 23% of the exchange’s total custodial assets.

In another recent hack, a DeFi protocol reportedly suffered a similar fate when hackers withdrew almost $11 million. According to reports, hackers exploited a bug in one of the protocol’s tokens to mint 1.2 quadrillion in fake coins, and then traded the counterfeit coins for millions in stablecoins.

In a third recent hack, a Singapore-based cryptocurrency exchange reportedly lost $23 million in ETH, QNT, GALA, SHIB, HOT, and MATIC in an attack that targeted a hot wallet used by the exchange. According to reports, the compromised wallet contained less than 5 percent of the exchange’s reserves.

For more information, please refer to the following links: