Blockchain for NASA and IoT, Developments in Crypto Products and Payments, Cryptocurrency Exchange Hacked

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In this issue:

The Blockchain Effect: NASA, IoT, Supply Chain and State Initiatives

Blockchain Announcements From Traditional Financial Institutions and Emerging Platforms

Cryptocurrency Exchanges and Payment Providers Announce New Products

Cryptocurrency Exchange Hacked, Crypto-Malware and Wallet Vulnerabilities Exposed

International Regulators Target Cryptocurrency Exchanges, ICOs and Tax Compliance

Tax Analysis: Crypto Thefts; Market Declines – Strategies to Manage Losses

The Blockchain Effect: NASA, IoT, Supply Chain and State Initiatives

By: Diana J. Stern

On Monday, NASA Ames Research Center published a paper about a permissioned blockchain framework that addresses privacy and security issues for FAA air traffic data using certificate authority, smart contract support and secure communication channels. The impetus for the proposal is that the FAA is mandating national adoption of an Automatic Dependent Surveillance Broadcast system, but, as the paper argues, the system leaves a question mark around certain security concerns. Also in security, a report found that only approximately 48 percent of businesses can detect a breach of their IoT devices – and that there will be more than 20 billion connected devices by 2023. In addition, of 950 IT professionals surveyed, 23 percent believe blockchain could be the answer for securing IoT devices. The results of the study suggest that 91 percent of organizations that do not use blockchain technology today are likely to consider it going forward.

In supply chain initiatives, a major U.S.-based international automaker and other companies at various stages of the mineral supply chain launched a pilot to monitor the responsible production, trade and processing of cobalt. The eventual goal is to explore an open, industrywide blockchain platform for tracking minerals used in consumer products. The World Wildlife Fund was also active in supply chain this week. The WWF Australia launched a tool that enables businesses and consumers to track food using QR codes and blockchain technology. In other enterprise news, a major U.S.-based package delivery and supply chain management company made a strategic investment in Inxeption Corporation, a blockchain-based B2B e-commerce platform that helps merchants increase online sales.

A major energy company in Spain is using Energy Web Foundation, a blockchain-based platform purpose-built for the energy industry, for a renewable energy pilot. One of the company’s takeaways from the test drive was to use blockchain tech to issue a guarantee of origin so that consumers have a verifiable certificate about the source of the energy they consume. The largest cargo shipping company in Israel, Zim, has been piloting a blockchain-enabled platform for electronic bills of lading for over a year, and is now making the offering available to its clients for selected trades. Zim said the value proposition includes improved workflow and digitization of paper-based processes. Finally, Vermont put out an RFI to test whether blockchain technology can improve the efficiency, accuracy, security and transparency of regulatory processes. The pilot program will allow new captive insurance companies to register with the state.

For more information, please refer to the following links:

Blockchain Announcements From Traditional Financial Institutions and Emerging Platforms 

By: Robert A. Musiala Jr.

On Monday, one of the largest banks in the world announced that over the course of 2018 it settled $250 billion in foreign exchange trades using an internally developed blockchain platform that, among other benefits, allowed the bank to verify settlement without external confirmation. Meanwhile, a major Swiss investment bank announced that it is launching a cryptocurrency custody service targeted at institutional market participants. In the commodities markets, the blockchain-based commodities trading platform Vakt, which runs on the Quorum blockchain, has added a major U.S.-based multinational energy company to its platform and industry consortium. On Jan. 10, cryptoasset index provider Bitwise Asset Management filed a registration statement with the SEC seeking approval for a physically held bitcoin exchange-traded fund (ETF). According to a press release, the proposed ETF will differ from prior ETF proposals because it will use regulated third-party custodians to hold its physical bitcoin.

According to reports, late last week the security token trading platform tZERO announced that it has begun releasing security tokens into the custody of investors who purchased the tokens during a private offering completed in August 2018. Another announcement this week stated that the Aspencoin, a securitized token associated with the St. Regis Aspen Resort, will be migrated to the Securitize platform to enable trades across multiple exchanges. In Europe, the Belarus-based blockchain technology company Currency.com issued a press release claiming to have launched “the world’s first fully-functional trading platform for tokenised securities.” According to the press release, the platform will offer “a tokenised version of a contract for exchange of a specific equity, commodity or index.”

In recently published findings, a study by MarketWatch searched the SEC’s Edgar database and identified 287 Form D filings that contained key terms indicating that funds raised from accredited investors involved an initial coin offering (ICO). The study estimated the total value of Reg D exempt ICO-related fundraising events at $8.7 billion for the year 2018. Another study recently published by BitMEX analyzed ICO tokens issued to members of ICO teams. The study found that the total value of tokens held by ICO team members has declined from $24 billion to $5 billion, due mostly to falling market prices for the tokens.

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

Cryptocurrency Exchanges and Payment Providers Announce New Products

By: Joanna F. Wasick

Ways to exchange cryptocurrency continue to grow. Bittrex, a U.S.-based cryptocurrency exchange, announced its launch of an over-the-counter (OTC) trading desk that will support the nearly 200 cryptocurrencies the exchange currently offers. According to Bittrex, the OTC desk will allow parties to transact directly, unlike exchange trading, which matches buy and sell orders through an order book. Binance, another prominent exchange, announced its new fiat-to-crypto exchange, which will be based in the island of Jersey. “Jersey Binance” will purportedly enable traders in Europe and the UK to trade Bitcoin and Ethereum against the British pound and the Euro. New reports also reflect a continued increase in the number of cryptocurrency ATMs, citing roughly 4.9 ATMs installed per day worldwide (with more installed in the United States than in any other country). Getting paid in cryptocurrency by an employer may soon become easier as well. Bitwage, a cryptocurrency payment and wage service, announced a new system that allows companies to pay salaried employees in cryptocurrency. The system includes a new crucial feature that converts a portion of funds into dollars so employers can pay withholding taxes. And one fiat-backed cryptocurrency began the new year with positive news. Cryptocurrency finance company Circle released the third audit of its fiat-backed stablecoin USD Coin. The audit, conducted by a major U.S. accounting firm, confirmed that USDC tokens do not exceed the company’s fiat reserves.

According to recent reports, daily volatility of bitcoin is down a full 98 percent from last year. This volatility decrease comes hand in hand with a significant decrease in price ‒ the price for bitcoin is down nearly 68 percent from this time last year. Some predict that the decrease is here to stay: bitcoin’s spot price is currently higher than its futures price. Regardless of pricing, one company is making sure cryptocurrency owners can store their wealth in style. A luxury Swiss watchmaker is now offering “Blockchain Watch,” a handcrafted timepiece with a built-in crypto-wallet. The watch is priced over $100,000 and can only be purchased with bitcoin.

For more information, please check out the following links:

Cryptocurrency Exchange Hacked, Crypto-Malware and Wallet Vulnerabilities Exposed

By: Jordan R. Silversmith

On Jan. 15, several news outlets reported that a New Zealand-based cryptocurrency exchange, Cryptopia, had gone offline after being hacked, with about $2.44 million worth of ether tokens and about $1.18 million worth of centrality tokens being transferred to unknown wallets on Jan. 13. Shortly after the hack, cryptocurrency exchange Binance froze and quarantined certain tokens sent to its exchange by the entity allegedly responsible. In related news, gate.io announced that $100,000 worth of cryptocurrency stolen from its exchange during the 51 percent attack on Ethereum Classic allegedly has been returned by the hacker who took it. Gate.io mentioned in its post that the hacker may have been a “white-hat” hacker seeking to demonstrate security risks.

Recent hard forks of Ethereum Nowa (ETN) and Ethereum Classic Vision (ETCV) have reportedly been tarnished by malware that appropriates the private keys of users trying to redeem their forked coins. Meanwhile, malware posing as a movie file on popular torrenting site The Pirate Bay reportedly has been found to trigger a chain of nefarious activities that include cryptocurrency thefts. Additionally, a recent report has highlighted vulnerabilities in numerous “cold storage” cryptocurrency wallets, including Trezor One, Ledger Nano S and Ledger Blue. The report, titled “wallet.fail,” outlined research into the vulnerabilities of popular hardware wallets, which are typically considered more secure than wallets hosted online.

A recent rash of ransomware attacks known as the Ryuk ransomware, estimated to have earned hackers $2.5 million in Bitcoin, likely came from Russian cybercriminal activity rather than state-sponsored North Korean actors, crypto-focused news site Hard Fork reported on January 14. According to a recent report from Zerohedge, Russia is preparing to make major investments in bitcoin as part of a larger trend in which the country has been liquidating its U.S. Treasury holdings and investing in other foreign currencies and commodities like gold. One source has claimed that Russia intends to purchase as much as $10 billion in bitcoin, beginning as early as February. Russian government officials have refuted this claim.

For more information, please check out the following links:

International Regulators Target Cryptocurrency Exchanges, ICOs and Tax Compliance

By: Simone O. Otenaike

Bitmex, a Hong Kong-based Bitcoin derivatives exchange registered in the Seychelles, reportedly deactivated the trading accounts of clients from the U.S. and the Canadian province of Quebec this week. Bitmex also imposed similar restrictions against clients from North Korea, Iran, Syria, Cuba, Sudan and Crimea, to avoid violating anti-money laundering and anti-terrorist financing laws. Coincheck, a Japanese cryptocurrency exchange registered with the Kanto Financial Bureau, recently lost $530 million in altcoin tokens due to a hack. Despite the loss, Japan’s Financial Services Agency granted full permission for Coincheck to continue operations in the country. According to a recent report from South Korea’s Ministry of Science and ICT, Internet & Security Agency, and the Ministry of Economy and Finance, only a third of cryptocurrency exchanges satisfy the government’s network, security and wallet management standards. The South Korean agencies inspected a total of 21 cryptocurrency exchanges from September to December 2018 and examined 85 different aspects. Only seven of the cryptocurrency exchanges satisfied the applicable standards: Upbit, Bithumb, Gopax, Korbit, Coinone, Hanbitco and Huobi Korea.

Also this week, the Finance Minister of Malaysia announced that the Securities Commission plans to regulate initial coin offerings and the trade of cryptocurrencies effective Jan. 15. Meanwhile, The Cyberspace Administration of China (CAC) introduced new regulations for blockchain-based companies that operate in China. The CAC’s guidelines require companies to permit authorities to access stored data and obtain an ID card or mobile number from its users ‒ the new regulations will be effective Feb. 15. In Spain, The Spanish National Securities Market Commission added 23 unauthorized cryptocurrency exchanges to its warning list this week. The Danish Tax Council will soon permit its Tax Agency to access cryptocurrency trader information from exchanges. Upon the Tax Agency’s request, cryptocurrency exchanges must produce trader information, including trades, names and addresses, and central person registration numbers, for the period spanning 2016 – 2018. The Danish Tax Agency ultimately plans to use this trader information to determine if citizens are paying taxes on any profits.

For more information, please check out the following links:

Tax Analysis: Crypto Thefts; Market Declines – Strategies to Manage Losses

By: Roger M. Brown and Nicholas C. Mowbray

It’s hard to read about developments in the cryptocurrency space without seeing articles about token thefts, post-initial coin offering declines in value and market volatility. These are recurring themes reported on in our Blockchain Monitor blog posts. According to a recent survey, U.S. investors who have sold bitcoin collectively have realized approximately $1.7 billion in losses, but only 53 percent plan to report bitcoin gains and losses on their tax returns.

Like most commercial events, tax planning presents ways to provide value, reduce risk and/or enhance operating efficiency for crypto market participants. Proper tax planning can yield positive results and should be considered by investors with significant crypto market activity. Favorable tax treatment can be achieved by addressing the fact that crypto assets are capital assets for market participants that are not dealers. That means that gains and losses are not “ordinary” from a tax perspective, which in turn means that any net capital losses of an individual taxpayer can be carried forward to provide for a $3,000 annual deduction only until the carryforward is used up (assuming there are no capital gains in that or proceeding years).

There are many strategies to minimize inefficiencies related to the characterization of gains and losses as capital verses ordinary. Some of these include:

  • Disposing of crypto assets in a way that creates an ordinary deduction rather than a capital loss.
  • Holding crypto assets in certain entities where character is less relevant and gains and losses offset each other without regard to character.
  • Planning to achieve dealer status where crypto assets are treated as ordinary in nature.

