Industry Token Standards Published, Supply Chain Pilots Expand, Foreign Crypto Guidance Issued, US Enforcement Actions Continue

In this issue:

Token Taxonomy Framework Published, Blockchain Supply Chain Pilots Expand

Stellar Burns Tokens, New Cryptocurrency Market Data and Studies Released

Blockchain Startup Receives Transfer Agent License, UK and Hong Kong Issue Crypto Guidance Enforcement

Multiple US Agencies Bring Enforcement Actions, Report Describes North Korea Crypto Sanctions Evasion

Token Taxonomy Framework Published, Blockchain Supply Chain Pilots Expand

By: Robert A. Musiala Jr.

This week, the members of the Token Taxonomy Initiative (TTI), an organization with members that include several major firms across a diverse set of industries, announced the publication of the Token Taxonomy Framework (TTF) v1.0. According to the TTI, the TTF is intended to be a set of industry standards for building token-based systems that can “interoperate across the multiple and disparate systems that make up a typical enterprise infrastructure.” In a related development, according to a report this week, a major U.S.-based global technology firm, and member of the TTI, is testing a “mint” that will enable the creation of blockchain tokens that meet the standards of the TTF.

Several blockchain pilots announced advancements this week. According to reports, a major U.S.-based food and beverage company is expanding its blockchain pilot for tracking bottled drinks in its supply chain from two to 70 manufacturers. In another development, a Sweden-based automobile manufacturer has reportedly joined the Responsible Sourcing Blockchain Network (RSBN), “a blockchain network committed to strengthening human rights and environmental protection in mineral supply chains.” The auto manufacturer reportedly intends to trace the cobalt used in its batteries using blockchain technology.

In Peru, a major Peruvian grocery chain has reportedly announced a pilot project to trace the provenance of various meat products using blockchain. Finally, in a press release this week, a major global charity organization “announced the success of the first season of their blockchain-based delivery of microinsurance to smallholder paddy field farmers in Sri Lanka.”

For more information, please refer to the following links:

Stellar Burns Tokens, New Cryptocurrency Market Data and Studies Released

By: Joanna F. Wasick

The Stellar Development Foundation (SDF) announced earlier this week that it burned 55 billion of its Stellar Lumens tokens (XLM), reducing the number of XLM in existence by about 50%. Of the remaining XLM, about half are still in SDF’s possession. The decision follows SDF’s earlier proposal to disable the network’s inflation mechanism. SDF said its decision was due in part due to the difficulty in moving the XLM into the market.

On Wednesday, a major U.S. cryptocurrency exchange announced staking rewards, estimated at 5% annually, for eligible customers holding Tezos on the exchange. Staking lets holders earn income by participating in a network of a particular asset, and it can make the underlying blockchain of that asset more secure and efficient – in exchange for locking their assets in a staking wallet, customers are rewarded with more assets from the network. And major cryptocurrency exchange Binance continues to move into new markets, having recently registered an affiliate with authorities in South Korea. Binance is also reportedly planning to issue a won-backed stablecoin.

This week, a major U.S. fintech firm released its earnings report, which reflected that it processed $148 million in bitcoin sales in the third quarter of 2019. According to an investor letter published contemporaneously, first-time bitcoin buyers on the firm’s platform approximately doubled.

A recent study by two university professors concludes that a single large player manipulated the price of bitcoin up to its peak of nearly $20,000 in 2017. The unknown manipulator allegedly operated from a single Bitfinex account and used tether to boost bitcoin’s demand. Tether’s general counsel called the report meritless. Also this week, Juniper Research, a fintech data analysis company, issued a report in which it found that the total value of B2B business-to-business cross-border payments stored on blockchain will exceed $4.4 trillion by 2024, up from $171 billion in 2019.

For more information, please refer to the following links:

Blockchain Startup Receives Transfer Agent License, UK and Hong Kong Issue Crypto Guidance Enforcement

By: Veronica Reynolds

This week, security token startup Harbor received a transfer agent license from the Securities and Exchange Commission (SEC). Transfer agents record changes of ownership, maintain issuers’ security holder records, cancel and issue certificates, and distribute dividends. Harbor’s acquisition of this license, along with the broker-dealer license it was granted in September by the Financial Industry Regulatory Authority (FINRA), brings it closer to becoming a “one-stop shop” for digital asset issuance. It is the first blockchain company to receive both licenses.

On Nov. 1, the United Kingdom’s tax, payments and customs authority, HM Revenue & Customs, released a white paper explaining how the administrative body will tax cryptoasset exchange token transactions undertaken by companies and other businesses. The guidance provides a detailed breakdown of fact-specific circumstances that may affect taxpayer liabilities for trading, mining and other cryptocurrency-related activities. And in Hong Kong, the Securities and Futures Commission (SFC) published a position paper outlining its regulatory approach to virtual asset trading, stating that it will only grant licenses to platforms capable of meeting the standards. Its guidance will reportedly allow investors to better distinguish between platforms that are regulated from those that are unregulated.

For more information, please refer to the following links:

Multiple US Agencies Bring Enforcement Actions, Report Describes North Korea Crypto Sanctions Evasion

By: Jordan R. Silversmith

On Wednesday, U.S. law enforcement officials announced charges against an alleged fraudulent intergovernmental organization for falsely promising investors guaranteed returns and an ownership interest in a “digital coin offering.” Asa Saint Clair was charged with one count of wire fraud related to an alleged scheme to use World Sports Alliance, a fraudulent affiliate of the United Nations, to defraud lenders and investors in IGOBIT, a digital currency Saint Clair claimed World Sports Alliance was developing. Another press release from U.S. law enforcement officials, issued last week, announced the guilty plea of defendants in an extortion conspiracy where the defendants demanded payment in bitcoin.

Last week, the U.S. Commodity Futures Trading Commission (CFTC) announced that a federal court had entered a default order against two individuals and four corporate entities, ordering them to pay $4.25 million for fraud and misappropriation. The order resolves a CFTC enforcement case filed on April 16, 2018, charging the defendants with fraud relating to a binary options scam based on a virtual currency known as ATM Coin.

In a filing with the New York Eastern District Court dated Oct. 31, the SEC said it reached a settlement with Reggie Middleton; Veritaseum Inc.; and Veritaseum LLC related to a $14.8 million initial coin offering (ICO). The case began in 2017 when Middleton was accused of allegedly raising millions through an ICO without registering with the SEC while also deluding investors with false information to raise more funds. Middleton agreed to pay approximately $9.5 million to settle the case without admitting or denying the allegations. In a separate SEC action last week, the SEC charged a Switzerland-based securities dealer “for offering and selling unregistered security-based swaps to U.S. investors using bitcoins and for failing to transact its swaps on a registered national exchange.”

In Canada, the British Columbia Securities Commission (BCSC) has appointed a receiver to take control over Einstein Exchange, a cryptocurrency exchange, related to reports of customers being unable to access their funds. Finally, a report from Hong Kong indicates that North Korea has been using a Hong Kong-based blockchain company to launder money, prompting an investigation by the UN Security Council’s Sanctions Committee on North Korea. The committee reportedly said that North Korea used the “front” company to exchange stolen cryptocurrency for cash after “layering” it through at least 5,000 separate transactions through several countries to make tracking difficult.

