New Crypto Payment Services Launch; Blockchain Pilots Announced for Agriculture, Textile, Seafood Supply Chains; DeFi Project Hacked for $7 Million

A side view on a digital panel merging binary numbers with an integrated circuitIn this issue:

New Crypto Payment Services Launch, Bitcoin ATM Firm Asserts Patent Rights

Blockchain Pilots Announced in the Agricultural, Textile and Seafood Industries

Spanish Police Target Crypto Front Company, DeFi Project Hacked for $7 Million

New Crypto Payment Services Launch, Bitcoin ATM Firm Asserts Patent Rights

By: Joanna F. Wasick

Late last week, BitPay, a major cryptocurrency payment provider, announced the introduction of BitPay Send, a new mass payout service that enables organizations to pay employees, affiliates, customers, vendors, contractors and others with cryptocurrency. According to a press release, for a 1 percent fee, payments can be made 24/7, anywhere around the world. Recipients can participate without a bank account, and only need a BitPay ID and cryptocurrency wallet. The press release notes that companies do not need to own or manage cryptocurrency, and that no foreign exchange fees apply.

Also last week, Peninsula Visa, a U.S. passport and visa expeditor, announced it will accept bitcoin payments, using the payment services arm of a U.S. major cryptocurrency exchange as its processor. Bitcoin payments will only be accepted for select passport services, including renewals and name change. However, additional passport and visa services for which Peninsula will accept bitcoin payment will be rolled out over the next 12 months.

Belarusbank, the largest financial institution in Belarus, recently announced plans to launch a service allowing users to exchange cryptocurrency using a major credit card company’s payment card. The service is available to citizens of Belarus and Russia, and also enables trading cryptocurrency with fiat currencies, including the Belarusian ruble, the U.S. dollar and the euro.

Earlier this month, Bots Inc., a software company that develops artificial intelligence-based chatbots, announced that it was taking steps to enforce its Bitcoin ATM patent, which it acquired late last month. The patent relates to protocols underpinning the operation of “Bitcoin ATMs,” which enable purchase and sale of cryptocurrencies through web-linked kiosks that accept cash or debit or credit cards. In a statement, Bots said it was meeting with a major law firm to discuss enforcement of the patent to make Bitcoin ATM operators pay royalties to Bots. Bots also said it was contacting individual ATM operators to reach an amicable arrangement without litigation, while inviting those operators to join a consortium of Bitcoin ATMs.

For more information, please refer to the following links:

Blockchain Pilots Announced in the Agricultural, Textile and Seafood Industries

By: Robert A. Musiala Jr.

Two recent partnerships have been announced for blockchain solutions in the agricultural sector. Late last month, a major U.S. financial services firm announced a collaboration with GrainChain to develop and implement a blockchain platform “to forensically track commodities, from the initial inputs and raw materials to harvesting and processing to logistics and delivery to the consumer’s hands.” And this week, a major German pharmaceutical firm and BlockApps, an enterprise blockchain platform provider, announced the launch of TraceHarvest, an Ethereum-based network designed to “enhance food quality, safety and sustainability by bringing supply chain efficiencies, transparency, compliance and stewardship to agricultural products.”

Also this week, a major U.S. technology firm announced a collaboration with KAYA&KATO, “a textile company that manufactures uniforms and work wear,” to develop “a blockchain network for the fashion industry … designed to create transparency about the origin of garments, from the fiber used to the completion of the final product, and to provide consumers with the knowledge that their clothes are sustainably produced.” In another recent development, Australian tech firm Two Hands announced that it had successfully completed a pilot of its GoTrace blockchain platform to track a shipment of southern rock lobsters from Melbourne, Australia, to Shanghai, China, where the lobsters were served at a hotel wedding banquet.

A recent paper published by academics at MIT addresses “voting over the Internet” or “voting on the blockchain” and finds that “Internet and blockchain-based voting would greatly increase the risk of undetectable, nation-scale election failures.” The paper “analyzes … the security risks of online and electronic voting, and show[s] that not only do these risks persist in blockchain-based voting systems, but blockchains may introduce additional problems for voting systems.”

For more information, please refer to the following links:

Spanish Police Target Crypto Front Company, DeFi Project Hacked for $7 Million

By: Jordan R. Silversmith

Last week, Spanish police arrested a man alleged to be a former member of the Colombian Cali Cartel in relation to a cryptocurrency money laundering operation. The police claim that after the arrests of the Cali Cartel’s heads in 1995 and the subsequent decline of the gang’s drug empire, the man founded a cryptocurrency company that was a front for his money laundering activities. The Spanish police believe that the man has laundered over $7.1 million in drug and crime proceeds through cryptocurrencies.

A Chinese crypto blogger reported on Monday that cryptocurrency miners in China have been struggling to pay for electricity as a result of a recent crackdown by Chinese authorities on the country’s over-the-counter (OTC) brokers, which the cryptocurrency miners use to convert newly mined bitcoin to yuan. Chinese regulators have been increasing efforts to block bank accounts potentially related to money laundering via cryptocurrency and have recently investigated the two largest cryptocurrency OTC brokers in China.