Depending on a taxpayer’s investment strategy, there may be a trade-off between long-term capital gains tax rates and tax rates for ordinary income. However, those rates will not apply when a crypto asset is held for less than one year. Moreover, avoiding inefficiencies of mountains of capital loss carryforwards could militate in favor of employing a strategy that is not reliant on a long-term holding period.

Separately, other considerations might exist when crypto assets are held by a domestic corporation. This is because capital losses can be carried back for three years, providing refunds of prior taxes paid on capital gains. In addition, corporations can carry capital losses forward for only five years, after which they vanish (whereas individuals can carry forward their capital losses indefinitely). Thus, corporations might have more pressure to pursue strategies that avoid capital losses.

New Blockchain Products, an FBI Raid, the $11 Billion Bitcoin Case, Hackers Strike With a 51 Percent Attack and Crypto Tax Analysis

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In this issue:

New Cryptocurrency Financial Products and Platforms Announced

An FBI Raid, the $11 Billion Bitcoin Case, and Other Enforcement and Regulatory Actions in the U.S. and Abroad

Hackers Strike With 51 Percent Attack and Crypto-Mining Malware

Tax Analysis: Token Taxonomy Act Would Allow Tax-Free Exchanges of Virtual Currencies

Tax Analysis: Impact of Increases to Crypto Trading and Organized Exchanges

New Cryptocurrency Financial Products and Platforms Announced 

By: Simone O. Otenaike

Last week, SEFToken Inc. launched a new tokenized instrument. The new token, known as a “covered warrant,” will be issued through the Securitize platform on the Ethereum blockchain. According to reports, the “warrant tokens” will be convertible into equity in Mercari, a licensed exchange based in Australia. Warrant token holders will hold the right to buy or sell the underlying security at a fixed price, up until a predetermined date. In the U.K., the country’s oldest Bitcoin exchange, Coinfloor Group, launched CoinFLEX (Coin Futures and Lending Exchange) ‒ the world’s first physically delivered bitcoin futures exchange. CoinFLEX will offer contracts that trade against Tether (a crypto token that is pegged to the dollar) and features the world’s first stablecoin-to-stablecoin futures contract, a contract to trade Tether against USD Coin.

According to reports, investors funded approximately $2.2 billion in U.S.-based crypto projects and $4.6 billion in global crypto projects over the course of 2018, a roughly 400 percent increase from last year. Last week, Bakkt, the Intercontinental Exchange’s cryptocurrency project, raised $182.5 million during its first institutional funding round. After achieving regulatory approval, Bakkt plans to launch a one-day physically delivered Bitcoin futures contract along with physical warehousing. Also this week, the Nasdaq-powered DX Exchange announced plans for its new trading platform. The exchange intends to offer investors the opportunity to trade tokenized stocks in select global companies and support various crypto-to-crypto and crypto-to-fiat pairs.

On the international front, Thailand’s Ministry of Finance, under the recommendation of the SEC Board, granted digital asset business licenses to three digital asset exchanges and one cryptocurrency broker-dealer. The SEC’s press release revealed that two other applicants failed to meet the SEC’s acceptable standards regarding the systems for custody of client assets, Know Your Customer controls and cybersecurity systems.

tZERO, an e-commerce giant’s cryptocurrency subsidiary, filed a patent for a “crypto integration platform” early last week. According to the patent filing, the system will trade securities, tokens, digital shares, cash equivalents and digital assets from broker-dealers and then translate the orders into digital assets on the platform. Among other things, the platform reportedly will aggregate market data from various cryptocurrency exchanges and generate the best price in the crypto market for the digital asset or liability involved in the transaction. tZero’s parent company also announced Thursday it plans to pay part of its business taxes in Ohio via the state’s new cryptocurrency taxpayer platform, OhioCrypto.com. The e-commerce giant will become the first company to pay part of its Ohio state taxes in Bitcoin.

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

An FBI Raid, the $11 Billion Bitcoin Case, and Other Enforcement and Regulatory Actions in the U.S. and Abroad

By: Robert A. Musiala Jr.

According to reports, late last month the FBI raided the offices of a Michigan-based nonprofit technology center in what appears to be an action related to unlicensed operation of a cryptocurrency exchange business. Late last week, U.S.-based cryptocurrency exchange Kraken reported that the number of inquiries it received from U.S. law enforcement agencies tripled from 2017-2018, with a total of 475 inquiries from global law enforcement agencies received in 2018. Also last week, a U.S. district court judge denied a motion to dismiss and set a Sept. 30 trial date for a civil lawsuit against Australian businessman and self-proclaimed Bitcoin creator Craig Wright, who is being sued by the estate of his deceased former business partner. The plaintiffs in the lawsuit claim Wright fraudulently took possession of over $11 billion of bitcoin that belonged to the deceased. Also, a second private class action lawsuit was recently filed related to the theft of $170 million in cryptocurrency assets from an Italian-based exchange.

In India, police recently arrested a suspect accused of involvement in a $71.6 million fraud scheme related to the sale of cryptocurrency tokens. In the United Arab Emirates, according to reports, the UAE financial regulators intend to introduce new regulations governing initial coin offerings sometime in the first half of 2019. Additionally, this week the European Banking Authority issued a report on “crypto-assets” that advised the European Commission to perform a cost-benefit analysis to assess “whether EU-level action is appropriate and feasible” to address the effects and implications of crypto-assets on the financial sector. On the same day, the European Securities and Markets Authority (ESMA) published a report on initial coin offerings and crypto-assets for the EU Commission, EU Council and EU Parliament. Issues highlighted in the ESMA report include anti-money laundering risks and investor risks related to certain crypto-assets that fall outside of current regulatory frameworks.

For more information, please refer to the following links:

Hackers Strike With 51 Percent Attack and Crypto-Mining Malware

By: Joanna F. Wasick

Barely into the new year, Ethereum Classic (ETC), an offshoot of Ethereum (ETH) and the 18th-largest cryptocurrency by market cap, was subject to a “51% attack” – a type of hack possible on cryptocurrencies using a proof-of-work (POW) protocol. In essence, a single entity or group gains a majority of the network hash rate, enabling it to rewrite blockchain data and therefore “double-spend” ‒ sell cryptocurrency for fiat, and then amend the ledger to get the coins back, while keeping the fiat. Reports indicate that nearly $1 million worth of ETC was stolen in the recent attack. A Chinese security firm, SlowMist, published technical details on the attack and claimed it may be able to identify more information on the attacker if certain cryptocurrency exchanges assisted by providing information. This news comes on the heels of The Ethereum Foundation’s announcement that it will slash energy consumption in 2019 by replacing POW with a proof-of-stake protocol, which cuts energy consumed per Ethereum transaction. In addition to ecological benefits, the protocol switch may thwart these kinds of thefts, although it is unclear whether other types of attacks will be made possible.

But POW-targeted attacks are hardly the only kind of theft in crypto news. A new study reports a staggering 4,000 percent rise this year in cryptocurrency mining malware ‒ malware used by criminals to hack into an innocent user’s computer, smartphone or other device in order to harness processing power to use for mining cryptocurrencies. The study estimates that illicit crypto-mining was responsible for nearly $57 million in revenue. The most popular cryptocurrency was Monero, 4.3 percent of which was mined through the use of illicit malware. Bitcoin was the second-most-targeted currency, but its popularity has declined over the past three years due to an increase in hash rate and difficulty in mining.

Conventional bitcoin wallet attacks continue as well. According to reports last week, a hack targeted at the Electrum bitcoin wallet provider stole approximately $750,000 worth of bitcoin from Electrum wallet users.

For more information, please check out the following links:

Tax Analysis: Token Taxonomy Act Would Allow Tax-Free Exchanges of Virtual Currencies

By: Roger M. Brown and Heather K.P. Fincher

The Token Taxonomy Act, introduced by Rep. Warren Davidson, R-Ohio, on Dec. 20, 2018, would treat so-called “trading pair” exchanges of virtual currency, where one cryptocurrency is exchanged for another cryptocurrency, as tax-free exchanges.[1]

Prior to 2018, many holders of virtual currency took the position that exchanges of one token for another qualified as a tax-free exchange of like-kind property under pre-tax reform rules (pre-2018 Section 1031 of the U.S. Tax Code). In certain ways, the rules could be flexible by focusing on like-kind asset classes, rather than on similar value.

This approach was applied to certain financial assets, such as an exchange of gold bullion for Canadian Gold Maple Leaf coins, and an exchange of one bundle of patents for another.

The 2017 Tax Cuts and Jobs Act changed the like-kind exchange rules. They now only apply to exchanges of real property. The Token Taxonomy Act would permit the tax-free exchange of virtual currency (in addition to real property), and apply to post-Jan. 1, 2017, exchanges.

All cryptocurrency assets are not created equal. Some may even fall into another bucket all together and be outside of what the bill treats as a crypto asset from a U.S. tax perspective. This is because labels mean little in tax law, and some tokens, particularly securitized tokens, may be treated as actual ownership in the underlying reference assets. In such an instance, the token could even be outside of the protection offered by the new bill.

[1] The proposed legislation would also exclude up to $600 of gain when virtual currency is sold or exchanged for cash or cash equivalents.

Tax Analysis: Impact of Increases to Crypto Trading and Organized Exchanges

By: Roger M. Brown and Nicholas C. Mowbray

On Dec. 11, 2018, the Commodity Futures Trading Commission released a request for public comments signaling their belief that there will be an increase in the trading of crypto assets and crypto-based derivatives on organized exchanges. This belief is evidenced by the launch of the Coin Futures and Lending Exchange, and the anticipated launch of Bakkt and the Eris Exchange’s crypto market.

The increases in trading and the number of organized exchanges give rise to unique U.S. tax issues that may not have applied to a crypto asset before, including:

  • Whether gain or loss will be triggered annually, regardless of whether the crypto asset is sold.
  • Whether a non-U.S. fund can trade a crypto asset without being subject to U.S. taxation.
  • Whether certain rules apply that can defer the recognition of a tax loss despite the sale of an asset.

This is because the tax consequences of trading in an asset can change as it becomes actively traded, and in some instances, whether trading is on an organized exchange.

Thus, holders of crypto assets should review their holdings and consider whether an asset’s trading has become sufficiently active to be subject to tax treatment that differs from its prior treatment. Further, the differences in active trading and whether such trading is on an organized exchange can cause differences in tax treatment among tokens.

Studies Analyze Cryptocurrency Market, New Announcements in Payments, Enterprise and Threats

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In this issue:

Multiple Studies Analyze Recent Cryptocurrency Market Trends

Stablecoins, “Trading Pairs” and Other Developments in Cryptocurrency Payments

Threat Update: Ransomware, Crypto-mining Malware, BTMs and ICO Fraud Schemes

Blockchain Enterprise Developments in France, Spain and South Korea

UK Issues Cryptocurrency Guidance; US Issues Remain

Monetizing Positions in Cryptoassets Without Triggering Taxable Gain or Loss

Multiple Studies Analyze Recent Cryptocurrency Market Trends

By: Robert A. Musiala Jr.

A recently issued report from the Blockchain Transparency Institute analyzed high-volume bitcoin “trading pairs” on various cryptocurrency exchanges and found “clear evidence of wash trading” on 22 of 25 exchanges analyzed. A bitcoin “trading pair” is an exchange of bitcoin for another type of cryptocurrency (or vice versa), and “wash trading” is a form of market manipulation where an investor simultaneously buys and sells the same financial instrument to create artificial market activity. The report claims to have identified four different “bot strategies” used to artificially inflate bitcoin trading pair volumes via wash trading on cryptocurrency exchanges. According to the report, over 80 percent of the top bitcoin trading pairs volume reported by CoinMarketCap is wash traded, with most of the trading pairs having actual volume under 1 percent of their reported volume.

Another recent report analyzed website traffic on the most frequently used cryptocurrency exchanges and found that many cryptocurrency exchanges with low website traffic report high transaction volumes. According to the report, this indicates that some cryptocurrency exchanges may be artificially inflating the dollar value of transactions processed on their platforms. Cryptocurrency market manipulation is also the topic of a recently published research paper co-authored by professors from four different universities that provides a detailed examination of “pump and dump” schemes in the cryptocurrency markets. The report’s findings suggest that such schemes are “widespread and often quite profitable.”