For more information and related news, please refer to the following links:

 

Blockchain Pilots Move Forward in Food Supply Chain, Land Registries and Buying Coffee with Crypto; Regulators Grant Approvals and Continue Enforcement

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

Coffee Conglomerate Set to Accept Bitcoin in 2020 as Cryptocurrency Adoption Continues to Rise

Blockchain Capital Markets Firms Achieve New Approvals in US and Abroad

Blockchains Take Another Bite Into Food Tracking; Land Registry Pilot Takes Off in Latin America

US Agencies Join Global Innovation Network, Crypto Enforcement Actions Continue

Coffee Conglomerate Set to Accept Bitcoin in 2020 as Cryptocurrency Adoption Continues to Rise

By: Veronica Reynolds

This week brought big news for fans of both coffee and cryptocurrencies. According to reports, a leading financial company has said that it will begin testing a consumer app for bitcoin purchases of coffee from a well-known international coffee chain. Testing of the app is set to launch in the first half of 2020. In other news, Avalon bitcoin miner maker Canaan filed for a $400 million Initial Public Offering this week. This attempted offering comes after two failed attempts to go public overseas in mainland China and Hong Kong. Chinese media outlets peg Canaan’s valuation at between $2 billion and $3 billion. Finally, Binance has begun its rollout of a new payment service allowing international users to buy cryptocurrencies using local fiat. Last week, it added a Nigerian fiat-to-cryptocurrency gateway that allows consumers to enter the market using the Nigerian currency, Niaira.

Yet as cryptocurrency markets continue to develop, so do cyberthreats. Cryptocurrency-related crime is on the rise in South Africa, according to digital wallet provider Paxful. According to Paxful, there has also been a 64% increase in cryptocurrency trades occurring in Africa this month compared to October 2018. Meanwhile, the number of Americans who own cryptocurrencies has doubled since 2018, according to an Australia-based financial services company. According to a recent survey it conducted, an estimated 36.5 million people currently hold some form of cryptocurrency. The survey indicates the average cryptocurrency holder owns approximately $5,500 worth of digital currencies, but the median amount hovers at only $360. The survey also found that daily bitcoin transactions now amount to $9.6 billion per day, a figure that surpasses PayPal’s yearly transaction volume ($578 billion in 2018) in just two months. The survey found that since Bitcoin’s inception in 2009, $11 trillion in wealth has been transferred within the network.

For more information, please refer to the following links:

Blockchain Capital Markets Firms Achieve New Approvals in US and Abroad

By: Simone O. Otenaike

Early this week, a New York-based regulated financial institution announced plans to launch a blockchain-based settlement platform for a limited number of U.S. equities. The platform will reportedly help clients reduce fees and gain access to capital that is otherwise unavailable through the legacy settlement system. The financial institution recently received a “no-action” letter from the Securities and Exchange Commission (SEC), which means the SEC will not take any enforcement action against the institution for its platform. According to reports, two multinational financial services firms will be the first to use the financial institution’s settlement service once those firms obtain additional approvals from the SEC.

3iQ, a Canadian investment fund manager focused on digital asset technologies, announced earlier this week that the Ontario Securities Commission issued a favorable ruling regarding the Bitcoin Fund, a closed-end bitcoin fund that is expected to be listed for trading on a major Canadian stock exchange. According to reports, Gemini Trust Company LLC, a New York-based cryptocurrency exchange and trust company, will operate as the custodian of the bitcoin in the fund.

Overseas, Sygnum, a digital asset technology group based in Singapore and Switzerland, recently obtained a capital markets services license from the Monetary Authority of Singapore. The license allows the group to offer private qualified investors a curated portfolio of digital assets. Also this week, tZero announced plans to partner with a U.K.-based direct-to-developer real estate investment company to tokenize the company’s 180-unit luxury residential development and issue tokens on the Tezos Blockchain. According to reports, this offering will be the U.K.’s first real estate-backed security token offering.

For more information, please refer to the following links:

Blockchains Take Another Bite Into Food Tracking; Land Registry Pilot Takes Off in Latin America

By: Diana J. Stern

Recently, a multinational financial services corporation announced a food supply chain pilot that will be used by a major United States food cooperative to track salmon, cod and shrimp. The goal is to provide greater visibility into ethical sourcing and environmental compliance of seafood. According to reports, the pilot is built on the financial services firm’s proprietary blockchain technology, which provides industry-agnostic track-and-trace functionality.

Another enterprise pilot took off this week in the real estate sector. The largest source of development financing for Latin America and the Caribbean engaged blockchain startup ChromaWay to record land registration and lending in Bolivia, Peru and Paraguay on a blockchain over the next two years. The solution has multiple layers, including a blockchain rooted in relational databases, a smart contract programming language and the option to deploy on a public blockchain, Chromia. In addition to tech, the project will focus on governance and standards such as the W3C standard for Verifiable Claims and Decentralized Identifiers. ChromaWay’s platform was previously used for tracking land titles in Sweden.

For more information, please refer to the following links:

US Agencies Join Global Innovation Network, Crypto Enforcement Actions Continue

By: Jordan R. Silversmith

Last week, four U.S. financial regulatory agencies, including the SEC and the Federal Deposit Insurance Corp. (FDIC), joined the Global Financial Innovation Network (GFIN). Participation in GFIN will help the agencies clarify regulations and promote the early identification of emerging regulatory opportunities, challenges and risks. In related news, the U.S. Commodity Futures Trading Commission’s (CFTC) fintech initiative, LabCFTC, is set to become an independent operating office of the agency. A newly independent LabCFTC, reporting directly to Chairman Heath Tarbert, will take on a greater role in engaging with the fintech community to develop and write regulations for new products involving technologies such as blockchain, digital assets and other novel financial technologies.

A New York federal judge recently resolved the CFTC’s claims against a convicted fraudster, his co-conspirator and his British binary options company, ordering them to pay a total of more than $4.6 million in a default judgment. The CFTC claimed that the defendants had used digital assets to cheat investors, using a cryptocurrency to conceal their misconduct and make illegal off-exchange retail swaps.

Also in New York, the U.S. Attorney’s Office of the Southern District of New York last week indicted a banking solution platform’s principal on three criminal counts. Oz Yosef, the principal of Crypto Capital, was indicted on conspiracy to commit bank fraud, bank fraud and conspiracy to operate an unlicensed money transmitting business. As a result of the indictment, Yosef will forfeit listed assets that represent the number of proceeds traceable to his offenses. The president of Crypto Capital was later extradited to Poland by Polish authorities on charges of laundering approximately $390 million. In a final note, this week another instance of cryptocurrency SIM swapping hacking was reported in a lawsuit filed by a major cryptocurrency investor, who claims he lost $1.7 million in cryptocurrency in a SIM swapping attack.

For more information, please refer to the following links:

Blockchain Pilots from US Treasury, Seafood Providers, Voting Systems; Global Regulators Address Stablecoin Risks

In this issue:

US Treasury Announces Blockchain Pilot, Major Bitcoin Mining Facility Launches in Texas, Foreign Crypto Exchange Developments

More Blockchain Solutions for Food Safety and Telecom; Utah Voting Pilot Expands

Regulators Address Stablecoins, CFTC and IRS Rules; Telegram Network Postponed

New Crypto-Mining Malware Discovered in Audio Files

US Treasury Announces Blockchain Pilot, Major Bitcoin Mining Facility Launches in Texas, Foreign Crypto Exchange Developments

By: Jonathan D. Blattmachr

There were several developments in the digital capital markets and payments space this week, spanning a variety of topics. First up, Blockstacks announced that its Stacks (STX) token can now be traded on the Binance and HashKey Pro exchanges (U.S. investors may not buy, sell or trade the tokens). The company raised most of its money from a Reg A+ offering in July, the first of its kind involving ERC20 tokens.

The U.S. Department of the Treasury’s Office of Financial Innovation and Transformation announced this week two projects to improve financial management and the government’s interaction with its customers, including a blockchain project that will aim to provide proof of concept of payments in a simulated letter of credit context. In another announcement, a major U.S. financial institution signaled this week that its cryptocurrency custody and trading service platform is in final testing. The company is waiting for final approval from the New York State Department of Financial Services before it fully launches.

Circle announced this week that it is spinning off the Poloniex cryptocurrency exchange into a new company called Polo Digital Assets Ltd. Circle acquired Poloniex just 18 months ago but said it has had issues as a U.S. company trying to run an international cryptocurrency exchange. As a result of the spinoff, U.S. customers will no longer be able to trade on the exchange.