Stablecoin project Origin Dollar (OUSD) recently experienced a DeFi attack that resulted in a loss of $7 million, including over $1 million deposited by Origin and its founders and employees. The attack used a flash loan and flaws in OUSD smart contracts to initiate a “rebase” that artificially inflated the supply of OUSD tokens in the protocol before swapping out the newly printed tokens for USDT. The team subsequently disabled deposits as the project’s native token has dropped 85% since the attack. The attack comes as the U.S. dollar value of cryptocurrency liquidity stored in DeFi projects reportedly hit $13.6 billion.

For more information, please refer to the following links:

Podcast: BakerHostetler Blockchain University: What You Need to Know About the Most Common Blockchain Networks

The third episode in the series focuses on the differences and similarities between the Ethereum Network, HyperLedger, and other key blockchain networks. Topics discussed include smart contracts, public versus private blockchains, distributed autonomous organizations (DAOs), blockchain “forks” and more.

Questions & Comments: rmusiala@bakerlaw.com, jsilversmith@bakerlaw.com

Listen to the episode.
Download Episode Transcript

Subscribe to BakerHosts
Apple Podcast | Google Podcast | iHeartRadio | Spotify | Stitcher | TuneIn

Ethereum Upgrade and Blockchain Identity Solutions Progress, SEC Addresses Digital Asset Custody, Data Published on ICO Penalties and Crypto Crimes

Modern research and information technologies in cyberspaceIn this issue:

Ethereum 2.0 Moves Closer to Launch, Blockchain Identity Solutions Announced

SEC Addresses Digital Asset Custody, Crypto Firms Achieve Licenses/Certs

Crypto Fraudster Sentenced, Data on ICO Penalties and Crypto Crimes Published

Ethereum 2.0 Moves Closer to Launch, Blockchain Identity Solutions Announced

By Jordan R. Silversmith

After having launched last week, the deposit contract for the newest upgrade to the Ethereum blockchain, Ethereum 2.0, now tops out at over 50,000 ETH, equivalent to over $22.5 million, which is one-tenth the way toward the threshold needed to activate the update. The deposit contract, a cornerstone of the Ethereum 2.0 update, is a bridge for major change in the Ethereum network. Rather than maintaining the traditional proof-of-work (PoW) consensus algorithm as its foundation, Ethereum 2.0 is intended to help the Ethereum network migrate away from PoW and toward a new technical infrastructure based on proof of stake (PoS). Once Ethereum 2.0 is triggered and goes live, early investors of Ethereum on the new network, or “stakers,” will reportedly begin earning block rewards at an estimated rate of 8 percent to 15 percent annually.

A collection of Spanish firms, including banking giants and energy firms, recently announced the development of a new “self-managed” digital identity system founded on blockchain technology. The group, named “Dalion,” said in an announcement that the mobile device-enabled ID platform will allow users to have more control over the ways their personal data is used. The group mentioned likely use cases including car rentals, insurance and loan applications, and sign-ups with utility providers. A proof-of-concept trial found the solution works “satisfactorily,” and while a second phase launches this month, there has been no word on when the platform will be released to the public.

A Japanese e-commerce giant recently announced that a blockchain platform is being integrated into the company’s online travel booking subsidiary. The integration of the platform means that customers can opt in to use the platform’s self-sovereign identity app and access bookings at more than 600,000 hotels and 200,000 rentals, according to an announcement. The blockchain-powered platform will reportedly allow customers to store and exclusively access travel documents in one location and eventually use cryptocurrencies to pay for bookings. The integration is scheduled to go live within the next two weeks.

For more information, please refer to the following links:

SEC Addresses Digital Asset Custody, Crypto Firms Achieve Licenses/Certs

By Robert A. Musiala

This week, the U.S. Securities and Exchange Commission (SEC) Staff of the Division of Investment Management, in consultation with the Staff of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), published a statement addressing the recent letter by the Wyoming Division of Banking that gave a trust company authority to provide custodial services for digital assets, “including virtual currency and digital (tokenized) securities” under Wyoming law. The SEC statement encourages interested parties “to engage with the Staff directly on the application of the Custody Rule to digital assets, including with respect to the definition of ‘qualified custodian’ under the rule.” The SEC statement also calls on interested parties to submit comments to the SEC on the topic of the “Custody Rule and Digital Assets” and provides a list of topics that the SEC is interested in discussing with industry participants.

According to reports this week, cryptocurrency custodian Anchorage recently received a SOC 1 Type 1 certification from a Big Four professional services firm. The SOC 1 Type 1 certification is an independent attestation of Anchorage’s internal systems and controls. Another report this week noted that Texture Capital has received its broker-dealer and alternative trading system licenses from the Financial Industry Regulatory Authority (FINRA). The licenses are a key step forward in the firm’s plans to launch a marketplace for trading private securities issued on blockchain networks

For more information, please refer to the following links:

Crypto Fraudster Sentenced, Data on ICO Penalties and Crypto Crimes Published

By Veronica Reynolds

Last week, a software engineer formerly employed at a major tech firm was sentenced to almost a decade in prison for 18 federal felonies related to an attempt to defraud his former employer of more than $10 million. The scheme involved the engineer using his role at the company to steal “currency stored value” (CSV), including digital gift cards, and reselling the CSV online. The sentencing may have been influenced and more severe due to the fact that the man fraudulently used email addresses associated with his colleagues in an attempt to cover his tracks, as well as a bitcoin “mixing” service in an effort to hide the source of the funds that were directed to his bank account.