According to a recent Bloomberg article, a large U.S. hedge fund acknowledged emerging contingencies related to initial coin offerings (ICOs) by citing the risk that a significant percentage of ICOs it had invested in may be found in violation of U.S. securities laws. An analysis published Dec. 17 found rising outflows of Ethereum (ETH) from wallets reportedly controlled by ICO projects, with over 400,000 ETH moving out of ICO team wallets over a 30-day period. Another recently released analysis found that of the over 460 million “public key” addresses on the bitcoin blockchain, only about 172 million were “economically relevant” in that they are “controlled by people or services who currently own bitcoin,” with the remaining 63 percent of addresses used only temporarily to facilitate transactions.

Another apparent trend, reported by Diar, found that institutional bitcoin trading appears to be shifting away from traditional exchanges in favor of over-the-counter markets. Finally, the University of Cambridge has released its 2nd Global Cryptoasset Benchmarking Study, which “gathers survey data from more than 180 cryptoasset companies and individuals, covering 47 countries across five world regions” and provides analysis focused on mining, exchange, storage and payments. In one notable finding, the study reports that in the first three quarters of 2018, the number of ID-verified cryptocurrency users almost doubled, increasing from 18 million to 35 million.

For more information, please check out the following links:

Stablecoins, “Trading Pairs” and Other Developments in Cryptocurrency Payments

By: Robert A. Musiala Jr.

In recent developments in cryptocurrency payments, according to reports, the PAX stablecoin, which is backed 1:1 by U.S. dollars, recently exceeded $5 billion in transaction volume in just over three months of its September launch. Another recently launched stablecoin, USD Coin, has been added by the cryptocurrency exchange Binance as a “trading pair” option for six different cryptocurrencies.

This week, Coinbase began allowing its retail customers to trade bitcoin in “trading pairs,” where bitcoin is exchanged for another type of cryptocurrency. Coinbase also recently announced that its U.S. customers now will be able to withdraw cash balances to their accounts at a major U.S. internet payment processor. And startup OpenNode recently announced that it has closed a seed-funding round from a major U.S. venture capital firm to develop a new bitcoin payment processing system for merchants that want to accept bitcoin as payment.

For more information, please check out the following links:

Threat Update: Ransomware, Crypto-mining Malware, BTMs and ICO Fraud Schemes

By: Shea M. Leitch

Scammers recently delivered messages to various targets threatening to detonate explosive devices carried by an unidentified “mercenary” unless the targets paid a $20,000 ransom to a bitcoin wallet by the end of the business day. The sender(s) targeted individuals in geographically dispersed English-speaking countries, such as the U.S., Canada and New Zealand. Authorities in these jurisdictions have reported that no explosives were actually found.

In addition to so-called crypto-ransomware, another emerging threat are bitcoin ATMs (BTMs), which according to a recent report are spreading quickly and may pose high risks of money laundering. Perhaps the most pervasive current threat is crypto-mining malware, which, according to a new Threats Report from McAfee Labs, has increased 4,000 percent over the past year.

Financial regulators in France and Belgium have sought to minimize the impact of cryptocurrency fraud on investors, each blacklisting a number of crypto-related investment websites this week and warning against unauthorized or fraudulent ICOs. The Belgian Financial Services and Markets Authority announcement contained a blunt warning to investors.

“The principle remains the same: they offer you an investment they claim is secure, easy and very lucrative. They try to inspire confidence by assuring you that you don’t need to be an expert in cryptocurrencies in order to invest in them. They claim to have specialists who will manage your investments for you. You are told that your funds can be withdrawn at any time or that they are guaranteed. In the end, the result is always the same: the victims find themselves unable to recover their money!” (Emphasis in the original)

Greece’s high court issued a ruling this week affirming a lower court’s decision to extradite to France Alexander Vinnik, who is accused of laundering up to $4 billion through the now-defunct cryptocurrency exchange BTC-e. Russia has also sought Vinnik’s extradition. Vinnik’s legal representatives have expressed the belief that his extradition to France will result in his eventual extradition to the United States to face charges of fraud, identity theft, money laundering and a number of other crimes related to his alleged operation of the BTC-e cryptocurrency exchange.

For more information, please check out the following links:

Blockchain Enterprise Developments in France, Spain and South Korea

By: Simone O. Otenaike

According to a recent report, French officials plan to invest about $569 million in state-level blockchain projects over the next three years. In the same report, officials expressed a desire to create a more bitcoin-mining-friendly environment in France. Despite these potential initiatives, the country’s commitment to the blockchain and cryptocurrency industries seems tenuous – just last month, France’s central bank failed to endorse a plan involving the sale of bitcoin at thousands of tobacco kiosks. Meanwhile, Spanish renewable energy company ACCIONA Energía launched the GREENCHAIN project, which will use a blockchain platform to track the supply chain of renewable energy from five wind and hydro facilities in Spain to four corporate customers in Portugal in real time. According to reports, ACCIONA Energía will be the first entity in Spain and Portugal to trace renewable energy through blockchain technology and allow clients to certify from any location in the world that 100 percent of the energy supplied is green.

In South Korea, the Ministry of Science, ICT and Future Planning and the Ministry of Oceans and Fisheries announced plans to launch its maritime blockchain pilot project, which will promote efficiency in the country’s container shipping industry. The port-logistics pilot will run for one year out of the Port of Busan, the country’s largest port, and the fifth-busiest container port worldwide. The pilot is part of the South Korean government’s overall strategy to raise $204 million for blockchain technology by 2022.

For more information, please check out the following links:

UK Issues Cryptocurrency Guidance; US Issues Remain

By: Roger M. Brown and Nicholas C. Mowbray

This week, the U.K. tax authorities (HMRC) published guidance on the taxation of cryptoassets. The guidance states that HMRC does not view such cryptoassets as currency or money – which aligns the HMRC view with the general U.K. regulatory position. The guidance identifies three types of cryptoassets:

— Exchange tokens (including bitcoin and other cryptocurrencies)

— Utility tokens

— Security tokens

The guidance notes that labels do not control; rather, the functionality and substance do. The guidance focuses on the taxation of exchange tokens while noting that it also provides a beginning discussion point for rules that may ultimately be developed for the other types of tokens.

The guidance states that, in the vast majority of cases, individuals hold cryptoassets as a personal investment and hence will be liable to pay capital gains tax on any profits arising when they dispose of their cryptoassets. Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, organization and sophistication that the activity amounted to a financial trade – the profits of which would be subject to income tax rather than capital gains tax.

HMRC specifically notes that it does not consider the buying and selling of cryptoassets to be the same as gambling – the proceeds of which would be tax-free. This is a clear change of position from their March 2014 guidance, which stated “depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable.”

Under the U.K. guidance, cryptoassets received from mining or from airdrops may be subject to income tax on receipt, depending upon the nature of the activity giving rise to the receipt. Cryptoassets received as earnings from employment are treated as “money’s worth” and are therefore subject to income tax and national insurance contributions.

The U.K. guidance raises questions that are similar to those that must be addressed from a U.S. tax perspective when transactions in cryptocurrency occur. Some of these questions focus on:

– The proper category of property in which to place tokens

– Which types of transactions give rise to taxable gains or deductible losses

– The applicable rate at which to tax gains

– Application of employment compensation rules to cryptoassets (or rights therein), including when there are conditions of continued employment associated with the retention of such rights

– Treatment of cryptocurrency or tokens received in exchange for performing some activity (e.g., mining, social actions, validating)

– Actions that give rise to a taxable gain (or loss) when cryptocurrency is disposed of, as well as planning opportunities that can defer taxable gains

– Tax treatment of forks – both hard and soft

– Record keeping and reporting

In the absence of comprehensive guidance in the U.S. on cryptocurrency issues, taxpayers will borrow from other areas in doing their best to comply with their tax obligations – while identifying opportunities to optimize their tax situations when applicable doctrines permit.

* * * * *

The U.S. discussion above was provided by Roger Brown and Nicholas Mowbray of Baker Hostetler LLP. The U.K. discussion above was provided by Darren Oswick of Simmons & Simmons, LLP.

Monetizing Positions in Cryptoassets Without Triggering Taxable Gain or Loss

By: Roger M. Brown and Heather K. P. Fincher

Strategies still exist to monetize a position in crypto without triggering current taxable gain or loss, as a recent case shows: Estate of McKelvey v. Commissioner (906 F.3d 26, 2nd Cir. 2018).

Many people historically have sought to diversify their crypto holdings by exchanging one cryptoasset for another. Some people sought to avoid recognition of taxable income by taking the position that the exchange of cryptocurrencies was exempt from current taxation under the “like kind exchange” rules. However, that’s no longer possible, due to 2017 tax law changes.

Nevertheless, a number of common law doctrines continue to exist that permit current monetization without current taxable income. One example is illustrated by the transaction undertaken by the founder of the Monster.com website, Andrew McKelvey (McKelvey). McKelvey had substantial appreciation in his shares, and he sought to monetize that value without triggering current taxable gain by entering into variable prepaid forward contracts (VPFCs).

Under VPFCs, a buyer of the shares agrees to make an upfront payment for the right to receive at a future date a maximum amount of the designated assets or their cash equivalent. The exact number to be delivered, however, would be determined by a minimum price and a maximum price that limit the amount of property to be delivered in the future.

As security for performance, the buyer gives the seller cash up front, effectively “monetizing” the shares upfront. In turn, the seller receives the maximum amount of assets at a future date that the buyer may have to deliver. Custodians can be involved to minimize performance and execution risks.

The IRS did not take issue with the fact that the VPFCs of McKelvey were effective in allowing the taxpayer to monetize his position. Rather, the IRS said that McKelvey’s modification of the VPFCs by extending their settlement dates shortly before delivery was effectively an event that triggered taxable gain. The appellate court agreed.

As trading activity in cryptoassets increases, taxpayers seek to monetize positions without triggering taxable gains or losses. Traders also seek to enter into different forms of “long” and “short” positions to profit from market movements. VPFCs are among the established tools that can be used to achieve these goals in the crypto space – just like they have been for other asset classes.

Blockchain Developments: Government and Transport Sector Solutions, Legislation, Payment Applications and Global Enforcement Actions

In this issue:

• Blockchain Transport Applications, Public Sector Initiatives, Protocol and Market Developments

• Capital Markets Initiatives Continue as US Congress Issues New Research and Two New Bills

• Blockchain Payments Networks Evolve, New Cryptocurrency Exchange Lands in US

• SEC Achieves Settlements, FATF Evaluates UK, Regulator Actions in Denmark and New Zealand

• Tax Analysis: Securitized Tokens Backed by Real Property or Other Assets

Blockchain Transport Applications, Public Sector Initiatives, Protocol and Market Developments

By: Diana J. Stern and Simone O. Otenaike

Transportation, oil and gas industry players have put the pedal to the metal to push blockchain pilots. According to reports, the Abu Dhabi National Oil Company (ADNOC) is working on a blockchain-based system that automates the accounting process for oil and gas production from end to end. In addition, Maritime Blockchain Labs has announced plans to further develop its blockchain-based platform for tracking marine fuel quality and quantity assurance, with the goal of facilitating data-driven decision-making and alleviating industry-wide pain points. National Transport Insurance, a truck and transport insurer, is taking part in a trial to improve food safety, better animal welfare and monitor exports by leveraging blockchain technology, innovative packaging and IoT systems to secure supply chain provenance for Australian beef. Finally, State Farm is testing whether blockchain technology can streamline the manual process of subrogation, the legal right to seek damages from a third party responsible for a loss suffered by the insured.

In the public sector, the U.S. Department of Homeland Security is soliciting applications for a funding program that provides blockchain startups and small businesses with the opportunity to receive grants of up to $800,000 for the development of anti-counterfeiting solutions. At the state level, Vermont’s Attorney General has established a working group to study blockchain technology by engaging with stakeholders, associations, industry experts and state agencies. On the international front, UNICEF’s Innovation Fund will invest up to $100,000 in six companies selected from more than 100 applications to fund open-source blockchain prototypes aimed at solving global challenges such as transparency in healthcare delivery and access to mobile phone connectivity. Early this week, the European Union Blockchain Observatory & Forum published a report that sets out use cases, advantages and challenges for deploying blockchain technology in government and public service applications – urging that experimentation needs to continue and that digital identity and blockchain-based central bank digital currencies (CBDCs) are fundamental building blocks.

