Crypto Payment Products Show Gains, Blockchain Initiatives Announced for COVID-19 Data, Regulators Consider Blockchain Issues, Ethereum Classic Suffers 51% Attack

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

Announcements Provide Details on New Cryptocurrency Payment Products

Blockchain Use in COVID-19 Data, Food, Beverage Bottles and Wine Supply Chains

Regulators Consider Blockchain Issues in Tax, Banking, Securities and State Services

DOJ Targets Hackers and Darknet Vendors, Ethereum Classic Suffers “51% Attack”

Announcements Provide Details on New Cryptocurrency Payment Products

By: Robert A. Musiala Jr.

According to recent reports, a major U.S. mobile payments firm has announced that its Q2 revenue from selling bitcoin to customers through its Cash App application totaled $875 million – six times the corresponding amount in Q2 2019. In another recent announcement, a blog post noted that in only one year since its initial issuance, the ERC20 stablecoin, HUSD, now has more than $1.6 billion in tokens issued and is available in “nearly 20 markets.” HUSD is issued by a New York trust company in partnership with Huobi, a Singapore-based cryptocurrency exchange.

A San Francisco-based venture capital firm recently announced that it had “closed its second cryptonetwork and blockchain business-focused fund, with $110 million in commitments from undisclosed investors.” The firm noted that it would invest in “cryptocurrency tokens or equity.”

Binance, a major global cryptocurrency exchange, recently confirmed that it has begun shipping its new cryptocurrency debit card product to Europe. The Binance Card will allow users to spend cryptocurrencies by swiping the card through the readers of traditional point-of-sale systems. Another cryptocurrency exchange, Tauros, recently announced plans to offer a similar cryptocurrency debit card product in the Latin American market.

A startup hotel and accommodation booking platform recently announced that it has added 600,000 hotels and 1 million “holiday homes” to its travel platform, which allows payment to be made in a variety of cryptocurrencies. According to the company’s website, cryptocurrencies can be used to book more than 2.2 million hotels and accommodations worldwide through the company’s platform.

For more information, please refer to the following links

Blockchain Use in COVID-19 Data, Food, Beverage Bottles and Wine Supply Chains

By: Teresa Goody Guillén

Last year, a group of bottlers for a U.S.-based global beverage company adopted a blockchain platform based on Hyperledger Fabric, with the goal of reducing friction and improving transparency and efficiency in cross-organization supply chain transactions. According to reports, the bottler group is now seeking to expand the solution to enable “a low barrier network joining process” for other bottlers of the same products. The group will reportedly use the Baseline Protocol to lower barriers to entry for bottling suppliers, streamline internal bottler-suppliers’ provision of products to the bottling network and benefit external suppliers by providing an “integrated, private, distributed integration network.”

A Chinese tech giant recently announced its plan to create a blockchain-based wine traceability platform in collaboration with China’s biggest and oldest wine producer. The platform is reportedly designed to trace the winemaking and sales processes, including planting, brewing, distribution and management, and to issue a unique traceable certificate for each bottle of wine it produces. The solution will seek to help distributors and sales outlets identify counterfeit bottles and bottles that failed quality-control tests.

In spring 2020, a major global technology firm launched both a new blockchain network to help healthcare organizations find new suppliers more quickly and an open data hub that provides users with streamlined access to verifiable COVID-19-related information. The firm has now announced a new contest for developers to submit ideas for how blockchain can assist in addressing COVID-19-related issues.

In responding to issues presented by COVID-19, VeChain and Avery Dennison Intelligent Labels recently revealed a new food traceability tool at the 14th International Internet of Things Exhibition, held in Shenzhen, China. The solution reportedly uses built-in food traceability templates and customizable tools and can be implemented almost immediately in existing supply chains for food manufacturers, suppliers and retailers.

For more information, please refer to the following links

Regulators Consider Blockchain Issues in Tax, Banking, Securities and State Services

By: Joanna F. Wasick

Earlier this week, four legislators in the bipartisan Congressional Blockchain Caucus wrote to the IRS stating that the possible taxation of “staking” rewards as income could overstate taxpayers’ actual gains, hamper participation in important new technology and result in “a reporting and compliance nightmare” for taxpayers and the IRS alike. Staking allows cryptocurrency holders to earn income by participating in the transaction validation process on a blockchain network. When the cryptocurrency is staked, the underlying blockchain of that asset becomes more secure and efficient, and in exchange, the stakeholder is rewarded with more assets from the network. Alternatives to taxing staking rewards as income include taxing the rewards as interest payments or new property.