The SEC recently reported that in 2020 it collected around $1.26 billion in penalties from enforcement actions against unregistered initial coin offerings (ICOs), the majority of which was collected from Telegram. And abroad, the Canadian Revenue Agency is seeking judicial intervention to force cryptocurrency exchange Coinsquare to relinquish more than seven years of client data in an effort to trace tax gains received by Canadians who failed to report such gains to the agency.

A recent report by Crystal highlights that fraud and cybersecurity issues continue to proliferate in the cryptocurrency industry. The report details “security breaches, fraudulent activity, cyber-terrorism, and scams” related to cryptocurrencies between 2011 and 2020, noting 113 security attacks and 23 fraudulent schemes, which have resulted in approximately $7.6 billion worth of stolen crypto assets. Of that amount, $2.8 billion is attributed to theft resulting from security breaches and $4.8 billion is from scams.

For more information, please refer to the following links:

US Crypto Debit Card Launches, Cayman Islands Announces VASP Regulations, Enterprise Developments in Telecom and Transport, DOJ Seizes $1 Billion in Bitcoin

In this issue:

US Crypto Debit Card Launches, Cayman VASP Regs Announced, INX to List in Canada

Blockchain Developments in Telecommunications, Transportation and Digital Identity

DOJ Seizes $1 Billion in Bitcoin from Silk Road, DOJ and CFTC Prosecute Crypto Fraud

US Crypto Debit Card Launches, Cayman VASP Regs Announced, INX to List in Canada

By: Joanna F. Wasick

Paxful, a peer-to-peer marketplace, and BlockCard, a cryptocurrency fintech platform, recently announced the launch of a crypto debit card they say will enable users to convert cryptocurrencies to U.S. dollars at the time of purchase and will allow payments and the withdrawal of funds at over 45 million merchants and ATM locations worldwide. At launch, the card will be available only to U.S. users, but there are plans to expand into other regions. The card is touted as filling the void left by traditional banking to service unbanked populations.

The Cayman Islands recently announced its development of a regulatory framework for Virtual Asset Service Providers (VASPs) within its jurisdiction, as part of compliance with Financial Action Task Force (FATF) guidelines that were rolled out last year. According to the October press release, the regulations for VASPs will commence in two phases. The first begins immediately and focuses on the compliance, supervision and enforcement of anti-money laundering and counterterrorist financing rules that comport with the FATF and Cayman local guidelines. For example, prospective and existing VASPs will have to register with the Cayman Islands Monetary Authority. The second phase is slated for June 2021 and focuses on licensing requirements and supervision.

And late last week, the INX cryptocurrency and security token exchange announced that it plans to trade its INX token on the Canadian Securities Exchange after finishing its initial public offering (IPO). The IPO was the first security token offering registered with the U.S. Securities and Exchange Commission and is seeking to raise $117 million from U.S. investors.

For more information, please refer to the following links:

Blockchain Developments in Telecommunications, Transportation and Digital Identity

By: Robert A. Musiala Jr.

According to reports this week, a major U.S. telecommunications company intends to begin recording all of its public statements and press releases on a blockchain ledger in order to “combat misinformation online.” The initiative is called the Full Transparency project and it leverages a blockchain platform that was reportedly developed by the telecom firm in collaboration with a New York-based digital ad agency, the AdLedger blockchain consortium and blockchain adtech firm MadNetwork.

In the transportation industry, a major provider of dump truck logistics technology recently announced that it has joined the Blockchain in Transport Alliance (BiTA). BiTA is a blockchain consortium focused on developing blockchain standards for use in the transportation industry.

And in the digital identity space, a market research firm recently published a major report covering digital identity from technical, regulatory and market perspectives. The report focuses on how consumers are expected to use digital identity, how successful blockchain will be in the digital identity market, the effect of regulations, the emergence of new identity networks and leading digital identity companies.

For more information, please refer to the following links:

DOJ Seizes $1 Billion in Bitcoin from Silk Road, DOJ and CFTC Prosecute Crypto Fraud

By: Jordan R. Silversmith

Early Wednesday morning, a blockchain intelligence firm reported that a wallet possibly belonging to the early dark web market Silk Road moved more than $1 billion in bitcoin. This was the first reported transaction from the address since 2015, when it transferred 101 bitcoin to BTC-e, a now-closed crypto exchange allegedly favored by money launderers. Later, on Thursday, the U.S. Department of Justice (DOJ) announced that it had seized the more than $1 billion in funds. According to a press release, the DOJ used a blockchain analytics firm to identify the seized bitcoin as having been stolen from Silk Road by an unnamed individual referred to as “Individual X.” The seizure represents the largest cryptocurrency seizure to date by the DOJ. The Bitcoin has been transferred to a government-controlled wallet and the DOJ has filed a civil complaint for forfeiture of the funds. If forfeited, the bitcoin will be moved to the Treasury Forfeiture Fund.