Last Friday, Ethereum core developers agreed to launch the Constantinople hard fork (Constantinople) at block 7,080,000. Constantinople incorporates five separate Ethereum Improvement Proposals that soften Ethereum’s transition from proof-of-work (PoW) consensus to a more energy-efficient proof-of-stake (PoS) consensus algorithm. This upgrade to a PoS consensus algorithm has the potential to fundamentally change the Ethereum blockchain system. Meanwhile, earlier this week, Hyperledger announced that 16 more organizations have joined its project as general members and four as associate members. According to a leading accounting firm, the price of bitcoin is down more than 80 percent from its December 2017 high, the total market value of all cryptocurrency has fallen 87 percent from its early January high, and about 86 percent of the ICOs from 2017 are trading below their listing price while 30 percent have lost nearly all of their value. According to reports, these market declines are causing investors to put pressure on crypto-based and blockchain-based enterprises to produce revenue-generating products.

A major online retailer’s investment arm may soon become its core business. Yesterday, the retailer’s founder announced that the publicly traded company is seeking to sell its flagship retail site by February and keep its portfolio companies, many of which have business models based on blockchain. These include the security token trading platform tZERO, enterprise technology provider Symbiont, voting application Voatz, lending startup Ripio and data managing platform Factom, among others.

For more information, please check out the following links:

Capital Markets Initiatives Continue as US Congress Issues New Research and Two New Bills

By: Jonathan D. Blattmachr 

This week brought a slew of developments in the block and crypto capital markets space, largely in Europe. In Germany, solarisBank is working with the Boerse Stuttgart Group to create full-spectrum infrastructure for digital assets. The two entities are seeking to launch a crypto trading venue by the first half of 2019, with bitcoin and ether initially available for trading and an eye toward providing a platform for ICOs and secondary market trading for tokens. Blockchain consortium R3 has partnered with several major European banks to produce live commercial paper transactions, which follows a simulated transaction conducted last year. The program aims to cut inefficiencies from current models. The Gibraltar Stock Exchange subsidiary is now providing insurance coverage for crypto assets (both online and offline) traded on the Gibraltar Blockchain Exchange. This makes the Gibraltar Blockchain Exchange at least the third digital exchange offering such insurance, but coverage remains insufficient to cover all trades made daily worldwide. To quell concerns that its stablecoins may not be backed one-to-one with euros, Malta-based Stasis has hired an outside auditor to provide assurance to investors. In October, similar concerns led to Tether’s USDT tokens losing parity with the dollar. Outside Europe, a major South Korean bank announced it will begin blockchain recordkeeping to reduce human error and increase efficiency.

While bipartisanship can feel unfathomable these days, congressmen from different sides of the aisle have introduced two bills focused on cryptocurrency market manipulation. The lawmakers say the proposed legislation will help shape regulations that will also promote competitiveness. The Congressional Research Service (CRS), which operates for and under the direction of Congress, has issued a report on cryptocurrencies, economics and policy issues. The CRS report notes that cryptocurrencies’ “role and value … remain highly uncertain,” largely because of functionality questions. The report also notes cryptocurrency-related concerns about consumer protections, proper regulatory schemes, potential facilitation of crime and the effect on monetary policy. CRS also wrote that central bank digital currencies could provide certain benefits, including allowing individuals to have accounts at central banks, which could improve systemic stability and cause commercial banks to offer interest rates to entice customers.

For more information, please check out the following links:

Blockchain Payments Networks Evolve, New Cryptocurrency Exchange Lands in US

By: Joanna F. Wasick

Financial services firms in the Middle East, Europe and Asia continue to build on cryptocurrencies’ ability to facilitate domestic and cross-border payment transactions. According to reports, the United Arab Emirates’ (UAE) central bank and the Saudi Arabian Monetary Authority are collaborating to issue a cryptocurrency that will be used exclusively by banks for transactions between the two countries. In Germany, cryptocurrency payments startup Bitwala and German fintech startup solarisBank are reportedly launching a banking system that enables users to manage bitcoin and euro deposits in one place, with the same services, safety and convenience of a traditional German bank account. In Asia, Coinone Transfer, a subsidiary of Coinone, recently introduced Cross, South Korea’s first blockchain-based remittance app and web service, which can be used regardless of whether the user has a bank account. Cross is enabled by RippleNet, blockchain technology from U.S. startup Ripple, and is being launched with support from the Siam Commercial Bank in Thailand and Cebuana Lhuillier in the Philippines. The UAE Exchange and Ripple announced plans to launch another cross-border remittance service in Asia by the first quarter of 2019.

On the domestic front, Amplify Exchange has announced plans to open U.S. operations in Knoxville, Tennessee. Amplify Exchange reportedly operates on a decentralized internet system enabled by its sister company, Substratum, and allows users to access the internet privately and irrespective of certain government use restrictions. Also reflecting a premium on privacy, Mastercard recently applied for a patent on a system that obfuscates the point of origin and amount of certain cryptocurrency transactions. In other payments news, U.S.-based cryptocurrency exchange Kraken, following a recent valuation of $4 billion, is reportedly preparing for an initial private offering targeted to high-net-worth investors.

For more information, please check out the following links:

SEC Achieves Settlements, FATF Evaluates UK, Regulator Actions in Denmark and New Zealand

By: Marc D. Powers

The SEC was successful this week in two enforcement settlements. It obtained an order from a federal court in Texas requiring the former CEO and COO of AriseBank to pay $2.7 million to settle registration and anti-fraud violations. The case arose from the ICO of AriseCoin, where AriseBank executives falsely claimed their company was a first-of-its-kind decentralized bank offering a variety of cryptocurrency-related services. As part of the settlement, the executives agreed to an Officer and Director bar. The former CEO was criminally charged for the same conduct shortly before the settlement was finalized. In another settlement, CoinAlpha Advisors LLC (CoinAlpha) settled registration violation charges when it agreed to return $600,000 raised from 22 investors from several U.S. states. The SEC alleged that CoinAlpha engaged in a general solicitation of unregistered securities and took no reasonable steps to ensure only accredited investors purchased interests in its fund.

Also this week, in a class action alleging sales of unregistered securities related to an ICO, a district court denied the defendants’ motion to dismiss, finding the defendants were unable to demonstrate that the tokens subject to the lawsuit were not “investment contracts” subject to SEC registration requirements. In a voluntary action, a well-funded startup, Basis, announced that it would return its funding to investors and cancel its project to build a stablecoin that would maintain a stable price based on algorithmic functions. As reported by Forbes, Basis decided to cancel the project after a meeting with the SEC left the company and its lawyers believing that the proposed stablecoins would be deemed unregistered securities. In another item of note this week, the CFTC published a request for information seeking public comment and feedback on the underlying technology, opportunities, mechanics, use cases and markets related to Eether and the Ethereum Network to benefit its LabCFTC, created in May 2018.

In international news, a new report was published last week by the Financial Action Task Force (FATF) that evaluated anti-money laundering and counter-terrorist financing (AML/CFT) measures in place in the United Kingdom. The report pointed out that “virtual currency exchange providers are not yet covered by AML/CFT requirements” and cited this as an “emerging risk.” The report also stated that “there is not yet evidence to suggest that broad scale ML/TF is occurring in the UK through this relatively small sector.” According to another recent report, Denmark has identified 2,700 individuals that it claims owe substantial taxes on bitcoin profits from 2015 to 2017. Meanwhile, New Zealand has blacklisted three more cryptocurrency platforms as scams. Harking back to the days of Mt. Gox, prosecutors in Japan are seeking a 10-year prison sentence for Mark Karpeles, who they claim stole $3 million from customer accounts in late 2013, months before the exchange collapsed in the wake of a hack. In a recent cybersecurity incident, hackers reportedly have set in motion a massive campaign that scans for internet-exposed Ethereum wallets and mining equipment, stealing the ether. Finally, a Dec. 12 blog post from the University of Oxford noted that an interesting precedent may have been set in a recent Canadian court case, where the court ordered a substantial amount of ether to be returned to the plaintiff after the plaintiff demonstrated, using blockchain analysis, that the ether had been transferred in error.

For more information, please check out the following links:

Tax Analysis: Securitized Tokens Backed by Real Property or Other Assets

By: Roger M. Brown and Heather K. P. Fincher

In October 2018, an asset management company, Elevated Returns, reportedly raised $18 million through securitized tokens backed by commercial real estate. Other asset managers are thinking of similar token issuances.

Many investors in such token issuances may think the asset they hold is a new token. However, the U.S. tax law likely would treat the investors in these types of token issuances as owning an interest in the underlying real estate. This can be important for a number of reasons, including where a token holder is not a U.S. tax resident.

In such an instance, the investor not only may be subject to U.S. tax on the sale of a token but also may be required to comply with special tax rules applicable to transfers by a non-U.S. resident of a U.S. real property interest. Moreover, under these rules, the purchaser of the token could be responsible for withholding and depositing with the IRS 15 percent of the proceeds they transfer to the seller. Special tax filing obligations can also apply to the non-U.S. resident, and certain pre-certifications may be needed prior to any sale – regardless of whether the token seller is a U.S. or non-U.S. person.

These results are generally different from the normal rules that would apply to a sale of a token, such as bitcoin or ether. In other words, the federal and state tax consequences on the sale of a token may vary based on whether and what assets back a particular token. Similar rules may apply in other countries, as well, where the real estate or other assets backing the token are outside of the United States.

Blockchain Patents and Patient Data Pilots, Capital Markets Movements, Mining Malware, and More

In this issue:

Blockchain Enterprise Developments in Food Supply Chain, Patient Data, Patents, Mobile Devices and More

Regulation, Investment and a Bad Week for Bitcoin: Blockchain and Cryptocurrency Capital Markets Developments

Global Regulatory Consensus Beginning to Take Shape; Cryptocurrency Mining Malware Evolves 

Blockchain Enterprise Developments in Food Supply Chain, Patient Data, Patents, Mobile Devices and More

By: Simone O. Otenaike

An international supermarket conglomerate operating in 17 countries worldwide recently announced that it will implement TE-FOOD’s blockchain-based food traceability solution in five countries: France, Italy, Spain, Portugal and Senegal. More than 6,000 companies, including other leading global food retailers, have implemented TE-FOOD’s solution. In related news, a major online retailer’s crypto fund announced plans to purchase $2.5 million of equity stake (roughly 10 percent) in GrainChain, a startup that is developing a blockchain platform to aid farmers and purchasers in the grain industry by providing a more transparent vision of a grain supplier’s source and eliminating the need for middlemen. Roughly 500 farmers are currently piloting the network, and the company expects to go live sometime in the first quarter of next year.

SwissPost, Switzerland’s national postal service, and Swisscom, the state-owned telecom provider, have announced plans to team up and develop a private blockchain platform designed to meet the high security levels required by banks and to assist in securing applications such as maintaining temperature measurement data during the transport of pharmaceuticals. In Barcelona, Spain, last week, Sirin Labs unveiled the final design of its blockchain phone, the Finney. The Finney will start shipping in late December and seeks to make decentralized applications and cryptocurrency platforms easier to use through functions like automated conversion between various cryptocurrencies.

Earlier this week, one of the top five hospitals in the U.S. announced plans to collaborate with Korean blockchain startup MediBloc to develop a secure solution for health information exchange that supports data sharing. Ultimately, MediBloc aims to develop a tool that would convert data held by hospitals, research bodies, and insurance and pharmaceutical companies into a universal format. Eight medical institutions across Asia and 14 tech companies are presently signed up to test MediBloc’s system.

In patent technology news, a U.S.-based global tech giant recently won a patent connected to a chip that reduces by 15 percent the amount of power needed for cryptocurrency mining operations. The patented chip would be smaller than those currently used by cryptocurrency miners and would promote energy-efficient, high-performance mining. Meanwhile, a U.S.-based multinational vehicle manufacturer and distributor published a patent application this week that discusses the use of a distributed ledger to store data and facilitate information sharing between vehicles.