Computer chip manufacturer Bitmain said this week it has launched a 50MW bitcoin mining farm in Texas. The farm, Bitmain’s third in the U.S., has the capacity to grow to 300MW, which would make it the world’s largest mining facility. Finally, ATM manufacturer Bitsmap recently installed crypto ATMs at the Miami International Airport. Travelers are required to declare when they carry over $10,000 in cash or equivalent fiat currency, gold or other assets. This begs the question for some: Is a traveler required to make a declaration if she carries a crypto cold wallet holding more than the equivalent of $10,000? Congress has considered several bills recently that would address this directly. For now, it is an open question.

For more information, please refer to the following links:

More Blockchain Solutions for Food Safety and Telecom; Utah Voting Pilot Expands

By: Diana J. Stern

In its latest food supply chain effort, a multinational technology firm partnered with a U.S. seafood provider to implement blockchain for tracking and tracing wild-caught scallops. Reports indicate that a number of details about the catch and subsequent processing will be recorded on a permissioned blockchain platform, allowing those with access to quickly obtain information about the scallops at any point from catch to market. Seafood distributors, suppliers and retailers are also on board with the project. The seafood provider says it plans to build a connected app that enables diners to scan a QR code on a menu and deep dive into the history of the scallops on deck for dinner.

Earlier this week, Utah County, Utah, announced it is expanding the voting pilot it launched this past summer, as reported on by the Blockchain Monitor. Continuing the work with blockchain start-up Voatz, Utah will allow disabled voters to use their smartphones to cast their ballots in the November municipal elections. The county’s decision to move forward with the initiative came after the National Cybersecurity Center audited votes from the 45 participants who participated in the pilot and found the results were accurate.

Finally, a multinational conglomerate holding company headquartered in Tokyo, a multinational technology corporation and blockchain start-up TBCASoft announced a strategic collaboration to facilitate the adoption of blockchain technology by telecommunications carriers in the Carrier Blockchain Study Group Consortium. The consortium’s first application is the Cross-Carrier Payment System, which aims to allow mobile phone users traveling abroad to pay local merchants with their mobile payment app.

For more information, please refer to the following links:

Regulators Address Stablecoins, CFTC and IRS Rules; Telegram Network Postponed

The Group of Seven (G7), an international intergovernmental economic organization comprised of seven of the largest economies in the world, recently published a report that discusses potential risks and benefits associated with global “stablecoins.” The report notes that stablecoins have the potential to provide access to financial services to unbanked populations and to improve cross-border retail payments but are associated with potentially crippling risks as well, including the potential to destabilize the global economy and facilitate money laundering and terrorism. The report cites the need for a “well founded, clear and transparent legal basis in all relevant jurisdictions” to support mass adoption of global stablecoins. The Financial Action Task Force (FATF), an inter-governmental body established to set standards to protect the integrity of the global financial system, recently issued a press release highlighting the money laundering risks of stablecoins as well. In addition, a bill titled “Stablecoins are Securities Act of 2019” is now under review by Congress. The bill seeks to define “managed stablecoins” as securities within the Securities Act of 1933.

In other regulatory news, the U.S. Commodity Futures Trading Commission (CFTC) Chairman, Heath Tarbert, recently said cryptocurrency assets classified as securities have the potential to become commodities, and vice versa. Meanwhile, the Chief Counsel for the Internal Revenue Service (IRS) confirmed that the agency plans to release additional guidance to clarify unanswered questions related to cryptocurrency. The attorney stated that the agency’s main concern is one of compliance, with too few cryptocurrency investors reporting cryptocurrency transactions on their taxes.

Finally, an anticipated hearing between the SEC and Telegram, a global messaging platform, related to whether the messaging platform’s pending GRAM token launch is a securities offering, has been postponed until February. According to reports, as a result, Telegram will delay the launch of its TON blockchain network.

For more information, please refer to the following links:

New Crypto-Mining Malware Discovered in Audio Files

By: Joanna F. Wasick

Last week, a software company that develops antivirus programs reported the discovery of malicious code hidden in WAV audio files, including malware known as “steganography,” in which hackers hide malware codes in ordinary-looking files. The report notes that when played, some of the WAV files produced music with no discernible quality issues, while others simply generated static. The malicious WAV files enable hackers to steal processing resources from unwitting users and use it to mine cryptocurrency. The report goes on to explain the three methods the WAV file loaders employ to decode and execute the malicious code, and provides in-depth technical details on the WAV file loaders and indicators of compromised (IOCs), including malware sample hashes and C2 infrastructure.

For more information, please refer to the following links:

Multiple Enterprise Blockchain Applications Announced, SEC and CFTC Issue Guidance and Enforcement Actions

In this issue:

Blockchains on Broadway, Smart Contracts Make Headway, Food Supply Chain and Health Applications Continue

CFTC Says Ether Is a Commodity, Crypto Trading and Payments Markets Expand

Federal Agencies Warn on AML and Bring Civil Actions; DOJ Brings Down Darknet Site

Blockchains on Broadway, Smart Contracts Make Headway, Food Supply Chain and Health Applications Continue

By: Diana J. Stern

The National Science Foundation has awarded SimplyVitalHealth Inc. a grant to further develop its blockchain protocol, Nexus, which seeks to “decrease healthcare costs by enabling data access through blockchain.” According to a press release, Nexus is compatible with the Health Insurance Portability and Accountability Act (HIPAA).

In supply chain news, KT, a South Korean telecommunications company, is working with the Korea Muslim Federation and B-square Lab to develop a blockchain-based platform that authenticates halal food. KT intends to transform a largely paper-based process by issuing blockchain-based certificates and utilizing unique QR codes to track products. In another development that would transform the chocolate supply chain, Dutch NGO FairChain Foundation is working with the United Nations to insert a code inside wrappers for The Other Bar chocolate. Consumers scan the code to donate a blockchain-based token to the farmer who produced the cocoa and to receive discounts on future chocolate bar purchases. Reports state that many cocoa farmers currently do not earn a living wage, despite chocolate production being a €92 billion industry.

An Asian news outlet reported this week that the Mobility Open Blockchain Initiative, a consortium of international automobile manufacturers, will soon begin testing a blockchain-based system that assigns digital IDs to automobiles, enabling the collection of data throughout the lifetime of a vehicle. According to reports, among other features the system would enable automatic payment of parking fees and highway tolls.

This week, the largest theater operator on Broadway announced a pilot with startup True Tickets. Starting next year, the pilot will leverage the True Tickets’ blockchain-based mobile ticketing platform to reduce fraud in the secondary market for theater tickets. In other news, a multinational professional services firm launched a blockchain-enabled solution for governments that tracks and improves processes for financial management of public funds. The City of Toronto has already piloted the platform to test how it can improve reconciliations and interdivisional fund transfers by increasing transparency and efficiency.

Finally, yesterday, Canadian multinational media conglomerate and smart contract startup OpenLaw announced a proof-of-concept to test how the Canadian firm’s flagship document automation product, Contract Express, can integrate with OpenLaw and the Ethereum blockchain. According to reports, Contract Express can be used to input the initial data for the agreements, and then OpenLaw can hash certain data points on the Ethereum blockchain. As a result, users could configure smart contracts to preprogram how certain tokens should be sent among parties.

For more information, please refer to the following links:

CFTC Says Ether Is a Commodity, Crypto Trading and Payments Markets Expand

By: Joanna F. Wasick

The chairman of the Commodity Futures Trading Commission (CFTC) recently stated that ether is a commodity and therefore falls under the CFTC’s jurisdiction. While the CFTC had previously announced its view that bitcoin was a commodity, this was its first official statement on ether, and it comports with the position of the Securities Exchange Commission (SEC) that neither bitcoin nor ether is a security. The CFTC chairman also stated that “forked” assets – cryptocurrencies created by forks from the original cryptocurrency (e.g., bitcoin cash or bitcoin gold) – should be treated by regulators the same way as the original asset.