Also this week, the DOJ announced that it had seized cryptocurrencies worth an estimated $24 million on behalf of the Brazilian government in connection with a large cryptocurrency fraud scheme. Brazilian authorities estimate that the scheme, dubbed “Operation Egypto,” has defrauded tens of thousands of Brazilians of more than $200 million. The individuals behind the scheme duped investors with the possibility of lucrative investments in cryptocurrencies, allegedly making false and inconsistent promises about the way funds were invested and exaggerating the rates of return.

The Commodity Futures Trading Commission (CFTC) this week announced that a federal court has ordered a Colorado company and its principal to pay over $900,000 for their role in a digital assets and forex Ponzi scheme. The court ruled that the defendants fraudulently solicited more than 72 clients to invest in commodity pools that purportedly traded in foreign exchange funds and digital assets, including bitcoin, and then misappropriated the money. In addition to civil monetary penalties and a ban by the CFTC, the order requires the principal and the company to repay defrauded investors.

A hacker has reportedly stolen over $24 million from Harvest Finance, a decentralized finance service that allows users to invest cryptocurrencies and then farm out the price variations for small profit yields. The hacker ended up stealing $13 million worth of USD Coin and $11 million worth of Tether, although the hacker returned $2.5 million to the platform two minutes after the hack. Harvest Finance authors are offering $100,000 to anyone who can return the remaining funds.

For more information, please refer to the following links:

US Bank Crypto Services Proceed, Crypto Debit Cards Launch in US and Mexico, Blockchain Enterprise Developments, and Crypto Enforcement Continues

In this issue:

US Bank and Trust Companies Move Forward with Cryptocurrency Services

Cryptocurrency Debit Cards Launch in the United States and Mexico

Blockchain Developments in Protocols, Healthcare, Copyrights, E-Signatures, IoT

Enforcement Actions Target Crypto SIM Swapping and Ponzi Schemes

US Bank and Trust Companies Move Forward with Cryptocurrency Services

By: Robert A. Musiala Jr.

This week Avanti Bank & Trust was granted a bank charter from the Wyoming State Banking Board. According to a press release, the charter gives Avanti the same powers as national banks in its approved business lines. The press release notes that Avanti’s approved business plan includes “a tokenized U.S. dollar called Avit™*; custody services for digital assets as a ‘qualified custodian’ under the Investment Advisers Act; API-based online banking services, where customer deposits must be 100% backed by reserves; and prime services for digital assets.”

In related news, late last week a Wyoming-based trust company that provides wealth management services to high net worth individuals and family offices received a “No-Action Letter on Custody of Digital Assets and Qualified Custodian Status” from the Wyoming Division of Banking. The no-action letter gives the trust company authority to provide custodial services for digital assets, “including virtual currency and digital (tokenized) securities” under Wyoming law.

According to recent reports, the largest bank in the U.S. has said that its digital currency, JPM Coin, “is being used commercially for the first time this week by a large technology client to send payments around the world.” Late last week, the same bank reportedly issued a report noting that while bitcoin is more appropriately characterized as a “risk” asset than a “safe” asset, the “potential long-term upside for bitcoin is considerable.”

For more information, please refer to the following links:

Cryptocurrency Debit Cards Launch in the United States and Mexico

By: Robert A. Musiala Jr.

This week a major U.S. cryptocurrency exchange, in partnership with a major U.S. financial services firm, launched the first cryptocurrency debit card to be made available in the U.S. The crypto debit card will enable users to spend their cryptocurrency by using the debit card to make in-store and online purchases, as well as withdraw funds in U.S. dollars from ATMs. According to a press release, the crypto debit card is now available to customers in “nearly 30 countries, including the UK and across Europe,” with the first U.S. customers to be approved this winter.

In similar news from abroad, Paxful, a peer-to-peer cryptocurrency marketplace, has reportedly partnered with a Spanish bank to launch the first-ever crypto debit card to be made available to customers in Mexico. According to another recent report, “almost half of all bitcoin traded on the P2P exchange Paxful is exchanged for gift cards.” The report noted that up to $20 million worth of bitcoin is exchanged for gift cards on Paxful every week.

Earlier this month a major U.S. blockchain payments firm published its annual Blockchain in Payments Report. The report finds that blockchain payment solutions are scaling; digital assets are increasingly being considered for facilitating payments, especially when paired with blockchain technology; and industry innovators are realizing significant growth, even amid COVID-19.

For more information, please refer to the following links:

Blockchain Developments in Protocols, Healthcare, Copyrights, E-Signatures, IoT

By: Jordan R. Silversmith

Last week, a major U.S. technology company announced a new partnership with a New York-based blockchain company. By way of this collaboration, the technology company, which has mostly focused its blockchain offerings on HyperLedger Fabric, will now be able to offer blockchain solutions that leverage the R3 Corda blockchain. While the two companies have been competitors in the area of permissioned enterprise blockchain, the collaboration will now allow each to offer more solutions that leverage blockchain protocols initially developed by the other company.

A recent report on the role of blockchain in the global healthcare market predicts significant growth in the use of blockchain through 2027. The market is expected to reach a valuation of USD 5,798.0 million by 2027, the report says, even taking into account the effects of the pandemic.

A new plug-in from a leading web publishing platform will now allow users to timestamp content on the Ethereum blockchain. Timestamping, which creates a unique hash for the latest version of the content added to a blockchain, provides proof that the owner of the content created it and that the content has not been tampered with. To that end, the company hopes the new plug-in will help with copyright issues.