According to a recent report, various Ohio venture funds will invest more than $300 million over the next three years in early-stage startups that focus on using blockchain technology for business or government. And Hyperledger recently launched a cryptographic library, Ursa, as a new tool for developers in the open source space. Ursa aims to avoid duplication of development efforts among blockchain developers by serving as a single repository of cryptographic implementations.

For more information, please check out the following links:

Regulation, Investment and a Bad Week for Bitcoin: Blockchain and Cryptocurrency Capital Markets Developments

By: Jonathan D. Blattmachr and Robert A. Musiala Jr.

In news that no Blockchain Monitor reader wants to hear, technical analysts are sounding the alarm bell on bitcoin. On Dec. 6, bitcoin slid below its 52-week low to around $3,400, which comes on the heels of November, in which it experienced its worst month in seven years. Chartists forecast that bitcoin could drop another 60 percent, to around $1,500. Fundamental analysts have blamed the drop on regulatory pressure, the recent hard fork and the choppy conditions in global markets generally. Due to the price drop, many bitcoin miners have ceased operations. This appears to have resulted in the second-largest drop in Bitcoin block hashing difficulty in history, with a drop of 15 percent reported on Dec. 3. A cryptocurrency mining pool recently reported that breakeven for mining operations, depending on various factors, is between $3,891 and $11,581, which means at current prices, many large-scale miners will spend more on mining than the price for which they can sell the bitcoin.

The plunge isn’t stopping the capital markets industry from moving forward with new ideas, however. Institutional investors will now be able to trade on the cryptocurrency exchange Poloniex. These investors will have access to different cryptocurrency trading pairs and API interfaces as well as no-fee transactions on all bitcoin/U.S. dollar (USD) coin trades made this month. In Hong Kong, a Chinese investor will be heading up a stablecoin project within a blockchain fund. This “stable digital currency system” will focus on major currencies, beginning with instruments pegged to the yen, Aussie dollar and USD.

In regulatory developments, the New York Department of Financial Services (DFS) announced approval of a new virtual currency with commercial banking applications. Launched by a regional, New York state-chartered bank, the blockchain platform allows no-fee transfers of virtual currency between client accounts at the bank. DFS announced that to gain approval, the bank had to, among other things, implement, monitor and update effective risk-based controls and other measures to prevent money laundering or terrorist financing. In national news, Rep. Warren Davidson (R-Ohio) announced a forthcoming plan to regulate initial coin offerings and cryptocurrency offerings. The proposed legislation would create a new asset class that would regulate tokens in a way that allows them to avoid being classified as securities.

Overseas, the Swiss market regulatory body, FINMA, published new rules allowing licensed fintech companies to accept public deposits of about $100 million. An applicant seeking licensure must provide details about its business plan, asset storage methods and anti-money laundering policies, and the applicant cannot invest or pay interest on the funds received. In France, 26 companies and five banks have completed a block-based know-your-customer (KYC) test where participants were able to implement KYC checks on a shared network. And a Singapore-based cryptocurrency exchange, Huobi, recently acquired a license to operate in Gibraltar.

Caveat emptor: An MIT study reported that pump-and-dump schemes account for about $7 million in cryptocurrency trading each month. Fraudsters buy a coin at a low price, work to boost its value, then sell holdings before new buyers are able to get out. Investors should be heartened that according to the report, this represents only 0.049 percent of traded volume and new tools are emerging that it is hoped will drop this to zero. Researchers investigating these frauds believe they have developed an algorithmic tool that will be able to spot the coins targeted for pumping and dumping before the scheme begins.

For more information, please check out the following links:

Global Regulatory Consensus Beginning to Take Shape; Cryptocurrency Mining Malware Evolves

By: Brian P. Bartish

Last weekend’s G20 Summit in Buenos Aires, Argentina, saw cryptocurrency regulation take a pivotal place on the global economic agenda, with leaders calling for the integration of crypto-asset regulation into existing Financial Action Task Force standards for anti-money laundering (AML) and countering terrorist financing. In addition, G20 leaders jointly delivered a document outlining a plan for a taxation system for cross-border electronic payment services, with a final version of regulations expected to be put in place by 2020.

In the U.S., the Department of Homeland Security Small Business Innovation Research program published a report looking into the feasibility of conducting forensic analysis on privacy-focused coins, such as zcash and monero, if they are used for illegal activity. In Estonia this past week, a new version of Estonia’s Anti-Money Laundering and Terrorist Financing Prevention Act came into effect, with new amendments specifically targeting the AML risks from cryptocurrencies and companies offering crypto-related services. According to reports, Canada appears to be eyeing similar legislation. Japan is reportedly working on separate initiatives to combat initial coin offering (ICO) fraud and to curb tax evasion on significant profits from cryptocurrency transactions. These new initiatives follow 2017 legislation that brought cryptocurrency exchanges under Japan’s AML and know-your-customer rules, which has already resulted in 5,944 reported suspicious transactions for the first 10 months of 2018 – a 788 percent increase over the period of April to December 2017.

Cybercrime continues to rise, with coin mining malware increasing in both usage and sophistication. The total number of cryptocurrency mining malware infections reportedly increased 500 percent this year after hackers allegedly stole certain code from the NSA. According to reports, infections of MikroTik routers alone have doubled, reaching 415,000, since the summer of 2018. Further, new malware continues to emerge and evolve, as researchers reportedly have identified changes to KingMiner, a monero-mining application that first appeared six months ago, that improve the malware’s ability to avoid detection.

For more information, please check out the following links:

Ohio Accepting Bitcoin for Taxes, Multiple SEC and Financial Crime Developments, New Blockchain Capital Markets and Enterprise Initiatives

In this issue:

Satisfying Tax and Other Liabilities With Cryptocurrency

New SEC ICO Enforcement and Developments on Unregistered Securities, Fraud, Promotions and the Howey Test

International Crypto Crime Developments, OFAC Lists Bitcoin Addresses, Cyberattacks and Fraud Schemes Uncovered

Cryptocurrencies Continue to Permeate Capital Markets as Blockchain Permeates Settlement Systems

Blockchain Enterprise Announcements in BaaS, Supply Chain, Voting, Smart Contracts

Satisfying Tax and Other Liabilities With Cryptocurrency

By: Roger M. Brown and Heather K.P. Fincher

Ohio appears to be the first state that will accept bitcoin as payment for tax bills. Other states, such as Arizona, Georgia and Illinois, have considered allowing bitcoin tax payments, but the bills have not passed the relevant legislative bodies. Starting this week, Ohio reportedly will allow businesses to pay corporate taxes in bitcoin by sending the bitcoin to a payment processor called BitPay, which will then convert the bitcoin to dollars for the state treasurer’s office. In its move to rebrand the state as a tech hub, however, Ohio may also be introducing unexpected tax consequences to its taxpayers.

Read more

New SEC ICO Enforcement and Developments on Unregistered Securities, Fraud, Promotions and the Howey Test 

By: John W. Busch and Robert A. Musiala Jr.

On Nov. 16, 2018, the U.S. Securities and Exchange Commission (SEC) announced that it had settled charges against two companies – Carriereq Inc., d/b/a Airfox, and Paragon Coin Inc. – for securities registration violations arising out of previously conducted initial coin offerings (ICOs). The cases are the SEC’s first non-fraud ICO registration cases since the December 2017 case against Munchee Inc. The SEC published the cease-and-desist orders, which both imposed $250,000 penalties, required the companies to register the tokens under the Exchange Act by filing a form 10, and required the companies to implement an online claims process allowing token purchasers to recover amounts paid for the tokens.

On Nov. 27, 2018, a U.S. District Judge, the Honorable Gonzalo Curiel, denied the SEC’s motion for a preliminary injunction to halt a planned ICO and freeze the assets of Blockvest LLC. In reviewing the SEC’s motion, the court cited SEC v. W.J. Howey Co. and found that there were disputed issues of fact as to what the investors relied on prior to purchasing the Blockvest tokens. The court also found there was not a sufficient demonstration of an expectation of profits by the investors to establish that the tokens met the definition of a security. In denying the SEC’s motion, the court did not rule whether or not the tokens were securities, but rather found there were insufficient facts to determine the issue. The opinion also noted the defendant’s agreement not to proceed with the ICO without giving the SEC advance notice as a factor weighing against granting a preliminary injunction.

On Nov. 27, 2018, the Texas Securities commissioner issued an emergency cease-and-desist order to a company called My Crypto Mine for registration violations and fraud and materially misleading and deceptive statements in connection with the offer of investments. And on Nov. 28, 2018, the U.S. attorney’s office for the Northern District of Texas announced that AriseBank’s CEO was arrested by the FBI and charged with securities fraud and wire fraud in connection with an ICO. The defendant is alleged to have made several materially false and fraudulent misrepresentations while converting investor funds for his own personal use. Finally, on Nov. 29, 2018, the SEC announced that it has accepted settlements and entered consent orders against Floyd Mayweather Jr. and Khaled Khaled (also known as “D.J. Khaled”) related to charges of promoting securities issued in ICOs without fully disclosing that they were being compensated by the entities offering the ICO tokens.

For more information, please check out the following links:

International Crypto Crime Developments, OFAC Lists Bitcoin Addresses, Cyberattacks and Fraud Schemes Uncovered

By: Jordan R. Silversmith

On Wednesday, Nov. 28, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it was adding two residents of Iran – Ali Khorashadizadeh and Mohammad Ghorbaniyan – to its Specially Designated Nationals List. In addition to the usual identifying information such as physical addresses, email addresses and aliases, for the first time in the list’s history, OFAC included bitcoin addresses associated with the listed individuals. Khorashadizadeh and Ghorbaniyan are being added to the list for their role in facilitating financial transactions related to the SamSam ransomware, which has hit more than 200 victims over the past few years. SamSam held the data of its victims – including corporations, hospitals, ports, universities and government agencies – hostage in exchange for bitcoin, according to the Treasury, and then laundered the money through online exchanges.

The Telegraph reported on Nov. 26 that the U.K.’s Financial Conduct Authority (FCA) has doubled the number of cryptocurrency-associated businesses it is inspecting over unlicensed operations. Responding to a Freedom of Information request by the publication, the FCA said it was looking at 50 entities that it “suspected” were offering financial services without its permission. In Bulgaria, authorities reportedly have arrested three hackers alleged to be involved in stealing $5 million in cryptocurrencies. Bulgarian gendarmerie seized cryptocurrencies worth around $3 million along with computers, flash drives and other hardware, a car allegedly purchased with stolen funds, and paper notebooks containing cryptocurrency account details. In Cyprus, on Tuesday a court granted a motion to withdraw a lawsuit against Alexander Vinnik, the alleged former operator of defunct crypto exchange BTC-e. Greece is currently considering France’s request to extradite Vinnik, a Russian national, who still faces charges of fraud and money laundering in France and the United States.

On Monday, cryptocurrency payment processor BitPay announced that its open-source Bitcoin wallet, Copay, has been compromised by malicious code targeted at stealing users’ private keys. In related news, according to a recent publication by Kaspersky Labs, botnets are increasingly being used to distribute illicit crypto mining software designed to secretly reallocate processing power to mine crypto and send proceeds to the attacker. And on Nov. 19, Trezor, a popular provider of cryptocurrency cold storage devices, warned that it has discovered instances of fraudsters selling counterfeit Trezor devices.

For more information, please check out the following links:

Cryptocurrencies Continue to Permeate Capital Markets as Blockchain Permeates Settlement Systems

By: Robert A. Musiala Jr.

Recent SEC filings reveal that Silvergate Bank, which reportedly provides banking services to almost 500 customers in the cryptocurrency industry, is preparing to go public. The news comes as cryptocurrency exchange Coinbase recently opened an over-the-counter trading desk and, as a major New York stock exchange, confirmed plans to launch bitcoin futures products early next year. Alongside these developments, the long-sought approval of Bitcoin ETFs appears unlikely in the near future, based on recent comments from SEC Chairman Jay Clayton, who cited continued concerns over a lack of adequate investor protections, including difficulties mitigating risks related to cryptocurrencies being stolen or manipulated on exchanges.