In capital markets news, earlier this week trading platform eToro launched a new portfolio that trades cryptocurrencies based on AI analyses of Twitter posts (tweets). In the foreign markets, late last week, SE Digital Co. Ltd., a subsidiary of a leading Thai financial services firm, obtained SEC approval to operate in Thailand as an initial coin offering portal. The company plans to launch the country’s first investment token with a target transaction size of between two and three billion Thai Baht. Also last week, a major Australian precious metals company announced the launch of the Perth Mint Gold Token, a digital token backed 1:1 by GoldPass certificates issued by the Perth Mint, the world’s largest refiner of newly mined gold.

Acceptance of cryptocurrency as a form of payment continues to increase. According to a major British online real estate portal and property website, the seller of a property in Durham County priced at 1.2 million British pounds will accept bitcoin as a method for payment. Additionally, a California-based luxury electric car automaker now accepts bitcoin as payment for car sales and services at its flagship store in Newport Beach. And the Bermuda government announced this week that it will accept payments for taxes, fees and other government services in USD Coin (USDC), a stablecoin backed by U.S. dollars that was launched a year ago by a major cryptocurrency exchange and a U.S. fintech and cryptocurrency firm.

For more information, please refer to the following links:

Federal Agencies Warn on AML and Bring Civil Actions; DOJ Brings Down Darknet Site

By: Jonathan D. Blattmachr

Last Friday, FinCEN, the CFTC and the SEC issued a joint statement warning digital asset space players of their AML/CFT obligations under the Bank Secrecy Act (BSA). The statement emphasized that covered entities must establish and implement an effective AML program, and have certain recordkeeping reporting obligations, including filing suspicious activity reports. The agencies reminded those dealing with digital assets that simply labeling an asset or activity something does “not necessarily align with” how the BSA or other federal rules or regulations may classify them: “The nature of the digital asset-related activities a person engages in is a key factor in determining whether and how that person must register with the CFTC, FinCEN, or the SEC.”

Also last Friday, the SEC announced a temporary restraining order against two offshore entities the Commission alleges were conducting an illicit digital token offering in the U.S. and abroad. The SEC alleges that Telegram Group Inc. and subsidiary TON Issuer Inc. began raising capital in January 2018 to fund their operations. The complaint against the companies alleges they failed to register the token offers and sales, 2.9 billion tokens worth $1.7 billion, which the SEC avers are securities.

This week the CFTC filed a civil action against David Saffron and Circle Society Inc. related to a Ponzi scheme Saffron allegedly ran through Circle Society. The complaint alleges that for nearly two years, defendants tricked U.S. individuals into handing over $11 million worth of bitcoin and U.S. dollars to trade off-exchange binary options on foreign currencies and cryptocurrency pairs. The defendants allegedly guaranteed returns up to 300%, but instead misappropriated the funds.

A federal grand jury has indicted a South Korean national for operating the largest child exploitation market by volume of content. Hundreds of users in the U.S. and 37 other countries have been arrested and charged. The darknet site offered 250,000 videos for sale in exchange for bitcoin. The DOJ is seeking forfeiture of the bitcoin and to give the funds to the victims.

For more information, please refer to the following links:

UNICEF Launches Crypto Fund, Class Action Alleges Price Manipulation, US Enforcement Continues, More Ransomware and Hacks

In this issue:

Crypto and Blockchain Capital Markets News From UNICEF, Europe and Hong Kong

Blockchain and Cryptocurrency Payment Applications Introduced Across Jurisdictions

Class-Action Suit Filed Against Bitfinex/Tether, US Enforcement Actions Continue

Incidents of Ransomware, Cryptocurrency Hacks and Malware Continue

Crypto and Blockchain Capital Markets News From UNICEF, Europe and Hong Kong

By: Joanna F. Wasick  

On Wednesday, the United Nations Children’s Fund (UNICEF) announced its launch of a newly established cryptocurrency fund, making it the first UN agency that can receive donations and make disbursements in bitcoin and ether without having to convert the cryptocurrencies into fiat currency. The first contributions to the fund will be made by the Ethereum Foundation; the grantees are organizations dedicated to connecting schools around the world to the internet.

Earlier this week, the Swiss-based SIX Digital Exchange announced its collaboration with the central bank of Switzerland (SNB) on a project exploring how digital central bank money can be used in the trading and settlement of cryptocurrencies between market participants. Also this week, trade publication CoinDesk announced a major Swiss-based investment bank’s confirmation that it now accepts transactions on we.trade, a blockchain-based trade finance platform launched in 2018. The bank reportedly stated that the transactions are focused on facilitating services to small and midsized enterprises. And B2C2, a UK-based over-the-counter (OTC) trading platform, has reportedly launched a gold derivatives product that synthetically trades against bitcoin, enabling clients to trade gold priced in bitcoin and settle trades in bitcoin. B2C2 reportedly commented that the product will give clients “access to the underlying metal, since they correspond to ownership of physical gold in vaults.”

On Thursday, the Securities and Futures Commission of Hong Kong (SFC) issued a comprehensive set of regulations focused on funds investing in cryptocurrencies as well as the trading platforms on which the currencies are traded. The new regime essentially closes a regulatory loophole, as neither digital currency funds nor their trading platforms were under the regulatory purview of the Hong Kong Monetary Authority or the SFC. The guidelines also reflect the regulatory differences between Hong Kong and mainland China, where cryptocurrency initial coin offerings and exchanges have been banned since September 2017. Japan also issued guidelines for funds investing in cryptocurrencies in late September.

For more information, please refer to the following links:

Blockchain and Cryptocurrency Payment Applications Introduced Across Jurisdictions

By: Simone O. Otenaike

A U.S. blockchain payments firm and a UK financial technology company made news this week with the announcement of their strategic partnership. The partnership will reportedly enable users to send international payments with end-to-end tracking and visibility into fees, delivery time and status through the U.S. firm’s global blockchain payments network. According to a blog post, the partnership will employ the U.S. firm’s cloud solution and provide access to the UK firm’s network of more than 200 financial institutions. Users will reportedly also have the option to use On-Demand Liquidity, which leverages the digital asset XRP for cross-border payments.

According to recent reports, cryptocurrency exchange Binance now accepts fiat deposits through two popular Chinese mobile payment applications. This move reportedly opens the exchange to peer-to-peer digital asset transactions from China. In other recent international news, a partnership between a leading Spanish bank and blockchain startup Vottun plans to launch a single unified digital payment system powered by blockchain to handle payments for city transportation. The new city transportation application reportedly would leverage a blockchain platform to allow Madrid commuters to centrally access and pay for all different modes of public transportation in the city. In Venezuela, the country’s largest retail chain recently announced the launch of a bitcoin ATM in one of its stores. The retail chain’s bitcoin ATM reportedly only allows customers to buy bitcoin and other digital assets from the machine but does not yet allow customers to trade cryptocurrencies for cash.

For more information, please refer to the following links:

Class-Action Suit Filed Against Bitfinex/Tether, US Enforcement Actions Continue

By: Veronica Reynolds

A class action lawsuit filed on Oct. 6, 2019, against Bitfinex and its sister company, Tether, made waves in cryptocurrency headlines this week. The plaintiffs claim that the defendants manipulated cryptocurrency markets by issuing USDT, a stablecoin that Tether claims is backed 1:1 by US dollars, in amounts that exceeded Tether’s fiat reserves. The lawsuit further alleges that Tether purposefully issued unbacked USDT and the defendants used the USDT to flood the Bitfinex exchange and purchase other cryptocurrencies, thereby artificially inflating demand for cryptocurrencies and creating the “largest bubble in human history.” The suit claims that as much as half of the growth of the cryptocurrency market between 2017 and 2018 was driven by Bitfinex’s and Tether’s “manipulative scheme,” and cites economists and numerous studies. The complaint alleges damages of more than $1.4 trillion related to the crimes of Bank Fraud, Money Laundering, Wire Fraud and more.