A prominent electronic signature business recently announced its vision for how blockchain-based “smart agreements” will work. The business plans to work with a company focused on smart contracts to create a new way for e-signatures to be integrated into the blockchain framework. The goal of the functionality is to enable e-signatures to become active pieces of IT infrastructure that can communicate with external resources.

The Sovrin Community released a new white paper last week on the interaction between the “Internet of Things” (IoT) and the concept of self-sovereign identity (SSI). The white paper addresses the current lack of a universal means to distinguish one “thing” from others or to determine what that thing is permitted to do. According to the white paper, this lack of identity and authority in IoT objects hampers the development of multiparty IoT services and ecosystems and makes it more difficult to provide effective solutions to the growing threat of cyberattacks. The white paper runs through several use cases and shows how SSI-enabled devices can use cryptographic methods to validate the identity of IoT objects.

For more information, please refer to the following links:

Enforcement Actions Target Crypto SIM Swapping and Ponzi Schemes

By: Joanna F. Wasick

This week, the U.S. Attorney’s Office announced indictments related to a plot to steal cryptocurrency and various electronic accounts, including social media accounts. The scheme allegedly involved registering fraudulent internet domains that appeared to be from legitimate wireless providers, sending “phishing” emails and taking over wireless phone numbers. The defendants are also alleged to have used electronic account credentials stolen from employees and affiliates of wireless providers to access those companies’ computer networks without authorization. The indictment states that after getting access, the defendants took over victims’ wireless accounts through “SIM swapping,” whereby customers’ mobile numbers, which are linked to unique subscriber identity modules (SIMs), were instead linked to SIMs installed in a device controlled by the defendants or their co-conspirators. Defendants then were able to access the victims’ other accounts, including email, social media and cryptocurrency accounts.

Last week, Spanish National Police arrested Santiago Fuentes, the operator of cryptocurrency arbitrage firm Arbistar 2.0 and charged him with financial fraud and money laundering. Arbistar reportedly served about 120,000 users who together invested about $520 million dollars in bitcoin into Arbistar’s trading bot. Last month, investors began accusing the platform of being fraudulent after Fuentes claimed a “computer error” disabled trading bot withdrawals and erased more than a quarter of the funds. An investigation firm tracking the case has reportedly found that Fuentes was actually running the platform as a Ponzi scheme.

For more information, please refer to the following links:

Major U.S. Firm Offers Cryptocurrency Services, Blockchain Solutions Launch Across Industries, CFTC Issues Crypto Guidance, FinCEN Fines Tumbler Service

In this issue:

Major U.S. Payments Firm Launches Cryptocurrency Service as Adoption Grows

Blockchain Supply Chain, Copyright and Satellite Comms Solutions Launch

CFTC Guidance Addresses Crypto Deposits, Travel Rule White Paper Published

Arrests Target Criminal Network Using Crypto, FinCEN Fines Tumbler Operator

Major U.S. Payments Firm Launches Cryptocurrency Service as Adoption Grows

By: Robert A. Musiala Jr.

This week a major U.S. Internet payments firm announced the launch of “a new service enabling its customers to buy, hold and sell cryptocurrency directly from their … account.” According to a press release, the company plans to make cryptocurrencies “available as a funding source” through its online payment’s platform “for purchases at its 26 million merchants worldwide” and will initially support bitcoin, ether, bitcoin cash and litecoin directly within customers’ digital wallets. The new service will reportedly become available to U.S. customers in the coming weeks. As part of the new offering, the company has become the first approved entity to receive a “conditional BitLicense” from the New York State Department of Financial Services. According to various press releases, the company will partner with a New York chartered trust company that will provide cryptocurrency trading and custodial services for customers using the new service.

In foreign markets, this week the Bahamas officially launched its central bank digital currency (CBDC), the sand dollar. The sand dollar is a digital version of the Bahamian dollar that is issued by the Central Bank of the Bahamas. In Japan, the firm that operates the country’s most popular messaging app is reportedly planning to launch a blockchain-based platform targeted at assisting central banks in launching CBDCs. And in the U.K., a publicly traded fintech firm has reportedly become “the first U.K. publicly traded company to announce a significant purchase of Bitcoin as part of its treasury investment strategy.” According to a press release, the company “has allocated up to ten percent (10%) of its cash reserves to purchase Bitcoin and adopt it as a treasury reserve asset.”

For more information, please refer to the following links:

Blockchain Supply Chain, Copyright and Satellite Comms Solutions Launch

By: Teresa Goody Guillén

Two global container carriers recently announced that they are now fully integrated onto the TradeLens blockchain-enabled shipping platform. According to the announcement, the global container carriers will help expand the ecosystem and will run validator nodes on the blockchain network.

A global retailer and a developer of enterprise-level blockchain platforms have published a case study that provides details on the creation and adoption of DL Freight, a blockchain solution for freight invoice management that tracks deliveries, verifies transactions and automates invoices in real time through the application of smart contracts. According to a press release, the solution has become “the national standard for freight invoice management” for the Canadian division of the global retailer.