The Digital Asset Regulatory & Legal Alliance (DARLA), a group including fintech founders and senior legal counsel in the fintech space, wrote to the U.S. Office of the Comptroller of the Currency (OCC) this week, stating that better guidance is needed on fintech partnerships with national banks. The letter was in response to an advance notice of proposed rulemaking and request for comments issued by the OCC in May. Among other things, the DARLA letter emphasized that “providing banking services to fintech companies is not a high-risk endeavor” and that new regulations should be aimed at helping banks take advantage of technology innovation. Also, this week, a state-run commercial bank in Switzerland announced plans to launch cryptocurrency trading and deposit services through its banking subsidiary, making it the first Swiss state-backed lender offering such services.

The U.S. Securities and Exchange Commission (SEC) issued a solicitation request late last week, stating its intention to procure a tool to analyze smart contracts code within blockchains, including contract purpose, token type, purchase and sale restrictions, address whitelists and blacklists, modifications, and contract calls. The SEC reportedly will use the tool to support its efforts in monitoring risk, improving compliance and informing SEC policy with regard to cryptocurrency.

Last month, the California Blockchain Working Group issued a report to the California legislature analyzing the potential uses, risks and benefits of blockchain technology in state government and California businesses. The report identifies three recommended pilots involving the Department of Motor Vehicles, the Department of Food and Agriculture, and the Secretary of State’s State Archives Division.

For more information, please refer to the following links:

DOJ Targets Hackers and Darknet Vendors, Ethereum Classic Suffers “51% Attack”

By: Jordan R. Silversmith

Last week, the Department of Justice (DOJ) announced that three individuals had been charged in the Northern District of California for their alleged role in last month’s breach of several high-profile social media accounts, including those of former Vice President Joe Biden, Elon Musk and former President Barack Obama. The three individuals, including one juvenile, allegedly engineered the hack with a combination of technical breaches and social engineering, luring followers of approximately 130 accounts with a bitcoin scam promising an immediate doubling of their investment. The scam bitcoin account received more than 400 transfers worth more than $100,000 before it was shut down.

The DOJ also announced this week that a federal grand jury had indicted an American darknet vendor and a Costa Rican pharmacist for their illegal sale of opioids in exchange for bitcoin on the darknet and that a Missouri man pleaded guilty in federal court to attempting to purchase highly dangerous chemical weapons with bitcoin. Both cases can be traced to illicit marketing of illegal goods on the darknet, whose economy continues to flourish around the world. In Germany, dealers for the country’s largest online narcotics shop are scheduled to go to trial in Frankfurt soon for their role in trafficking massive amounts of illegal drugs on the darknet between September 2017 and February 2019. Prosecutors allege that the defendants gained more than 1 million euros ($1.2 million) from their trafficking scheme, which used bitcoin and other cryptocurrencies for payment.

This week, the Ethereum Classic blockchain suffered a “51%” attack. In this type of attack, the attacker gains control over more than 50% of network processing power, thereby allowing the attacker to alter the blockchain transaction history and “double-spend” the blockchain’s cryptocurrency. According to reports, Ethereum Classic has suffered from this type of attack twice in the past two years.

For more information, please refer to the following links:

Recent Securities Class Actions Targeting ICOs Raise Variety of Complex Legal Issues

On April 3, 2020, exactly one year after the Securities and Exchange Commission (SEC) issued its “Framework for ‘Investment Contracts’ Analysis of Digital Assets” (Framework), 11 class action lawsuits were filed in the Southern District of New York by two law firms representing various combinations of four proposed lead plaintiffs. The lawsuits all name as defendants companies and affiliated individuals involved in creating blockchain networks and platforms for various business activities that either distributed blockchain-based cryptographic assets (tokens) in initial coin offerings (ICOs) or operated trading platforms (exchanges) for the purchase and exchange of such tokens. The 11 complaints rely on the same essential legal theories—that the original token sales were unregistered securities offerings and the exchanges that facilitated secondary token sales were unlicensed securities dealers. In this article, the authors analyze these claims and discuss some of the potential defenses to them.

Read the article.