Also this week, prosecutors in the United States indicted Ho Jun Jia, who stands accused of Wire Fraud, Access Device Fraud, and Identity Theft for allegedly stealing the identities of multiple parties to gain unauthorized access to cloud computing services, which the defendant then used to run a large-scale cryptocurrency mining operation. At one point, one of the fraudulent accounts constituted a cloud provider’s “largest consumer of data usage by volume.” Ho allegedly racked up in total more than $5 million in unpaid cloud computing services. Ho allegedly executed the scheme by creating false emails and web domains and obtaining personally identifiable information, all used to execute a sophisticated social engineering campaign that gave him access to retail cloud provider accounts.

Late last week in San Antonio, Texas, a federal judge sentenced 30-year-old Alaa Mohammed Allawi to 30 years in prison for using cryptocurrencies to sell narcotics, including fentanyl, on the dark web. Allawi was ordered to pay a $14.32 million judgment based on the profits he generated by operating the criminal enterprise, as well as forfeit property worth around $28,000, multiple firearms, over $21,000 in cryptocurrency and his rights to a coffee and tea franchise.

On Oct. 2, 2019, the Securities and Exchange Commission announced a final judgment against PlexCoin proprietors Dominic Lacroix and Sabrina Paradis-Royer, who were ordered to pay nearly $7 million for selling unregistered securities to the public during an unlawful Initial Coin Offering (ICO). The ICO lured investors by disseminating false and misleading information about the size of the company’s operations, how the money raised would be used, and the amount of funds that were raised. The money judgment reflects a disgorgement of monies received by the parties, as well as civil penalties.

And finally, yet another asset-backed token issuance has come under regulatory scrutiny. Karatbars, a German company that previously sold gold products online, raised $100 million in 2018 through an ICO selling KaratGold Coins (KBCs), a cryptocurrency supposedly backed by gold. There has been no independent verification that the tokens are, indeed, backed by gold. The company announced plans to launch a second ICO in December 2019, this time for the launch of a coin connected to a “cryptocurrency bank” in Miami. This put the company on the radar of the Florida Office of Financial Regulation, which is currently investigating Karatbars.

For more information, please refer to the following links:

Incidents of Ransomware, Cryptocurrency Hacks and Malware Continue

By: Robert A. Musiala Jr.

According to reports late last week, another ransomware attack has hit the U.S. The attackers encrypted the file systems at three hospitals and demanded cryptocurrency as payment to provide the decryption keys. Medical staff at the hospitals were reportedly “forced to switch to a manual paper system to track patient data while their systems were down.” According to a report published in early October, “[i]n the first nine months of 2019, at least 621 government entities, healthcare service providers and school districts, colleges and universities were affected by ransomware.” The report estimates the total losses from these attacks at $5 billion.

In another hacking incident reported this week, the cellphone of an executive at a blockchain investment firm was hacked, resulting in the loss of $1 million to $2 million in cryptocurrencies. Separately, a malware attack was reported this week that involves a relatively simple botnet that has reached an estimated 2,000 devices per week since December 2018 in a phishing scam. Victims who open a malicious file attached to a phishing email enable the malware to steal cryptocurrencies stored in hot wallets on the victim’s device.

In a final item of note, last week a “high-severity security vulnerability” was reported in Tendermint Core, the consensus engine of the Cosmos blockchain interoperability platform. According to reports, an update patch has been released, and all validators and service providers on Tendermint-powered networks have been advised to update their software.

For more information, please refer to the following links:

 

Alert: IRS Issues New Guidance and FAQs on Virtual Currencies

On Oct. 9, the Internal Revenue Service (IRS) issued additional guidance regarding the taxation of cryptocurrency. The guidance comes more than five years after the IRS issued Notice 2014-21, the first and, until now, only official guidance regarding cryptocurrency.

Revenue Ruling 2019-24 (the Revenue Ruling) reaffirms that virtual currency is treated as property and does not constitute currency. The Revenue Ruling distinguishes virtual currencies from foreign currencies. According to the Revenue Ruling, foreign currency, unlike virtual currency, is “legal tender, circulates, and is customarily used and accepted as a medium of exchange.”

The Revenue Ruling goes on to analyze two hypothetical situations, one involving a “hard fork” and the other involving an “airdrop.” The Revenue Ruling defines a hard fork as occurring “when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger” and “the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency.” It defines an airdrop as “a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.”

In the first situation, a taxpayer holds units of a cryptocurrency on a distributed ledger that experiences a hard fork, but the event does not result in the taxpayer receiving the new cryptocurrency via an airdrop. In this situation, the Revenue Ruling makes clear that no taxable event has occurred under Section 61 of the Internal Revenue Code (the Code) because the taxpayer “did not receive units of the new cryptocurrency.” Continue Reading

Invoices Paid on Ethereum, FINRA Application Approved, SEC/ICO Enforcement, Industry Launches Compliance Initiative

In this issue:

Smart Contracts Deployed by Icelandic Retailer, Blockchain for Sneakers and DHS

Cryptocurrency Service Providers Target Mainstream Investors, FINRA Application Approved

SEC, DOJ and State Agency Enforcement Actions for ICOs and Crypto Fraud Schemes

Regulatory Problems and Solutions in the Cryptocurrency and Digital Asset Arena

Smart Contracts Deployed by Icelandic Retailer, Blockchain for Sneakers and DHS

By: Robert A. Musiala Jr.

A press release issued this week announced the successful completion of an automated invoice payment using the Ethereum blockchain. The transaction involved an Icelandic retailer that purchased goods from a major global retailer using an electronic invoice, which was represented as an ERC20 token on Ethereum. Upon receipt of the “e-invoice,” a preauthorized payment was then executed using a smart contract that triggered an Ethereum-based payment of a digital version of the Icelandic Krona that qualifies as “e-money” under Icelandic law.

Another announcement this week provided details on a strategic partnership between a global athletic brand and a blockchain engineering firm to combat counterfeiting by tracking and authenticating sneakers using the Cardano blockchain. According to another report published this week, one of the largest pharmaceutical and life sciences companies in the world has entered into a letter of intent with an affiliate of a major global e-commerce firm to explore the use of blockchain for agricultural product monitoring.

In a final notable development, this week the U.S. Department of Homeland Security (DHS) issued a press release announcing a contract award to an Austrian firm to develop “blockchain security technology.” The award is part of an initiative to explore the use of blockchain “to issue credentials digitally to enhance security, ensure interoperability, and prevent forgery and counterfeiting.”

For more information, please refer to the following links:

Cryptocurrency Service Providers Target Mainstream Investors, FINRA Application Approved

By: Brian P. Bartish

A credit rating agency owned by a global financial services firm recently provided new details on its blockchain initiatives, including efforts to publish its credit ratings on the Ethereum network to ensure that the ratings cannot be altered or corrupted. In a separate development, according to reports, a Los Angeles-based investment and asset management firm is seeking to offer the world’s first cryptocurrency derivatives-based yield fund, with the digital assets division of a leading financial services company providing custody for the fund.

According to reports, a blockchain-focused subsidiary of Switzerland’s primary stock exchange has organized a global consortium of banks, buyside firms and market infrastructure providers to back an initial digital offering for a fully regulated central securities depository (CSD) for digital assets. The launch of the CSD still faces issues related to custody solutions and connectivity to settlement and central money solutions. The same entity is poised to launch a new exchange-traded product with a combination of bitcoin and ether that will enable Swiss investors to add the popular cryptocurrencies to their portfolios.

Last week, Harbor Square Investments, a subsidiary of tokenized securities platform Harbor, was granted a broker dealer license by the Financial Industry Regulatory Authority (FINRA). Harbor’s newly granted license allows it to move forward with its plans to become a “one stop shop” for digital issuers – helping manage the process from fundraising to liquidity.