This week a technology firm based in Mumbai, India, announced an initiative to leverage the R3 Corda blockchain to develop “a suite of next generation payments, working capital, and Foreign Exchange services that can be seamlessly deployed on Corda.” The solution will target midsize and small businesses.

A major Chinese blockchain business has announced the deployment of a new digital copyright services platform that combines blockchain technology with artificial intelligence to enable creators to securely authenticate and verify various forms of original content, including video as well as image-based and written material. The platform reportedly generates a unique, tamperproof digital copyright certification and notary stamp for each work that is uploaded into its database.

In a final notable development, a U.S. university’s engineering school and a nonprofit organization have secured a flight for the university’s blockchain solution on an aerospace rocket scheduled to launch on Nov. 20. The rocket is expected to carry a satellite that will include the university’s private blockchain mounted on a Raspberry Pi, which is a credit card-sized single-board computer. The pilot project seeks to reduce the cost of maintaining ground stations by allowing satellites to “talk” to each other in space.

For more information, please refer to the following links:

CFTC Guidance Addresses Crypto Deposits, Travel Rule White Paper Published

By: Robert A. Musiala Jr.

The U.S. Commodity Futures Trading Commission (CFTC) has issued an advisory to futures commission merchants (FCMs) to provide guidance on “how to hold and report certain deposited virtual currency from customers in connection with physically-delivered futures contracts or swaps” and on “designing and maintaining risk management programs concerning the acceptance of virtual currencies as customer funds.” The advisory sets out 12 requirements that FCMs must adhere to when holding virtual currency as customer funds. Among other things, the 12 requirements address approved depository institutions for virtual currencies, identification and documentation of deposits, withdrawal availability and timing, fair market value reporting, computation of daily and month-end segregation requirements, account segregation procedures, investment and margin value restrictions, procedures for return of customer funds, and required notices. The advisory notes that the CFTC “may determine to examine any FCM that accepts and holds customer virtual currency assets to determine how it is choosing to meet its obligations.”

The U.S. Travel Rule Working Group (USTRWG), whose members include 25 leading U.S. virtual asset service providers (VASPs), have published a new white paper addressing the application to VASPs of the Travel Rule, which imposes certain customer identification and data transmission requirements on cryptocurrency transactions based on the U.S. Bank Secrecy Act, regulations issued by the U.S. Financial Crimes Enforcement Network, and guidance from the Financial Action Task Force. The white paper focuses on Phase 1 of a solution that is intended to serve as a proof of concept for facilitating Travel Rule compliance among VASPs.

This week a major U.S. cryptocurrency exchange published a report providing details on requests that the exchange received from law enforcement during the period of Jan. 1 to June 30, 2020. Among other things, the report noted that 58 percent of all requests came from U.S. agencies, 16 percent came from state or local authorities, and 90 percent of all requests came from just three jurisdictions: the U.S., the U.K. and Germany.

For more information, please refer to the following links:

Arrests Target Criminal Network Using Crypto, FinCEN Fines Tumbler Operator

By: Joanna F. Wasick

Twenty suspected members of the QQAAZZ criminal network were recently arrested for attempting to launder tens of millions of euros on behalf of the world’s most notorious cybercriminals. According to press releases, the QQAAZZ money laundering network used bank accounts and sometimes converted funds to cryptocurrency using “tumbling” services to obscure the source of the funds. After taking a fee of up to 50 percent, QQAAZZ members would return the balance of the stolen funds to their cybercriminal clients. The arrests were the result of an unprecedented international law enforcement effort involving enforcement from 16 countries, including the U.S. Department of Justice, which last week announced related indictments out of its office.

Earlier this week, the Financial Crimes Enforcement Network (FinCEN) announced its assessment of a $60 million civil money penalty against Larry Dean Harmon, the founder and operator of Helix and Coin Ninja, cryptocurrency “mixers” or “tumblers” that are designed to obscure the source of cryptocurrency. According to FinCEN, Harmon operated his companies as an unregistered money services business (MSB) and violated the Bank Secrecy Act and related regulations by failing to register as an MSB, failing to implement and maintain a proper anti-money laundering (AML) program, and failing to report certain suspicious financial activity. FinCEN identified over 1.2 million unlawful transactions, including 356,000 bitcoin transactions, through Harmon’s enterprise, including transactions involving narcotics traffickers, counterfeiters and other criminals.

The trial against Alexander Vinnik, who allegedly laundered billions of dollars through his alleged operation of the now defunct cryptocurrency exchange BTC-e, is set to begin this Monday in Paris. Vinnik, who is also wanted in the United States and Russia, was arrested in 2017 while on vacation in northern Greece. After two years of litigation, Greek authorities ruled Vinnik would be extradited first to France, then to the United States and then to Russia.

This week the U.S. Securities and Exchange Commission (SEC) announced a final judgment on consent against Kik Interactive Inc., to resolve the SEC’s charges that Kik’s unregistered offering of digital “Kin” tokens in 2017 violated federal securities laws. Under the judgment, Kik must pay a $5 million penalty and must, for the next three years, provide the SEC notice before engaging in enumerated future issuances, offers, sales and transfers of digital assets.