As cryptocurrency continues to permeate capital markets, blockchain continues to permeate the backend systems that operate those markets. According to reports, a major global bank-owned currency trading utility recently went live with a blockchain-based payment netting platform designed by one of the world’s largest technology companies. In addition, an Abu Dhabi bank recently announced that it had settled a $500 million bond on a new blockchain-based system, and a consortium founded by global oil giants has announced the launch of a blockchain-based platform to facilitate trading in crude oil between commodity firms. Also this week, blockchain startup Harbor officially launched its security token compliance platform and announced plans to offer tokenized shares in a high-rise building located in South Carolina.

For more information, please check out the following links:

Blockchain Enterprise Announcements in BaaS, Supply Chain, Voting, Smart Contracts

By: Diana J. Stern

This week, one of the world’s largest cloud computing providers announced a new managed service offering to facilitate customer creation and management of blockchain networks. In addition, blockchain-based shipping platform TradeLens added Hong Kong’s second-largest terminal operator to its user base. In other enterprise news, Gustav Gerig, a Swiss food company founded nearly a century ago, plans to release a consumer-facing, Ethereum-based track-and-trace technology for its canned, sustainable tuna. The cans of fish will be marked with QR codes that direct users to a blockchain explorer where they can view data about that tuna, including which captain manned the vessel that caught it.

According to a recent report, the market for blockchain solutions in retail may surpass $2.3 billion, which is 29 times its current value, by 2023. One source points to the following use cases as catalysts: supply chain management, inventory management, authenticity verification, auto-renewal and subscription services, and customer data and loyalty programs. Survey results revealed that while only 6 percent of businesses are prepared to use blockchain for payments today, 78 percent say they will be ready within the next five years.

In the smart contracts space, the CFTC’s hub for engaging with the fintech innovation community, LabCFTC, released a comprehensive primer on the tech. It covers definitions, use cases and legal frameworks applicable to smart contracts and enumerates cybersecurity, manipulation, operational and technical risks, including: “Humans! – make mi$taak3s when K0diNg.” LabCFTC cites good governance practices as a mitigating factor to these risks. In government use cases, voting pilots continue as the South Korean National Election Commission and Ministry of Science and ICT plan to develop a blockchain component for their online voting system by year-end, not far behind West Virginia’s statewide pilot earlier this month.

With bitcoin prices hitting a 14-month low earlier this week, the overall cryptocurrency downturn has reigned in token and virtual currency-related activity. For example, blockchain-based social media platform Steemit reduced its headcount by 70 percent, U.S.-based bitcoin mining company Giga Watt petitioned for bankruptcy with a rushed filing, and between 600,000 and 800,000 bitcoin miners have gone dark since mid-November, as estimated by the founder of the third-largest bitcoin mining pool.

For more information, please check out the following links:

NY BitLicense Approval, Blockchain for Energy Commodities, CFTC Enforcement, Advertising Use Cases and More

In this issue:

New BitLicense Approval, Stablecoin Developments and BAT on Coinbase

Blockchain Platform for Energy Commodities Announced in U.S., Restrictions Ease in Foreign Markets

CFTC and State Securities Enforcement, Litigation Developments and Fraud Schemes

More Blockchain Uses for Digital Advertisers, Software Licensees and Marine Insurers

New BitLicense Approval, Stablecoin Developments and BAT on Coinbase

By: Panida A. Pollawit

The New York Department of Financial Services (DFS) has granted New York Digital Investment Group (NYDIG) Execution LLC the 14th BitLicense in the state. A BitLicense permits businesses to perform custodial services and transmit cryptocurrencies. In the press release announcing the BitLicense approval, CEO Robert Gutmann of NYDIG, thanked DFS “for providing a clear and comprehensive regulatory framework for investors, providers, and users alike.” In more U.S. news, as of last Friday Coinbase customers – except those in New York – will be able to buy Basic Attention Token (BAT) on Coinbase. BAT is an Ethereum-based token that is intended to be used as a utility token on the Brave browser, which is seeking to change the relationship between advertisers, publishers and users in the digital advertising world.

Stablecoins – cryptocurrencies that are designed to remain at the same price – continued to make news this week. Binance, the second-largest crypto exchange in the world by 24-hour trade volume, recently announced that it was listing Circle’s USD-pegged stablecoin, USD Coin (USDC), starting on Nov. 15, 2018. Carbon announced last Friday that its USD-pegged stablecoin, which has been on Ethereum for two months, is the first to operate on the EOS platform. In South Korea, the popular messaging app KakaoTalk has partnered with Terra, a stablecoin project funded by four major crypto exchanges, to create a blockchain-based payment system using Kakao’s blockchain platform Klaytn.

In Australia, the National Disability Insurance Scheme (NDIS), Australia’s equivalent of the U.S.’s Supplemental Security Income for people with disabilities, is testing a blockchain-based programmable money that “knows what it can be spent on, who it can be spent by, and when it can be spent.” NDIS intends to use this “smart money” to manage insurance payouts, among other activities. In Japan, Mitsubishi UFJ Financial Group Inc. (MUFJ) announced that it will partner with Brazil’s Banco Bradesco to create a new cross-border payment system between Brazil and Japan using Ripple (XRP). And Malaysian banking group CIMB announced that it has joined RippleNet, Ripple’s blockchain-based payment network, to make faster, less costly cross-border payments within the Association of Southeast Nations (ASEAN).

For more information, please check out the following links:

Blockchain Platform for Energy Commodities Announced in U.S., Restrictions Ease in Foreign Markets

By: Marc D. Powers

Major oil companies in the North Sea and other industry participants recently announced the formation of a blockchain-based energy commodity trading platform called VAKT. They expect the platform to be operational by the end of this year and ultimately to bring about a 40 percent cost savings for trading and settlement, utilizing smart contracts.

A major U.S. financial services company issued an updated report on its review of bitcoin and cryptocurrencies, which was more optimistic than its past report. The firm is reportedly planning to offer bitcoin swap trading and has described cryptocurrencies as a “new institutional investment class.” Another bank announced it had beta-tested a digital safety deposit box, which seeks to provide cryptocurrency storage and multi-signature services for cryptocurrency exchanges and investment funds. A third bank recently was awarded a U.S. patent for a cryptocurrency storage facility targeted at enabling enterprise-level institutions to store cryptocurrencies on behalf of their customers, including private key storage.

On the international front, France recently introduced an amendment that would lower the capital gains tax on bitcoin transactions from 36.2 percent to 30 percent. In Thailand, the Thai Securities and Exchange Commission (SEC) this month is reported to be close to approving the first SEC-certified initial coin offering (ICO) portal, which will offer ICO due diligence services, including reviewing smart contracts code and know-your-customer procedures. According to reports, the first ICO authorized by the Thai SEC may follow as early as December. In China, a recent decision from the Shenzhen Court of International Arbitration is being interpreted as allowing citizens to legally own cryptocurrencies and use them in commerce, which appears to reverse a government ban on bitcoin and cryptocurrency trading. In Singapore, an institutional stock exchange and the Monetary Authority of Singapore are reported to have successfully trialed a blockchain tokenized asset settlement system that seeks to promote efficiency and reduce settlement risk. Finally, a recently released report on cryptocurrencies and ICOs found that despite the price declines in 2018 and the continual decline in monies raised by ICOs in recent months, investors are still net positive on cryptocurrencies as investments despite.

For more information, please check out the following links:

CFTC and State Securities Enforcement, Litigation Developments and Fraud Schemes

By: Simone O. Otenaike

Late last week, the Commodity Futures Trading Commission (CFTC) ordered an individual to pay more than $1.1 million in restitution to his former employer, a Chicago-based proprietary trading firm, and its individual customers. The CFTC order found that between September and November 2017, the individual orchestrated a fraudulent Bitcoin and Litecoin scheme and misappropriated more than $600,000 from his former employer. After the trading firm terminated the individual for the misappropriation of funds, the man continued to fraudulently solicit funds from the firm’s customers, obtaining approximately $545,000 from at least five customers to trade virtual currency. The U.S. Attorney for the Northern District of Illinois also filed criminal charges against the man, who pleaded guilty to wire fraud and fraudulent solicitation of funds from investors and was sentenced to 15 months. Also last week, the Colorado Securities Commissioner issued orders to stop 12 unregistered initial coin offerings that are accessible to Colorado residents.

According to court documents published Wednesday, Ripple Labs filed to move the consolidated class action by XRP investors from state court to federal court, arguing federal court is the proper venue based on the U.S. Class Action Fairness Act. The plaintiffs are seeking $167.7 million from Ripple Labs in damages. In other litigation news, China-based Bitmain filed a lawsuit against an anonymous hacker for the alleged theft of $5.5 million worth of Bitcoin and other digital assets. Although Bitmain is a China-based company, the lawsuit was filed in the U.S. District Court for the Western District of Washington.

In Japan, Tokyo police arrested eight men suspected of raising $68.4 million in cash and cryptocurrency. The suspects reportedly raised the cash and cryptocurrency funds through a U.S.-based pyramid scheme. The victims of the scheme recently filed a lawsuit in Tokyo District Court and are seeking approximately $3.2 million in damages. Last Thursday, in Nova Scotia,  St. Francis Xavier University was forced to shut down its entire network after discovering that an unknown party was using the network to mine cryptocurrency. According to reports, the university is still working diligently to restore the network and find the individual(s) responsible for the attack.

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

More Blockchain Uses for Digital Advertisers, Software Licensees and Marine Insurers

By: John C. McIlwee

Adledger, a consortium of ad companies in the digital media space, recently issued a free Blockchain and Advertising Special Report. The report identifies several major challenges confronting ad agencies in digital media, educates readers on blockchain technology and proposes use cases for early adopters. According to the report, consortium members see big brands moving millions of ad dollars away from digital media because of widespread fraud. Bots spoof legitimate websites to proliferate inauthentic ad clicks across the entire industry. These bots sap ad purchase value by increasing costs without ever getting the ad in front of the intended consumer. Adledger predicts that blockchain technology will trace the IP addresses of legitimate users, frustrate bot developers and restore advertiser confidence in the digital media space.

The Adledger report touts the recent work of two consortium members that use blockchain technology to enhance programmatic ad buys for digitally delivered television. Using this application, advertisers and networks get immediate feedback on where ads run, whether the viewer watches the entire ad and, if the ad is interactive, whether the viewer engages – all while stripping personally identifiable information to ensure data privacy. Meanwhile, outside the ad consortium, a U.S.- based software firm, Blockchain4Media, recently collaborated with R3 on a pilot to combat false ad engagement. Blockchain4Media believes that its combination of artificial intelligence, machine learning and blockchain controls will provide advertisers greater access to authentic consumer engagement.

Also this week, a major global consulting firm announced a new blockchain-based product for large organizations to track and manage their software license portfolio. The program relies on blockchain technology to increase the visibility of software license data while reducing the risks associated with unlicensed software use and failure to comply with use terms. The consultancy believes that its new application will provide a clearer view of software license distribution and utilization, potentially saving millions in operational costs.

Earlier in the month, another proof of concept for blockchain technology in the marine cargo insurance industry was announced. A partnership between a Japanese insurance company and a global data analytics firm verified that claim settlement drastically improved when using blockchain technology to promptly distribute, share and utilize marine insurance claim data across eight sites in Europe, the Americas and Asia.

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

Blockchain Developments: Bitcoin ATMs, Token Listings, Voting Pilots, Shipping Competition, Global Enforcement, Tax and More

In this issue:

NY DFS Grants License to Bitcoin ATM Operator, Exchanges Make Announcements

Capital Markets Developments in Regulatory Guidance, Value of ICO Offerings and Banking

Blockchain Pilots for Voting and Supply Chain, Global Shipping Business Network Challenges TradeLens

Multiple Enforcement Actions in US and Abroad Seek to Quell Blockchain Industry Crimes

Tax Compliance Stakes Raised for Cryptocurrency Issues

NY DFS Grants License to Bitcoin ATM Operator, Exchanges Make Announcements

By: Joanna F. Wasick

The New York State Department of Financial Services (DFS) announced last week that it approved Coinsource, Inc.’s application for a virtual currency license. Coinsource presently operates 40 Bitcoin teller machine (BTM) kiosks in New York, allowing customers to buy and sell bitcoin for cash. DFS says its approval was based on stringent requirements related to various risk controls and consumer protections. Coinsource is the only company operating BTMs with this type of license; however, DFS previously approved more general licenses for other companies in the cryptocurrency marketplace. One licensee, Square, a payments company that recently integrated cryptocurrencies, announced on Thursday that it generated $43 million in bitcoin revenue this quarter (up $6 million).