For more information, please refer to the following links:

SEC, DOJ and State Agency Enforcement Actions for ICOs and Crypto Fraud Schemes

By: Veronica Reynolds

In a settlement announced this week, the Securities and Exchange Commission (SEC) ordered EOS developer Block.one to pay a $24 million penalty for conducting an unregistered securities offering related to the company’s initial coin offering (ICO). The SEC order explains that the company stated it would use the money raised to develop the EOS platform and continued to engage in the ICO well after the SEC’s DAO Report was released. The order notes that the company raised several billion dollars’ worth of assets globally, including from U.S. investors, and did not register its ICO as a securities offering or seek exemption from the registration requirement.

The SEC also announced a second settlement with lesser-known cryptocurrency startup Nebulous Inc. for its 2016 sale of SiaNotes (which the company later began referring to as “SiaFunds”) to the public. The SiaNotes were sold to support the development of the Nebulous decentralized cloud storage network, Sia, with promises made to investors that future revenue generated from transactions on the network would provide returns over time. The company also promised investors the opportunity to convert SiaNotes to SiaStock upon Sia’s network launch. Nebulous consented to a cease and desist order and agreed to pay disgorgement of $120,000, prejudgment interest of $24,601 and an $80,000 civil money penalty.

This week, the U.S. Department of Justice (DOJ) announced an indictment against Jon Barry Thompson, the principal of cryptocurrency escrow company Volantis Escrow Platform LLC. Thomson allegedly received a total of $7 million from two separate victim companies after making false statements in connection with bitcoin transactions. Thompson is being charged with two counts of commodities fraud and two counts of wire fraud and could be sentenced to 10 or more years in prison. The U.S. Commodity Futures Trading Commission (CFTC) also filed civil charges against Thompson in connection with the fraud.

Finally, this week the Securities Division of Missouri’s Secretary of State issued a cease and desist order against unregistered firm Mavixbtc Limited for falsely claiming to be registered with the state authorities and fraudulently using the registration number of a registered investment agent. According to the press release, the company attempts to lure investors by offering up to 55% returns over the span of two months through its brokerage and investment advisory services.

For more information, please refer to the following links:

Regulatory Problems and Solutions in the Cryptocurrency and Digital Asset Arena

By: Jonathan D. Blattmachr

Some of the larger players in the cryptocurrency space have formed a council that will opine on whether a crypto asset would meet the Security and Exchange Commission’s (SEC’s) definition of a security. The Crypto Rating Council has created a points-based system of several dozen yes/no factual questions derived from SEC guidance and case law. The answers to those questions will help the council determine, under its own private framework, whether the at-issue asset should or should not be deemed a security. The council says it hopes this approach will help others reduce costs and get clarity to improve industry growth.

Bad news from Fusion Network (FSN) this week, where its token swap wallet was compromised; approximately one-third of its tokens, valued at about $6.4 million, were stolen. Reports state the attacker stole the private key to affect the tokens’ theft. FSN’s value dropped 66% after the tokens were stolen. In an effort to fight financial crimes involving cryptocurrencies, a blockchain solutions provider this week scored a contract with the U.S. government to deliver software to help detect suspicious cryptocurrency activity. The company says it will help the feds track and trace potential illicit transactions.

Cryptocurrency exchange Binance has helped U.K. authorities investigate a criminal at the center of a $50 million phishing fraud. The exchange noted its help was motivated by “fostering a safe environment in this space.” The police extradited the Bulgarian, who subsequently pleaded guilty to five fraud counts. U.K. police recently conducted their first-ever auction of cryptocurrency stemming from the seizure of fraudulently obtained assets. Bitcoin, ether and other cryptocurrencies valued at about $300,000 were seized from a hacker, with the auction netting 7,500 bids from around the globe.

For more information, please refer to the following links:

Blockchain Announcements in Supply Chain, Genomics, IoT, Trade Finance and Bitcoin Futures; More SEC ICO Enforcement

In this issue:

From Cattle to Coffee to Cannabis: Enterprises Continue to Test Blockchain Supply Chain Solutions

Enterprise Report Published, New Pilots Announced for Copyright, Genomics and IoT

Financial Institutions Continue Blockchain Pilots, Physical Bitcoin Futures Launch

SEC Brings Charges for ICO Fraud, DOJ Indicts Hackers, Regulatory Reports Published

From Cattle to Coffee to Cannabis: Enterprises Continue to Test Blockchain Supply Chain Solutions

By: Diana J. Stern

Late last week, the Irish Cattle Breeding Federation (ICBF) revealed a blockchain proof-of-concept with consulting company Version 1 that helps Irish farmers more efficiently and sustainably breed cattle. The ICBF already manages one of the world’s largest integrated animal databases, and it plans to bring in other stakeholders along the supply chain – such as supermarkets, retailers and consumers – to gather even more data. By combining the results of consumer feedback upon scanning a steak’s QR code all the way back to genetic data about the animal, the ICBF aims to unlock valuable information about beef. In another supply chain endeavor, tech startup Farmer Connect and heavy hitters in the coffee industry are leveraging a major technology firm’s Food Trust Platform to build an app that provides caffeinators with detailed data about coffee beans. In addition, this week one of South America’s leading cannabis production companies, Uruguay Can, teamed up with æternity, the entity behind the open source æternity blockchain, to create a supply chain management platform for the cannabis trade.

According to reports, blockchain startup Everledger, known for its early work using blockchain technology to track diamonds, closed a $20 million Series A round. A Chinese multinational investment holding conglomerate led the round, with a multinational financial services corporation and Japanese e-commerce company also participating.

Blockchain … and nanotechnology? A leading U.S. nonmaterial and cadmium-free quantum dot producer recently announced it will deploy these two technologies in an anti-counterfeiting initiative. Quantum dots, which are lab-designed atomic crystals that can be tuned to emit unique color signatures, can be incorporated into physical products in a tamper-resistant way and scanned with a device. The scanned information can then be stored on the QDX™ Ledger blockchain to log, track and verify the authenticity of physical goods.

Blockchain is also being used to prove authenticity in the academic sphere. Late last week, the University of St. Gallen in Switzerland launched a blockchain pilot that aims to provide employers with a better way to verify whether diplomas are authentic. According to reports, there are 200,000 fake diplomas in the U.S. alone.

For more information, please refer to the following links:

Enterprise Report Published, New Pilots Announced for Copyright, Genomics and IoT

By: Simone O. Otenaike

Last week, one of South Korea’s largest firms announced plans to develop a blockchain-based music copyright management system. The digital copyright system reportedly employs a major technology firm’s Managed Blockchain Service to maintain a history of the broadcasting of copyrighted songs. The system also aims to improve fairness and transparency in the copyright industry by offering the owners and users of the intellectual property to share the resulting ledger and develop an equitable payment scheme for the use of such property.

Also last week, Nebula Genomics, a privacy-focused personal genomics company, reportedly became the first personal genomics company to offer anonymous purchasing for genetic testing services. According to reports, users can purchase whole-genome sequencing and submit samples without revealing their name, address or credit card number through pseudo-anonymous payments enabled by cryptocurrencies. Nebula Genomics reportedly also offers anonymous sample collection by delivering saliva collection kits to USPS P.O. boxes and a blockchain-based product that facilitates transparent and controllable genomic data sharing with researchers.

According to recent reports, Helium, an Austin-based IoT startup, is now shipping its crypto-mining modems to 263 cities in the United States. Helium is a network that aims to aid IoT devices (e.g., e-scooters, simple sensors and pet trackers) in the transmission of low-volume data to the Internet quickly and at low costs. Helium hotspots that perform tasks useful to the network, such as verifying the location of nodes, the sequence of data and the location of devices sending data over the network, are rewarded with Helium tokens, while companies that want to transmit data using Helium hotspots must pay with a second token, data credits. Through this system, the reward for setting up hotspots and connecting them to the network also functions as an incentive to deploy the network on Helium’s behalf.