For more information, please refer to the following links:

DOJ and IRS May Soon Begin Enforcement Actions Against Virtual Currency Tax Fraudsters

In the past several years, the use and prevalence of virtual currency have increased exponentially. The proliferation of digital assets has changed the way goods and services are exchanged and has allowed for faster and cheaper transactions. But with this new technology comes the increased risk of fraudulent activity – especially tax fraud. Recently, the Internal Revenue Service (“IRS”) has made it abundantly clear through guidance, amendments to tax forms, and even warning letters to Americans suspected of tax fraud, that it is getting very serious about virtual currency tax compliance.

The IRS and the Department of Justice (the “DOJ”) appear to be poised to commence a flurry of enforcement actions against virtual currency tax fraud offenders. Likely to be entangled in these enforcement actions are virtual currency institutions and companies that regulators suspect facilitated their customers’ tax evasion. It is thus imperative for all entities in the virtual currency industry to ensure their compliance programs are equipped to detect and prevent the facilitation of virtual currency tax fraud. Continue Reading

BakerHostetler Blockchain University: Podcast Series

What is Blockchain and Why Should I Care?

Blockchain technology is widely anticipated to disrupt major industries and business operations over the next several years. But with all of the “hype” in the blockchain market, at times it can be difficult to separate fact from fiction and identify the real value in this new technology. To help bring things into focus, we’ve crafted a five-part series to introduce blockchain from a technological, market, and legal perspective.

Our first episode provides an introduction to what blockchain is, how it works, and the key blockchain networks that everyone should know about.

Listen to the episode


Bitcoin – Understanding the Phenomenon

The Bitcoin Network is the world’s first implementation of blockchain technology, and bitcoin is one of the world’s most widely used cryptocurrencies. In many respects, the blockchain market started with bitcoin, and so the origins and concepts underlying the Bitcoin Network can provide insights into the issues that drive the larger blockchain market. There are also just some really interesting stories surrounding the Bitcoin Network—like the fact that we still don’t know who actually created it.

Listen to the episode

US Firms Invest in Bitcoin; Blockchain Consortia Expand; Industry and Regulators Address Tech Standards, CBDCs, Crypto Investments, Enforcement, Stablecoins, Taxes

In this issue

Fintech Firm Brings $50 Million BTC on to Balance Sheet, Major CBDC Report Published

US Firms Announce Crypto Investment Initiatives, Crypto Fundraising Report Published

Blockchain Consortia Expand, Reports Detail Blockchain Standards and Economic Impact

US and Foreign Guidance Addresses Crypto Enforcement, Stablecoins, Taxes and More

Fintech Firm Brings $50 Million BTC on to Balance Sheet, Major CBDC Report Published

By: Joanna F. Wasick and Jordan R. Silversmith

Late last week, a major U.S. fintech and payments firm published a “Bitcoin Investment Whitepaper” and announced that it purchased $50 million worth of bitcoin (approximately 4,709 bitcoins). The white paper cites the “rapid evolution of cryptocurrency” and “unprecedented uncertainty from a macroeconomic and currency regime perspective” as two reasons why this was the right time to expand the company’s largely USD-denominated balance sheet. The white paper also details how the purchase was executed, the cold storage used to custody the bitcoin, the policy insuring the bitcoin and how the bitcoin will be classified from an accounting perspective.

The Italian Banking Association (ABI) recently announced that, after the addition of 42 more banks, about 100 Italian banks are officially operating on the country’s banking blockchain network, Spunta, built on R3’s Corda. According to the announcement, 204 million transactions had been processed on Spunta’s infrastructure since March, and the association predicts the number to exceed 350 by year’s end.

Last week, the Bank for International Settlements, together with seven central banks, released a report on how a central bank digital currency (CBDC), which the report describes as a “digital payment instrument,” could be used to help central banks meet their public policy objectives. The report outlines foundational principles and core features of a CBDC, including that it would (1) coexist with cash and other types of money within a payment system, (2) support wider policy objectives and do no harm to monetary and financial stability, and (3) promote innovation and efficiency. The report notes that a CBDC could be an important instrument for central banks to provide a safe means of payment; it also identifies ways in which a CBDC could adversely impact bank funding and institutional financial activity. The report concludes that “far more work” is required to understand the many issues that a CBDC could generate.

For more information, please refer to the following links:

US Firms Announce Crypto Investment Initiatives, Crypto Fundraising Report Published

By: Robert A. Musiala Jr.

A New York-based cryptocurrency asset management firm recently announced that its Ethereum Trust has become a registered reporting company under the Securities Exchange Act. The move follows in the footsteps of the firm’s Bitcoin Trust, which became a reporting company in January 2020. In a separate development, late last week, as part of an announcement related to a new funding round, the bitcoin-focused subsidiary of a major New York-based asset manager noted that it acts as custodian of 10,000 bitcoin (valued at $115 million) on behalf of its parent company.

A Big Four accounting and consulting firm recently published its 2nd Global Crypto M&A and Fundraising Report. Among other findings, the report notes a “sharp decline” in volume/value for crypto fundraising and mergers and acquisitions; a slight shift in investment from the Americas to APAC, EMEA and other geographies; and trends indicating consolidation of fundraising and deal flow to later-stage companies. According to the report, “the United States remains the main incubator for crypto, with the top 10 companies receiving funding during 2019 and 2018 mostly coming from the United States.” For 2020, the report predicts continued industry consolidation and increased fundraising and M&A driven by the APAC and EMEA sectors.