Crypto-Focused Bank Achieves Approval in Wyoming, US HHS Implements Blockchain, NY Challenge to OCC Fintech Charter Continues, ICO Issuer Charged in Fraud Scheme

In this issue:

Crypto-Focused Bank Approved in Wyoming, Initiatives Advance in Foreign Markets

US HHS Implements Blockchain; Clothing, Food and Shipping Platforms Expand

NY Challenges OCC Fintech Charter in 2nd Circuit, Fintech Report Covers First Half of 2020

ICO Issuer Charged With Fraud in US, Chinese Police Arrest 27 for PlusToken Fraud

Crypto-Focused Bank Approved in Wyoming, Initiatives Advance in Foreign Markets

By: Marc D. Powers

Former Wyoming regulator Caitlin Long, now the CEO of a payments processing company, recently announced that her company has received approval from the Wyoming Division of Banking for a banking license. Long said she expected the new company to be open for banking business as early as October 2020. Her company also announced a new product to modernize U.S. dollar payments, called Avit, which she claims will likely be treated as a cash equivalent and issued under existing U.S. commercial laws.

In international developments, according to reports 85% of Italian banks are now exchanging interbank transfer data on Corda’s R3 blockchain. This has reportedly reduced the average time for reconciliation from 30 to 50 days to within one day. In Australia, two Australian Securities Exchange-listed companies have announced an expansion of their partnership to launch “The trueGold Consortium,” with the goal of establishing a “mine-to-marketplace ethical gold supply chain assurance solution” that utilizes blockchain technology to promote trust around provenance, responsible sourcing and production standards.

According to a recent report, one of the largest telecom companies in Austria will now allow its users to make payments using cryptocurrencies including bitcoin, ether and dash on its cashless payments application. This new policy will allow about 2,500 merchants to accept cryptocurrencies. The telecom will convert the cryptocurrencies to euros in real time so retailers receive payment in fiat.

For more information, please refer to the following links:

US HHS Implements Blockchain; Clothing, Food and Shipping Platforms Expand

By: Robert A. Musiala Jr.

According to recent reports, the Chief Information Officer at the U.S. Department of Health & Human Services (HHS) has confirmed that HHS is using blockchain technology to track COVID-19 hospitalization data on a technology platform named HHS Protect. According to reports, “HHS Protect coordinates data from 6,200 hospitals across the United States, including numbers of ventilators, hospital beds, ER admittance, and discharge, lab test data across the U.S., warehouse implications, and nursing home data.”

A Los Angeles-based clothing brand recently integrated blockchain-based functionality from a German technology firm, Retraced, into its e-commerce platform. According to reports, the new functionality provides customers with information “about the product’s journey, the production processes needed to create each item and environmental implications for all products that are mapped out on the platform.”

In other supply chain news, a U.S. blockchain startup focused on tracking premium Wyoming beef recently demonstrated its product at the Cardano Virtual Summit. And in the shipping industry, a Mumbai-based digital freight forwarder is the latest firm to join the TradeLens blockchain platform for tracking maritime shipping.

For more information, please refer to the following links:

NY Challenges OCC Fintech Charter in 2nd Circuit, Fintech Report Covers First Half of 2020

By: Veronica Reynolds

The New York Department of Financial Services (DFS) filed a brief last week with the Second Circuit Court of Appeals challenging the U.S. Office of the Comptroller of the Currency’s (OCC) right to grant fintech charters to non-depository financial institutions under the National Bank Act. DFS argued in its brief that the OCC’s powers do not extend to non-depository institutions under applicable law and that the OCC, if allowed to exert such power, would limit DFS’ jurisdiction to enforce consumer protection and usury laws against subpar financial institutions, such as online lenders that provide small consumer loans at high interest rates. These and other efforts of the OCC are supervised by the agency’s relatively new acting head, Brian Brooks, former chief legal officer at one of the largest cryptocurrency exchanges in the world.

A report published this week by Law360 discussed Brian Brooks’ move to the OCC and recapped other major fintech developments spanning the first half of 2020. Notable developments covered by the report include Congress’ hearing on the potential of a digital dollar, increased oversight by federal agencies of fraud perpetuated through use of digital currencies, and a growing trend on the state level to increase focus on consumer protection oversight and the development of innovation offices.

For more information, please refer to the following links:

ICO Issuer Charged With Fraud in US, Chinese Police Arrest 27 for PlusToken Fraud

By: Joanna F. Wasick

Late last week, a U.S. federal grand jury returned a five-count criminal indictment charging three Canadians in connection with the initial coin offering (ICO) of PlexCoin, a cryptocurrency issued through their company, PlexCorps. According to the indictment, the defendants conspired in 2017 to induce investors to purchase the coin, making numerous false statements on social media and public Internet sites, including that investments could yield a 1,354% return. The ICO allegedly brought in the equivalent of US$8 million, which the government asserts was used, at least in part, to fund the defendants’ living expenses. Also last week, French officials began the process for the trial of Alexander Vinnick, who stands accused of extortion, aggravated money laundering and other crimes in connection with his operation of the exchange BTC-e, closed by law enforcement agencies in 2017.