Also in recent news, the University of Cambridge released its 2nd Global Enterprise Blockchain Benchmarking Study that focuses on the state of network deployment and evaluates the development of ongoing enterprise blockchain-based projects. The study summarizes survey data from more than 160 startups, established companies, central banks and other public sector institutions from 49 different countries around the world and 67 live enterprise blockchain networks. Some highlights from the study: 1) banking, financial markets and insurance industries are responsible for the largest share of live networks; 2) Hyperledger Fabric appears to be the platform of choice across all industries; 3) 81% of covered networks have a leader entity dominating the governance process; and 4) the median enterprise blockchain project takes 25 months from first proof-of-concept to launch, with some large-scale networks taking more than four and a half years for the full launch.

For more information, please refer to the following links:

Financial Institutions Continue Blockchain Pilots, Physical Bitcoin Futures Launch

By: Panida A. Pollawit

A U.K.-based credit score and reporting company has partnered with Ocyan to launch RomanAgora, a blockchain-based marketplace used for verifying credit applications. By leveraging blockchain to verify identity, RomanAgora seeks to reduce the time, expense and possibility of fraud involved in the online credit application process. It may also help financial institutions comply with regulations such as Know-Your-Customer rules.

More banks are integrating blockchain into their payment systems. The Interbank Information Network (IIN), a blockchain service spearheaded by a major U.S. bank and used by 112 banks, has welcomed the first Singaporean bank to join its ranks. IIN uses Quorum, an Ethereum-based permissioned blockchain that verifies identity for cross-border payments. Another major U.S. bank announced on Sept. 19 that it is joining the Marco Polo Network, R3’s Corda blockchain platform. The Marco Polo Network addresses issues in the trade finance business such as receivables discounting, payment commitment and payables finance programs. An application of Marco Polo is currently being tested by a German automaker. In this example, an order for equipment and prearranged payment was arranged through Marco Polo. Delivery of the equipment triggered payment on the other end. This reportedly reduced the time spent verifying delivery and receiving payment from days to a matter of minutes.

On Monday, the first physically settled bitcoin futures contracts began trading on Bakkt, a bitcoin futures exchange. In other cryptocurrency news, the International Monetary Fund has published an article presenting issues posed by stablecoins and offering potential solutions for policymakers. According to the article, stablecoins may lead some countries to consider new monetary policies to keep out foreign stablecoins that compete with their weaker currencies.

For more information, please refer to the following links:

SEC Brings Charges for ICO Fraud, DOJ Indicts Hackers, Regulatory Reports Published

By: Joanna F. Wasick

On Monday, the U.S. Securities and Exchange Commission issued a press release announcing charges against Jonathan C. Lucas for fraudulently raising approximately $63,000 from more than 100 investors during an initial coin offering (ICO) for Fantasy Market, an online adult entertainment marketplace that Lucas founded and controlled. According to the announcement, Lucas has returned the investors’ money and consented to a final judgment that orders him to pay a civil penalty of $15,000 and prohibits him from participating in certain securities offerings.

In California, the United States attorney’s office indicted Elliot Gunton and Anthony Tyler Nashatka for hacking EtherDelta, a cryptocurrency exchange, in December 2017. According to the indictment, which was filed in August, the defendants changed the settings of EtherDelta’s domain name system, misleading users in order to access their cryptocurrency addresses and private keys, allowing them to steal users’ funds. The federal government is increasingly focused on these types of crimes. In the September 2019 edition of the United States Department of Justice’s Journal of Federal Law and Practice, an entire section is devoted to addressing the challenges inherent in tracing, forfeiting and seizing cryptocurrencies.

The Korea Times recently reported that the International Financial Reporting Interpretations Committee (IFRIC) considers cryptocurrency to be an “intangible asset,” as opposed to cash or another financial asset. The IFRIC’s conclusion is unofficial, and no actual rule has been issued, but its assessment (which was reportedly reached in a meeting in London last June) can be significant, as the IFRIC’s determinations are the bases for many nations’ accounting rules and standards. And Global Legal Insights recently issued a report summarizing the blockchain and cryptocurrency regulatory landscape in Bermuda, British Virgin Islands, Cayman Islands, Guernsey and Jersey. Topics include government receptivity to cryptocurrency-related businesses, and regulatory issues related to licensing, mining and ICOs.

For more information, please refer to the following links:

 

Interbank Settlement Initiative and Crypto Payment Solutions Expand, SEC and International Enforcement Actions Continue

In this issue:

Blockchain Developments in Interbank Settlement, Capital Markets, Cryptocurrency Payments

Multiple SEC Enforcement Actions, New Treasury Sanctions, More Crypto-Mining Malware Detected

International Crypto Developments: Tax, FATF Compliance, Enforcement Actions

Blockchain Developments in Interbank Settlement, Capital Markets, Cryptocurrency Payments

By: Robert A. Musiala Jr.

According to reports this week, a major German bank has joined the emerging payments initiative, built on the Quorum blockchain, of one of the largest U.S. financial services firms. The goal of the Quorum-based platform is to increase speed and decrease costs in settling interbank payments.

Also this week, the blockchain-focused subsidiary of a major online retailer issued a press release announcing a partnership with a “blockchain entertainment financing company” to issue blockchain-based securities that will finance the production of films, television programming and online content. In a related announcement, blockchain startup Harbor has reportedly created Ethereum-based tokens that will represent existing shares of four real estate funds, collectively valued at $100 million.

In payments news, according to reports, major U.S.-based cryptocurrency payment processor BitPay will soon begin supporting ether, the second-largest cryptocurrency by market capitalization. This will allow merchants partnering with BitPay to accept payments for goods and services in ether, without having to take custody of the cryptocurrency. Separately, according to reports, cryptocurrency payments firm Abra will soon expand its network to allow customers to exchange cryptocurrencies for cash “at 6,000 outlets across the Philippines,” including at franchise locations of a major international convenience store.

Finally, two notable reports on the cryptocurrency market were published this week. A U.S.-based cryptocurrency asset management firm published the report “Bitcoin: 2019 Investor Study.” Also, a data analytics firm published a consumer survey of cryptocurrency use around the world. The survey found that consumer use of cryptocurrencies is most common in Turkey, and the “world region where most crypto currency users were located was Latin America.”

For more information, please refer to the following links:

Multiple SEC Enforcement Actions, New Treasury Sanctions, More Crypto-Mining Malware Detected

By: Marc D. Powers

This week, the LA office of the SEC brought an action against a Cayman Islands business, ICOBox, and its founder based in Beverly Hills, California, Nikolay Zvodokimov, for violations of the registration and broker-dealer provisions of the federal securities laws. The defendants allegedly raised $14 million from more than 2,000 investors since August 2017 for the purpose of building a platform for the distribution of initial coin offerings (ICOs) on behalf of other companies. The defendants sold their own blockchain-based token in an ICO, which the SEC alleges was a “security” requiring registration. The SEC further alleged that the defendants facilitated ICOs for dozens of companies, raising more than $650 million without registering as a broker-dealer.

Also this week, the U.S. Attorney’s Office in New York announced the arrest of a Great Neck, Long Island, attorney and a Rhode Island resident for purportedly extorting a cryptocurrency startup. The government alleges that the attorney was assisting the Seattle-based startup in November 2017 with raising monies through an ICO. The attorney is charged with, shortly before the expected closing, threatening to “destroy” the business of the startup if they did not pay him an additional $8.75 million in ether. He thereafter introduced his cohort to the company and made threatening statements which caused the company to make a “loan” to the men that was not repaid.

The U.S. Treasury has imposed sanctions on three North Korean state-sponsored groups that it believes are responsible for multiple cyberattacks on critical infrastructure, including the theft of approximately $571 million from five different cryptocurrency exchanges in Asia. Separately, according to a recent report, North Korea is believed to be developing its own cryptocurrency in an effort to avoid international sanctions.