In token news, Coinbase announced it will support BAT, tokens issued by Brave, which runs an internet browser that “pays” users in BAT to view ads. In addition, Stably, a Canadian startup, recently announced the early-access launch of StableUSD, a stablecoin issued with an equivalent unit of U.S. dollars held in escrow accounts. Tether, another stablecoin issuer (criticized by some for opacity), issued a letter earlier this month stating it had a $1.8 billion account with a Bahamas-based financial institution to back up its Tether coins. Days later, the bank issued a statement that the letter was legitimate. To help determine the best places to trade and store cryptocurrencies, the cybersecurity company Group-IB has announced its system of grading the security of various exchanges. Its methodology, which will be used to determine insurance premiums, tracks factors such as cyberattack losses, anti-money laundering (AML) policies and storage capabilities.

Outside the U.S., Binance Uganda reportedly signed up 40,000 users in the first week after it launched its cryptocurrency exchange. And Bithumb, a South Korean cryptocurrency exchange, announced a partnership with a major Asian e-commerce company that will enable customers to make purchases via the Bithumb Cache system, a password-protected payment service that allows Bithumb customers to convert their cryptocurrency funds for use as payments.

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

Capital Markets Developments in Regulatory Guidance, Value of ICO Offerings and Banking

By: Jonathan D. Blattmachr

There are (as usual these days) many interesting developments in the blockchain capital markets space this week. First up, Securities and Exchange Commission (SEC) director William Hinman announced the Commission intends to release “plain English” guidance for ICO issuers. This information may help those gearing up for an offering to determine whether the SEC will consider the token a security. Hinman is the same director who gave an interesting speech in June about what should be considered a security, which we wrote about here.

Also in regulatory news, the Swiss Financial Market Supervisory Authority (FINMA) has weighed in on capital adequacy requirements for crypto assets, recommending (but not requiring) that investors should be “assigned a flat risk weight of 800% to cover market and credit risks.” This would mean, for example, that for each bitcoin held, a bank should assume a value of eight times that amount in fiat currency when calculating the risk-weighted value of its assets. FINMA also recommends institutions limit their crypto trading activities to 4 percent of total capital, including long and short positions.

While everyone agrees the capital markets have raised a significant sum from initial coin offerings (ICOs) this year, what the total amount is depends on who’s asked. Estimates range anywhere from $11 billion to $22 billion; the divergence exists because while the issuers have self-reported how much they raised from their ICOs, market watchers can take those numbers at face value or adjust. That said, according to a recent report, Israel-based ICOs have raised $606 million during the third quarter this year. Israel has reportedly attracted $1.3 billion in blockchain investments so far, with the plurality of the money going into the fintech space.

In the world of banking, Bancor announced it will provide cross-blockchain token swaps between ether and EOS-based tokens, without exchanges. The company believes this will allow its users to “seamlessly interact with any blockchain which best suits their needs.” And a major Spanish bank announced it has completed a test program that placed a $150 million syndicated loan on the Ethereum blockchain. The pilot reportedly eliminated the need for banks to share information via fax, a slow and costly process.

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

Blockchain Pilots for Voting and Supply Chain, Global Shipping Business Network Challenges TradeLens

By: Diana J. Stern

In this year’s midterm elections, West Virginia conducted a statewide pilot utilizing a private blockchain, smartphones and facial recognition so that Americans abroad could vote more easily. One election security expert advised this would likely be superior to submitting absentee ballots by email but far less secure than in-person voting.

In another recent pilot, hardware manufacturer Seagate and a large, global technology company will seek to stop counterfeiting in the computer hard-drive supply chain. Hard drives produced by Seagate for the other company’s servers will include a physical marker and corresponding electronic key, which will be stored on a blockchain platform, where it will be available for verification at any time.

In a digital supply chain use case, smart contract outfit OpenLaw created an end-to-end demonstration of how artists can utilize their smart contract tools to manage fragmented ownership interests and commercialization strategies for their intellectual property in a more automated way – from proving ownership and issuing licenses to receiving royalty payments. In the demo, the artist uploads art as a nonfungible token on the Ethereum blockchain, then creates licenses linked to that token and finally enters into a written contract with the counterparty through a partially automated process. By tying the smart contracts to the token, OpenLaw aims to have the payments mechanism follow the license each time it is transferred. In related news, a U.S.-based software company was awarded a patent for a blockchain-based platform that would seek to prevent spam email.

Following our previous coverage of TradeLens, reports state the platform may have hit tumultuous tides as competitors attempt to work together, and efforts to achieve a network effect have fallen short with respect to carriers. One contributing factor may be that carrier Maersk is essentially steering the ship. On the other hand, customs authorities, logistics companies and a total of 94 players have reportedly integrated with TradeLens, and this week, the Port of Authority of Valencia in Spain joined as well. Still, multiple carriers have sailed over to a competing consortium, the Global Shipping Business Network (GSBN), affiliated with the Ocean Alliance. The recently announced GSBN is composed of ocean carriers serving the trans-Pacific market that collectively represent approximately one-third of global container ship capacity.

A major global enterprise software firm recently announced its HANA blockchain, which leverages the company’s databases and cloud platform and is compatible with Hyperledger Fabric and MultiChain and soon will be compatible with Quorum. In addition, Hyperledger Fabric recently announced support for Ethereum Virtual Machine (EVM) bytecode smart contracts. Among other features, Fabric now integrates with Solidity, a popular programming language used to write smart contracts.

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

Multiple Enforcement Actions in US and Abroad Seek to Quell Blockchain Industry Crimes

 By: Simone O. Otenaike

This week, the SEC announced that it has settled charges against the founder of EtherDelta for operating an unregistered national securities exchange. EtherDelta is a digital token trading platform for blockchain-based tokens commonly issued in ICOs. According to the SEC’s order, EtherDelta’s founder agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. This is the SEC’s first enforcement action against a digital token trading platform for operating as an unregistered national securities exchange. The SEC has previously brought enforcement actions relating to unregistered broker-dealers and ICOs, some of which were traded on EtherDelta. The SEC’s recently released annual enforcement report for the 2018 fiscal year cites three specific ICOs that defrauded investors of a combined $68 million.

In more SEC-related news, the crypto fund Blockvest LLC asked a federal court to require the SEC to submit admissible evidence before allowing the agency to block its ICO. Blockvest LLC argued that the SEC should be required to make more specific allegations and argued that evidence submitted in support of the SEC’s application for a temporary restraining order is based on hearsay and thus inadmissible. On the state level, this week the Texas State Securities Board filed an emergency cease and desist order against Automated Web Services Mining (AWS Mining), an Australia-based cloud mining company, for selling unregistered crypto mining power contracts. According to the order, AWS Mining, along with its officers and partners, failed to register as dealers or agents for securities offerings and failed to register its contracts as securities.

A leading web analytics platform, StatCounter, was breached late last week through an external JavaScript tag. The service is used by more than 2 million other websites, including several government-related websites, to gather statistics on website visitors. This breach was unique because the hackers compromised StatCounter’s external JavaScript tag, not StatCounter’s website. The hackers used an external resource that touches millions of other sites just to steal bitcoin from one cryptocurrency exchange website. The attack demonstrates that well-maintained and protected websites are still susceptible to flaws in external resources that are under the control of third parties.

On the international front, regulators continue to put pressure on hackers. Late last week, the Financial Markets Authority (FMA) of New Zealand blacklisted three new crypto-related websites – Crypto Gain, Russ Horn and Zend Trade. Meanwhile in Turkey, the Cybercrime Department of the Turkish National Police arrested 11 suspects for an alleged crypto hack that resulted in more than $80,000 in losses. In South Korea, intelligence officials have solved the first known case of cryptojacking in South Korea. Cryptojacking is a hacking method where the hacker secretly takes control of personal computers to mine cryptocurrency. While the four hackers collected only about $895 worth of virtual money, they will stand trial for infecting over 6,000 PCs during the course of their scheme.

On Monday, Cybersecurity experts at Japan Digital Design, a subsidiary of Mitsubishi UFJ Financial Group, announced the discovery of incriminating evidence against the hackers of Japanese crypto exchange Zaif. Back in September, Zaif lost roughly $60 million worth of crypto assets. The experts have provided all relevant information to the authorities. Also this week, Taiwan’s legislature bolstered current cryptocurrency regulations with the passage of amendments to its existing AML and counterterrorism financing laws. The amendments give Taiwan’s Financial Supervisory Commission (FSC) the power to prohibit anonymous crypto transactions and to allow banking organizations to reject anonymous transactions and report suspicious ones to the FSC. These changes promote AML compliance and allow Taiwan to better align with international AML standards.

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

Tax Compliance Stakes Raised for Cryptocurrency Issues

By: Roger M. Brown and Heather K.P. Fincher

At the International Tax Symposium held in Houston on Nov. 8 and 9 by the State Bar of Texas Tax Section, Daniel N. Price of the IRS Office of Chief Counsel reportedly said the IRS is not contemplating a separate disclosure program related to offshore cryptocurrency reporting. The IRS recently closed a comparable program, the offshore voluntary disclosure program (OVDP), in which taxpayers with foreign accounts could voluntarily report transactions to the IRS and receive certain benefits, and Mr. Price’s comments were meant to dispel a rumor that the IRS would launch a similar program encouraging taxpayers to disclose virtual currency transactions.

Many taxpayers struggle with a myriad of tax issues that arise in the cryptocurrency context, including the following:

  • Whether taxable gain arises from the exchange of one cryptocurrency for another (including potential application of the pre-2018 like-kind exchange rules).
  • Tax treatment of hard and soft forks, air drops, and exchanges of tokens for goods, services or other items of value.
  • Valuation issues arising from a variety of transactions, including token grants, option grants and air drops.
  • FBAR reporting for cryptocurrency assets held offshore.
  • Ability of non-U.S. persons to trade in cryptocurrencies through U.S. agents without being subject to U.S. tax.
  • Tax treatment of ICOs.
  • Classification and potential tax treatment of non-U.S. entities that may be used in effecting ICOs.
  • Potential application of broker, barter exchange and other reporting rules.

The absence of an OVDP-type program means that taxpayers will not have the benefit of reduced penalties if their tax treatment and reporting of these and other issues are incorrect. Further, because no reference to guidance related to cryptocurrencies is made in the 2018-2019 Priority Guidance Plan, released yesterday by the IRS and Treasury, it is unclear whether the IRS will be providing any additional guidance for taxpayers anytime soon. Thus, traditional means of reducing penalties by taking positions based on a learned application of the tax law to a taxpayer’s facts will be needed to minimize tax-adverse consequences that may arise when dealing with cryptocurrencies.

Global Blockchain Developments: Zero-Knowledge Proofs on Ethereum, New Foreign Regulatory Frameworks, Continued Enforcement Actions

In this issue:

Supply Chain and Banking Pilots Expand, Zero-Knowledge Proofs Meet Ethereum

Cryptocurrency Exchange Announcements, Malta Blockchain Laws Take Effect

Global Developments in Enforcement, Regulatory Frameworks and Court Rulings

Supply Chain and Banking Pilots Expand, Zero-Knowledge Proofs Meet Ethereum

By: Jaime B. Petenko

This week, a leading diamond mining company announced that it joined the Tracr diamond blockchain traceability program, which aims to provide consumers with confidence and information about their diamonds and raise the bar for the traceability, authenticity and provenance of diamonds. Also this week, the Canada Border Services Agency announced that it will pilot TradeLens, a blockchain platform for supply chains that enables participants to track import and export data in real time with a secure audit trail, which could reduce transit times and costs by improving visibility and communication. While more than 100 participants have signed on to TradeLens, the platform is reportedly facing challenges attracting other shipping carriers due to concerns related to the terms of engagement, including ownership of intellectual property rights. In related news, a leading enterprise software company recently announced that in early 2019 it will launch a suite of blockchain applications for supply chains that will focus on four specific use cases and offer packaged solutions requiring minimal system integration and customization.