According to a report released this week by a local Chinese media source, over 100 individuals, including 27 key executives, have been arrested by the Chinese police for their involvement with PlusToken, purportedly one of the largest scams in the cryptocurrency industry. PlusToken launched in 2018 as a South Korea-based cryptocurrency exchange/wallet, offering high investor returns; by May 2019, it reportedly had about 3 million users. Eventually, though, the entire operation was exposed as a scam after millions of users found themselves unable to withdraw funds. Roughly $5 billion was reportedly stolen.

According to a recent report issued by a leading blockchain analytics firm, nearly 900,000 bitcoin is held by Dark Web markets and cybercriminals who stole funds. Note, though, that the total bitcoin in circulating supply is around 18.4 million, and according to the report, only .32% of all current bitcoin transactions and flow are tainted by criminal activity. The report also finds that, historically, the top destination for illicit bitcoin is cryptocurrency exchanges, but that in recent years, these exchanges have strengthened their Know Your Customer and Anti-Money Laundering programs, making it increasingly difficult for criminals to continue to use exchanges to launder stolen funds.

For more information, please refer to the following links:

New Crypto Services Address Custody, Payment Cards and ATS’s, OCC Says Banks Can Custody Crypto, DOJ Charges Bitcoin ATM Operator and Crypto Fraudster

Abstract Digital network communication digital conceptIn this issue:

Reports Detail New Plans for Crypto Custody Services, Payment Cards and ATS Platforms

OCC Says Banks Can Custody Crypto, IRS and UK/FCA Act on Crypto Initiatives

DOJ Charges Bitcoin ATM Operator/Crypto Fraudster, Canada Exchange Settles Charges

Reports Detail New Plans for Crypto Custody Services, Payment Cards and ATS Platforms

By: Robert A. Musiala Jr.

According to recent reports, a major multinational financial services firm is taking steps toward launching a cryptocurrency custody offering. The offering would reportedly be targeted at institutional clients.

In a press release this week, another major multinational financial services firm announced that it is expanding its program focused on helping emerging fintech firms bring cryptocurrency payment cards to market. The press release named Wirex as “the first native cryptocurrency platform to be granted a … principal membership, allowing it to directly issue payment cards.”

Another press release published this week provided new details on an initiative to enable trading on the tZERO Alternative Trading System (ATS) platform of blockchain-based shares that would represent an indirect ownership interest in a luxury hotel in Aspen, Colorado. According to the press release, the shares “were distributed to accredited investors through a Reg D 506 (c) offering, which closed in October 2018 and raised $18 million.”

For more information, please refer to the following links:

OCC Says Banks Can Custody Crypto, IRS and UK/FCA Act on Crypto Initiatives

By: Joanna F. Wasick

On July 22, the Office of the Comptroller of the Currency (OCC) released a letter in which it recognizes the ability of banks to offer cryptocurrency custody services to their customers, including holding unique cryptographic keys – a string of characters that, broadly speaking, allows a user to access his or her cryptocurrency. The letter explains that providing cryptocurrency custody services is in line with, and is the modern equivalent of, traditional banking custody services such as safe deposit boxes and vaults. The letter also specifies that banks can provide both fiduciary and nonfiduciary custodian services. Notably, the OCC letter is issued under the helm of the new acting comptroller of the OCC, Brian Brooks, who joined the OCC earlier this year and who previously served as chief legal officer at a major U.S. cryptocurrency exchange.

According to public records, the Internal Revenue Service (IRS) recently contracted with a major U.S. cryptocurrency exchange to use its proprietary blockchain analytics software. Last week, it was reported that the tax agency had negotiated a contract with another blockchain analytics firm based in the U.K. Also last week, the IRS, together with the Department of Treasury, reportedly commented during a webcast that in-progress guidance will address third-party tax reporting requirements for cryptocurrency transactions.

Earlier this week, in proposals issued by the British government, the Financial Conduct Authority (FCA), a financial regulatory body in the U.K., was authorized to regulate certain endorsements of cryptocurrencies. The action aims to end misleading advertising by unauthorized companies that promote cryptocurrencies, and would require regulated financial companies to obtain consent from the FCA before they approve an advertisement from an unauthorized business.