Finally, a new instance of crypto-mining malware was reported this week that demonstrates increasingly complex techniques to avoid detection. According to the report, the “malware is notable because of the way it loads malicious kernel modules to keep its cryptocurrency mining operations under the radar.”

For more information, please refer to the following links:

International Crypto Developments: Tax, FATF Compliance, Enforcement Actions

By: Joanna F. Wasick

On Sept. 12, French economy minister Bruno Le Maire stated that cryptocurrency-to-cryptocurrency transactions would remain tax exempt, but that France will tax gains when cryptocurrency is converted into traditional fiat currency. Le Maire also stated that value-added tax (VAT) would be assessed on cryptocurrency transactions only when they are used to acquire an asset or service. Implementation of these policies has reportedly begun across the country.

Earlier this week, the South Korean arm of the OKEX exchange announced it will delist five cryptocurrencies that provide heightened privacy features for users. Beginning Oct. 10, the exchange will no longer support trading in Monero, dash, zcash, horizen or super bitcoin. OKEX Korea cited the “travel rule” recommendation by the Financial Action Task Force (FATF), an intergovernmental body that aims to combat money laundering, as the reason for delisting the coins. The exchange explained that under the FATF rule, “it is recommended that exchanges be able to collect relevant information such as the name and address of the sender and recipient of the virtual asset.”

In the Philippines last week, local authorities, reportedly working off of a tip from the Chinese government, arrested 277 Chinese nationals under the suspicion that they were conducting a cryptocurrency fraud that targeted potential investors in China. The alleged scam was run through Grapefruit Services Inc., an authorized service provider for Golden Millennial Quickpay Inc. Ltd., an offshore company providing cryptocurrency services.

Also, this week, Australian law enforcement announced that it uncovered a massive identity theft and money laundering ring. The crime syndicate allegedly purchased stolen personal identification information off the darknet, and used it to open bank accounts and steal funds. The syndicate then purportedly laundered the stolen funds by purchasing untraceable assets that it converted into cryptocurrencies, which were then transferred to Australia.

For more information, please refer to the following links:

 

Blockchain Continues to Disrupt Across Industries, Cryptocurrency Services Expand, Malware Threats Identified

In this issue:

Blockchain Clearing, Settlement, Custody and Capital Markets Developments

Cryptocurrency Exchanges and Payment Applications Continue to Expand Services

Blockchain Pilots for Mortgages, Recycling, Supply Chain and Digital Identity

Cryptomining Malware Found in Study Materials, Other Malware Uses Bitcoin to Proliferate

Blockchain Clearing, Settlement, Custody and Capital Markets Developments

By: Diana J. Stern

This week, R3 and a major multinational financial services company announced a partnership to develop and pilot a cross-border payments solution built on blockchain. According to reports, the financial services outfit will be the network operator for clearing and settlement, and R3’s Corda technology and ecosystem will support blockchain implementation for the use case.

Reports indicate that the bitcoin futures platform, Bakkt, launched its regulated custodian this week in anticipation of opening bitcoin futures trading later this month. The Blockchain Monitor covered Bakkt and its regulatory approvals here. In related news, documents filed by Bitwise on Wednesday show that the cryptocurrency index and beta fund provider has engaged an American worldwide bank to be the administrator and transfer agent for its proposed bitcoin exchange-traded fund.

This week Gemini announced that it is expanding its cryptocurrency custody solution through its Qualified Custodian, Gemini Trust Company, LLC. Among other new features, it will now support 18 different digital assets. In a final notable development, Blockstack announced that its SEC-qualified token offering has closed with a total of $23 million raised from more than 4,500 individuals and entities.

For more information, please refer to the following links:

Cryptocurrency Exchanges and Payment Applications Continue to Expand Services

By: Robert A. Musiala Jr.

According to two recent announcements, Binance, the largest cryptocurrency exchange in the world as measured by trading volume, will launch U.S. operations “in the coming weeks” and “will open account registration … on Wednesday, September 18, 2019.” According to another recent report, BUSD, Binance’s new stablecoin, which will be backed 1:1 by U.S. dollars, will be made available for trading on a major U.S. cryptocurrency exchange beginning next week.

This week the Swiss Financial Market Supervisory Authority (FINMA) published new guidance on stablecoins. According to the press release, “The requirements under supervisory law may differ depending on which assets (e.g. currencies, commodities, real estate or securities) the ‘stable coin’ is backed by and the legal rights of its holders.” FINMA also confirmed that it had received a request from the Libra Association “for an assessment of how the supervisory authority would classify the planned Libra project.” At a conference this week for the Organization for Economic Cooperation and Development, a French official said, “[W]e cannot authorise the development of Libra on European soil.” The French official advocated creation of a “public digital currency” to compete with the proposed Libra project.

In Japan, late last week the country’s financial regulator granted a cryptocurrency exchange license to an affiliate firm of a popular instant messaging app. According to another recent report, the highly anticipated Telegram Open Network blockchain project is due to launch by the end of October. Also, this week the Stellar Development Foundation announced that it will “airdrop” 2 billion XLM tokens into the accounts of users of another popular encrypted messaging app.

For more information, please refer to the following links:

Blockchain Pilots for Mortgages, Recycling, Supply Chain and Digital Identity

By: Simone O. Otenaike

Late last week, one of the nation’s leading mortgage companies successfully originated a loan on Provenance, a blockchain platform that reportedly allows lenders to originate, service and finance loans with lower costs and reduced risks throughout the loan process. The mortgage company will originate home equity line of credit loans through Figure, a SaaS that offers borrowers the ability to complete the lending process digitally and access their funds in days. Also this week, a digital logistics firm, Marine Transport International, launched Traca – a blockchain-based tool that reportedly enables recycling companies to relay essential data to value chain stakeholders (e.g., trash producers, recyclers, regulators and processing centers) in an accelerated time frame. Traca’s first trial reportedly cut administrative processing times from a few hours to minutes during the transport of used paper containers to Thailand from England.

A global professional services firm recently partnered with TruTrace Technologies to deliver a blockchain-based traceability solution for the cannabis industry. TruTrace’s technology reportedly collects and stores plant-testing data and genomic verification using a blockchain-powered database. Also this week, another leading global professional services firm released a report on blockchain technology in the industrial manufacturing sector. Topics addressed in the report include blockchain solutions to address supply chain transparency, track credentials of key personnel, and improve audit and compliance measures. According to the report, the industrial manufacturing sector is ranked second to financial services among industries leading the way on blockchain.

In international news, the government of Catalonia announced plans to develop IdentiCAT, a decentralized identity platform for its citizens. The Catalonian government’s new self-sovereign system reportedly seeks to allow any user to verify the legal age of a citizen with the ID system, without the citizen providing either his or her birth date or place of birth. IdentiCAT ultimately aims to empower citizens to control and manage their own identities with complete privacy.

For more information, please refer to the following links:

Cryptomining Malware Found in Study Materials, Other Malware Uses Bitcoin to Proliferate

By: Veronica Reynolds

A global cybersecurity company recently reported that cryptomining malware hidden in digital textbook downloads was the second most common type of malware spread under the guise of study materials. The malware, Win32.Agent.ifdx, is a program that opens a text file when launched to trick the user into thinking the file is benign. Once installed, the malware can download other pieces of malware, including cryptominers that allow hackers to generate profits through use of the host’s processing power.

According to another recent report, the Bitcoin blockchain is being used by the Glupteba malware dropper to improve the malware’s connection to command-and-control servers (C2 servers), which hackers use to control compromised systems. When a compromised system disconnects from a C2 server, hackers can use the Bitcoin network to replace C2 servers, allowing the compromised system to reconnect. The report noted that the Glupteba malware is also capable of implementing cryptomining and can steal browser data and passwords.

For more information, please refer to the following links:

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