Recently, the world’s leading provider of financial transaction messaging services and a voting solutions provider teamed up to demonstrate a blockchain proof of concept for voting built on Hyperledger Fabric. Also this week, a Big Four accounting firm announced the launch of a prototype for the world’s first implementation of zero-knowledge proof technology on the public Ethereum blockchain. The technology seeks to enable companies to use the standard, secure infrastructure of the public Ethereum blockchain but keep transactions private. According to a press release, the technology intends to support payment tokens and tokens similar to Ethereum ERC-20 and ERC-721 tokens, with the goal of allowing companies to reduce the costs and resources required to set up their own networks.

Last week, a multinational financial services corporation announced the expected launch date of Q1 2019 for its blockchain-based digital identity system for cross-border payments. The system, which is designed for financial institutions, seeks to allow for quick and secure business-to-business global payments. The system will reportedly utilize tokenization of an organization’s sensitive business information (e.g., account numbers and banking details) to produce a unique cryptographic identifier to facilitate transactions. In related news, a Japanese multinational information technology company announced that it has been selected as an application development vendor for a field trial by nine Japanese banks for a blockchain-based interbank settlement system. According to a press release, the proposed solution would utilize the technology firm’s peer-to-peer money transfer platform as well as “a digital currency” for interbank settlements. According to reports, in China the Shenzhen Court of International Arbitration officially recognized bitcoin as property, thereby allowing bitcoin to be owned and transferred without violating financial regulations. The decision by the court allows merchants to legally accept bitcoin as a form of payment.

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

Cryptocurrency Exchange Announcements, Malta Blockchain Laws Take Effect

By: Simone O. Otenaike

On Monday, a Belgium-based investment company acquired Bitstamp, the largest digital currency exchange in the European Union by volume, with turnover of $100 million per day. The acquiring company has more than 2 billion euros in assets under management and is the European subsidiary of the South Korea-based investment company that owns Korbit, a South Korean cryptocurrency exchange. Also this week, Bittrex International announced plans to launch a digital trading platform that will feature a streamlined and feeless token approval process. The platform will seek to identify tokens that are consistent with their jurisdiction’s regulatory environment and match token teams to a network of international exchange partners. According to a press release, Bittrex International will operate within the regulatory framework established by the European Union and the Malta Virtual Financial Assets Act.

Malta, recently dubbed “Blockchain Island,” is scheduled to host the Malta Blockchain Summit this week. During the summit, three new blockchain technology bills that were adopted earlier this year will take effect: (1) The Malta Digital Innovation Authority Act, (2) The Innovative Technological Arrangement and Service Act, and (3) The Virtual Financial Asset Act. The Malta Digital Innovation Authority Act establishes an agency that will regulate the blockchain industry, protect consumers and financial markets, and promote transparency. The Innovative Technological Arrangement and Service Act establishes a regime for the registration and certification of technology service providers and lays the groundwork for future technology developments. And The Virtual Financial Asset Act establishes the “financial instruments test,” which provides guidance on whether a cryptocurrency or token issued in an initial coin offering (ICO) constitutes a security. Any asset that does not squarely pass the test will be deemed a “virtual financial asset” regulated by the new law.

On the domestic front, a major national bank received a patent on Tuesday for a device that securely stores cryptographic keys, which have been prone to hacking and cybertheft. The patent presents a significant business opportunity for the bank since most cryptographic keys are used for blockchain platforms. And a report published this week states that if bitcoin were to become a true global transactional currency, the electricity needed to mine bitcoin would generate enough carbon dioxide emissions to warm the planet beyond 2 degrees Celsius within 25 years. Critics challenge the research’s assumption that bitcoin’s energy consumption will increase linearly, claim it is too speculative to conclude whether or not bitcoin will become a true global transactional currency, and assert that hydroelectric power and other renewable energy resources provide the potential for bitcoin mining to go green.

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

Global Developments in Enforcement, Regulatory Frameworks and Court Rulings

By: Taylor Thompson

On Oct. 29, the U.S. Attorney’s Office for the Southern District of California announced that a criminal defendant pleaded guilty in federal court to operating a bitcoin exchange without registering with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and without complying with anti-money laundering (AML) laws. The defendant used a bitcoin exchange in Hong Kong to purchase more than $3 million in bitcoin in hundreds of separate transactions on behalf of customers who paid him in cash at above-market rates. According to the announcement, between 2016 and 2018 the defendant arranged to import more than $1 million in U.S. currency from Mexico and exchanged the dollars with a San Diego precious metals dealer, structuring transactions to avoid reporting requirements. In other AML-related news, a recent report claims that the Russia-based cryptocurrency exchange WEX had its funds frozen by the Malta-based Binance exchange after users claimed WEX was involved in money laundering. The same report indicates that WEX, where bitcoin trades well above global norms, is a follow-on to BTC-e, an exchange subject to an investigation in the U.S. and Greece regarding a $4 billion fraud and money laundering scheme.

Recent reports claim that the U.S. Financial Industry Regulatory Authority (FINRA) will soon issue guidance to broker-dealers on how to apply the SEC’s Rule 15c3-3 to digital assets such as cryptocurrencies. And a multinational financial services firm has announced that it will launch cryptocurrency trading and custody services, amid news that competition is escalating among potential qualified custodians for digital assets. Meanwhile, the British government’s Cryptoassets Taskforce recently released a comprehensive final report claiming that there is “limited evidence of the current generation of cryptoassets delivering benefits, but this is a rapidly developing market and benefits may arise in the future.” H.M. Treasury, the Financial Conduct Authority and the Bank of England all pledged to support the development of “legitimate” crypto-related activities while cracking down on “illicit” activities.

According to a recent report, in June 2018, the Chinese Hangzhou Internet Court accepted blockchain data as evidence in a “right of communication” infringement case. The case centered on one company’s allegedly unauthorized distribution of a newspaper article. The court relied in part on data from a blockchain-based third-party data preservation firm to conclude that the plaintiff’s right of communication had, in fact, been infringed, and that all electronic data, including blockchain data, should be considered on a case-by-case basis. Meanwhile, the Thai Securities and Exchange Commission (SEC) recently issued warnings about investing in nine specific ICOs, and warned of crypto-based Ponzi schemes. Finally, multiple reports indicate that Hong Kong’s Securities and Futures Commission (SFC) will regulate cryptoassets “to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both.” The SFC announced that “[i]ntermediaries which distribute virtual asset funds, whether or not they are authorised by the SFC, are required to ensure compliance” with applicable regulations. Additionally, “the SFC will explore whether virtual asset trading platforms are suitable for regulation in the SFC Regulatory Sandbox,” but it may also deny a license to such platforms altogether. The SFC cited valuation, volatility and liquidity risks; cybersecurity; AML/CTF risk; conflicts of interest; and fraud as potential risks for the crypto space, though it also said it “will keep the development of activities related to virtual assets in view and may issue further guidance where appropriate.”

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

SEC Launches FinHub, FATF Publishes Guidance, Futures and Stablecoin Markets Mature

In this issue:

SEC Launches FinHub, FATF Revises Cryptocurrency Guidance

Capital Markets Developments in Futures, Stablecoins, Custody, ICOs

Blockchain Enterprise Developments for Gold, Ports, BaaS and Developers

SEC Launches FinHub, FATF Revises Cryptocurrency Guidance

By: Taylor Thompson

On Oct. 18, the Securities and Exchange Commission (SEC) announced the creation of the Strategic Hub for Innovation and Financial Technology (FinHub). According to an SEC press release, the FinHub will serve as a centralized resource on the SEC’s fintech initiatives, including those relating to blockchain, digital marketplace financing, automated investment advice and AI. SEC Chairman Jay Clayton said, “The FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission.” Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance, will lead the FinHub, which will be staffed by members of various SEC divisions and offices with fintech expertise.

Earlier this week, the SEC announced the suspension of trading in the securities of a U.S.-based retail company. The SEC alleged the company made false claims that it had partnered with an SEC-qualified custodian for cryptocurrency transactions and was conducting a token offering registered under SEC regulations. In related news, the Commodity Futures Trading Commission (CFTC) announced that a federal district court has ordered a New York-based corporation and its CEO to pay more than $2.5 million in civil penalties and restitution in what the CFTC called its first-ever anti-fraud enforcement action involving bitcoin. The CFTC brought the action in response to a Ponzi scheme in which the defendants generated false statements showing gains from bitcoin trading to solicit more than $600,000 from at least 80 investors between 2014 and 2016. According to a recent report, the Australia Securities Investments Commission (ASIC) has shut down a Brisbane-based initial coin offering (ICO) project that intended to raise up to $50 million USD to create a cryptocurrency trading platform.

A study published last week claims that Lazarus, a hacker group thought to be sponsored by North Korea, has stolen $571 million in cryptocurrency during 2017 and 2018, out of an estimated total of $882 million stolen from online exchanges in that time. The Financial Action Task Force on Money Laundering (FATF), an intergovernmental organization initially founded by the G-7, recently announced an update to 2015 guidance that set out requirements for combating money laundering and terrorist financing in the virtual currency space. According to the FATF, the updates are designed to make clear that virtual assets and their service providers “are subject to AML/CFT regulations, for example conducting customer due diligence including ongoing monitoring, record-keeping, and reporting of suspicious transactions.” The FATF said it would consider further updates over the next 12 months, as it tries to strengthen the global AML/CFT regime while also creating room for innovation.

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

Capital Markets Developments in Futures, Stablecoins, Custody, ICOs

By: Jonathan D. Blattmachr

There were several developments in the crypto capital markets space this week. ICE Futures U.S. Inc. announced it will list the Bakkt Bitcoin (USD) Daily Futures Contract on Dec. 12, 2018. This physical-settled futures contract calls for delivery of one bitcoin and will trade in U.S. dollars.

Coinbase now offers its customers the ability to trade the USD Coin stablecoin, which is pegged to the U.S. dollar on the Ethereum blockchain. The coins are collateralized by corresponding greenbacks. In similar news, Novatti Group, an Australian online payments processor, will issue a stablecoin tied to the Aussie dollar, with 1:1 fiat currency being held in trust.

The New York State Department of Financial Services, the state’s financial regulatory agency, recently announced its approval of Coinbase Custody Trust Company LLC, a Coinbase Global subsidiary. Coinbase Trust will be licensed to offer custody services for bitcoin, bitcoin cash, ether, litecoin and other virtual currencies. G4S also announced a new, high-security, offline storage for protecting virtual assets. Citing an estimate that more than $1.2 billion in cryptocurrency has been stolen since 2017, G4S believes its offline storage is superior, with assets fragmented and distributed across various vaults. And a major investment bank is investing $15 million in cryptocurrency custodian BitGo Holdings Inc. to offer a secure way to hold its clients’ digital assets. BitGo raised $57.5 million in this round of fundraising, but the endorsement by a household banking name may mean even more.

Ernst & Young has released a study about the ICOs that debuted in 2017, and the results are not inspiring: 86 percent of coins are below their listing price, with 30 percent now virtually worthless. Ninety-nine percent of the net gain was concentrated in 10 offerings, the majority of which involved blockchain infrastructure ventures. E&Y compared the current environment with the dot-com bust.

In Bermuda, fintech company Uulala has become the first applicant under the country’s new regulatory regime to receive approval for an ICO. The company is seeking to raise $50 million from its offering, which will support its platform of blockchain-enabled financial services being made available to underserved communities in Latin America. Also offshore, Swiss financial services provider Swissquote is claiming to be the first bank to offer purchase and custodial services for ICO participants. This announcement comes on the heels of Russia’s largest majority state-owned bank confirming it had completed a mock ICO as part of its regulatory sandbox test run.

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

Blockchain Enterprise Developments for Gold, Ports, BaaS and Developers

By: Joanna F. Wasick

The London Bullion Market Association recently announced plans to use blockchain technology to track the movement of gold, with the aim of taking gold that was illegally mined or used to finance conflict out of the global supply chain. In another recent announcement, the Port of Rotterdam is partnering with banking and tech businesses to launch a pilot program that uses a blockchain-based platform for more efficient, transparent and paperless administration of processes used for large-scale container transport. And this week a major global software provider launched a suite of blockchain-based applications for businesses of all sizes that want new ways to track and analyze their production stream and sales. According to a recently published report, demand for blockchain engineers increased by 400 percent from late 2017, and annual salaries now average between $150,000 and $175,000, putting them on par with those for specialists in AI technology.

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

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