For more information, please refer to the following links:

Blockchain Consortia Expand, Reports Detail Blockchain Standards and Economic Impact

By: Robert A. Musiala Jr.

A major Canadian railway has announced that it has joined the TradeLens blockchain shipping platform. In a press release, the railway notes that the TradeLens platform will help enable “secure and transparent transfer of container-shipping documents” and help the firm “create, amend and share documents with other supply chain participants, including consignees, beneficial cargo owners, customs agencies, dray operators and steamship lines.” In related news, a technology firm and creator of a machine learning-based logistics platform has joined the Blockchain in Transport Alliance, a major industry consortium focused on creating standards for the development of blockchain applications in the transportation, logistics and freight industries.

Late last week, the U.S. Department of Homeland Security awarded contracts totaling $817,712 to five different blockchain startups. The contract awards are aimed at developing proofs of concept for anti-forgery and counterfeit prevention systems.

A new white paper from the World Economic Forum (WEF) addresses blockchain technical standards. The paper “maps standards that focus broadly on distributed ledger technology (DLT) in order to take a comprehensive view of the evolution of standards” and “to map the wide ecosystem contributing to technical standards.” Among other topics, the paper addresses standards related to tokens, software, network governance and defined terms. The paper also notes some of the gaps, divergence and overlap among the various standards identified.

A recent report from a Big Four accounting and consulting firm “explores the impact blockchain technology can have on the global economy.” The report notes that blockchain “has the potential to boost global gross domestic product (GDP) by US$1.76 trillion over the next decade.” Among other findings, the report ranks the “top five” blockchain use cases, based on economic value, as provenance, payments and financial instruments, identity, contracts and dispute resolution, and customer engagement.

For more information, please refer to the following links:

US and Foreign Guidance Addresses Crypto Enforcement, Stablecoins, Taxes and More

By: Robert A. Musiala Jr.

Late last week, the U.S. Department of Justice published its Cryptocurrency Enforcement Framework. According to a press release, the framework “provides a comprehensive overview of the emerging threats and enforcement challenges associated with the increasing prevalence and use of cryptocurrency … and outlines the Department’s response strategies.”

This week the Financial Stability Board (FSB), an international body that monitors the global financial system, published a report that “sets out high-level recommendations for the regulation, supervision and oversight of ‘global stablecoin’ (GSC) arrangements.” The recommendations address legal authority, regulations proportionate to stablecoin risks, coordination across jurisdictions, accountability for stakeholders, anti-money laundering and cybersecurity frameworks, data safeguarding standards, orderly wind-down and recovery plans, disclosure requirements, stablecoin redemption rights, and licensing/registration.

A recent report from the Organization for Economic Cooperation and Development (OECD) addresses taxation of cryptocurrencies around the globe. The report was prepared “for presentation to the meeting of G20 Finance Ministers and Central Bank Governors in October 2020.” The 69-page report discusses tax policy considerations, provides an overview of how cryptocurrencies are taxed in different jurisdictions and addresses key challenges in taxing cryptocurrency-related transactions. In a related development, a recent report noted that South Korea has initiated a new 20 percent tax on gains derived from trading cryptocurrencies.

In Europe, this week the Isle of Man Financial Services Authority published new cryptocurrency guidance that classifies crypto-assets into three categories: security tokens, electronic money tokens and “unregulated tokens that fall outside the regulatory perimeter for financial services.” The report highlights registration requirements for businesses engaged in “convertible virtual currency activity” and notes that even “unregulated tokens” are subject to requirements related to anti-money laundering and countering the financing of terrorism. And in the Netherlands, the central bank recently approved the first registered cryptocurrency business under new regulations designed to implement the European Union’s 5th Anti-Money Laundering Directive.

For more information, please refer to the following links:

SEC Wins Case Against Kik and Adds Precedent for Digital Assets

On Sept. 30, the United States District Court for the Southern District of New York granted the U.S. Securities and Exchange Commission’s (SEC) motion for sum

mary judgment against Kik Interactive Inc. (Kik) and denied Kik’s cross-motion for summary judgment. As we previously reported, the SEC challenged Kik’s compliance with the federal securities laws in raising funds through simple agreements for future tokens, or SAFTs, and Kik’s 2017 public sale, valued at approximately $100 million, of Ethereum-based ERC20 tokens, known as Kin. The Court held that the undisputed facts show Kik offered and sold securities without a registration statement or exemption from registration, in violation of Section 5 of the Securities Act of 1933 (Securities Act).

Key Court Findings

The Court made numerous findings that are central to its opinion and provide additional precedent to the securities law analysis of digital assets and the offer and sale of those digital assets. Here, the Court held that the SAFT and public token offering were two offerings that were integrated. The integration doctrine prevents an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to multiple offerings that would not be available for the combined offering. Here, because the SAFT sales relied on Regulation D, the integrated public token offering would be part of the same Regulation D offering, and all sales must meet all the terms and conditions of Regulation D. In determining whether the two offerings are integrated, the court considers the following factors, not all of which need to be met: Continue Reading

LexBlog