For more information, please refer to the following links:

DOJ Charges Bitcoin ATM Operator/Crypto Fraudster, Canada Exchange Settles Charges

By: Jordan R. Silversmith

This week, the United States Attorney’s Office for the Central District of California announced that a Yorba Linda man had agreed to plead guilty to federal criminal charges of operating an illegal virtual-currency money services business through in-person transactions and a network of Bitcoin kiosks. According to a Department of Justice (DOJ) press release, “[a]fter FinCEN contacted Mohammad in July 2018 about his need to register his company, Mohammad did so, but he continued to fail to comply fully with federal law concerning money laundering, conducting due diligence and reporting suspicious customers.” Mohammad admitted that, in total, he exchanged between $15 million and $25 million through the illegal money services business. According to the press release, Mohammad is expected to plead guilty and will face a statutory maximum sentence of 30 years in federal prison.

Last week, the United States Attorney’s Office for the Northern District of California announced that it had charged a New York man with wire fraud in connection with a bogus multimillion-dollar cryptocurrency investment scheme. According to the complaint and affidavit filed on July 9, Douglas Jae Woo Kim claimed that he was a cryptocurrency trader and requested short-term business loans from friends and acquaintances. Kim allegedly used cryptocurrencies to finance transactions in the scheme and then transferred some or all of his victims’ assets to online gambling sites outside the United States.

Earlier this week, three executives with a Canadian cryptocurrency exchange, including its chief compliance officer, resigned as part of a nearly CA$2.3 million ($1.7 million) settlement agreement with the Ontario Securities Commission (OSC) tied to the exchange’s role in an illegal market manipulation scheme. The company admitted that it hid hundreds of thousands of misleading “wash trades” – simultaneous buy and sell orders – from clients, and then retaliated against an internal whistleblower who raised concerns to management about inflated trading volume. As part of the settlement agreement, the executives are banned from acting as director or officer of a firm registered with the Ontario Securities Commission. The company must also establish independent boards of directors, appoint a new CEO and CCO, create an internal whistleblower program, and update its policies and procedures in compliance with OSC rules.

For more information, please refer to the following links:

Blockchain Payments Reports Published, Coffee and Shipping Industries Adopt Blockchain, SEC and CFTC Charge Blockchain App, Bitcoin Used in Social Media Hack

In this issue:

Monetary Authority of Singapore and World Bank Publish Blockchain Payments Reports

U.S. Coffee Brand and Foreign Shipping Ports Initiate Blockchain Solutions

SEC/CFTC Charge Blockchain App, DOJ Charges Allege Crypto Fraud Related to PPP

Hackers Use Bitcoin in Social Media Fraud, Research Highlights Crypto Threats

Monetary Authority of Singapore and World Bank Publish Blockchain Payments Reports

By Veronica Reynolds

The fifth and final phase of Project Ubin, a blockchain project spearheaded by the Monetary Authority of Singapore, concluded this week. It was marked by the publication of a report that summarizes the blockchain-based multicurrency payments network developed during the final phase of the project. The report emphasizes that the prototype was built to be “production ready,” with the goal of modeling better connectivity and integration among cross-border payments participants. The report examines the integration of the prototype with more than 40 companies, finding that a real-world implementation of the prototype could facilitate faster and cheaper cross-border payments than are currently possible with existing technologies. The report concludes by offering design ideas and concepts for payment processes that could be applied to current payment architectures.

Another report released this week by the World Bank takes a close look at smart contracts. The report begins by explaining smart contracts, proceeds with an overview of policy considerations related to the deployment of the technology, and concludes with an analysis of the technology’s potential in the retail and finance industries. The report notes that while in 2019 a survey of more than 1,000 senior executives from 12 countries found that 80% of those surveyed believed blockchain has compelling applications in industry, the percentage of survey participants engaged in implementing blockchain-based projects decreased from 34% in 2018 to 23% in 2019.

For more information, please refer to the following links:

U.S. Coffee Brand and Foreign Shipping Ports Initiate Blockchain Solutions

By Robert A. Musiala Jr.

This week, a major U.S. food manufacturer announced that one of its popular coffee brands has joined the Food Trust, a blockchain-based platform for tracking the food product supply chain. The Food Trust is hosted by a major U.S. technology firm and runs on the Hyperledger Fabric blockchain protocol. According to a press release, the initiative will enable consumers to use an app that allows coffee drinkers to scan a QR code on their bag of coffee and “trace their coffee back to its country of origin and learn about efforts to help farmers in coffee-growing regions.” The technology will reportedly use blockchain “to record data about supply chain events in the coffee’s journey; including which beans were used, when they were roasted, ports they were shipped to and beyond.”

In a recent development involving the same U.S. technology firm and the world’s largest container shipping company, a shipping container terminal in Sri Lanka has joined TradeLens, a blockchain platform designed to improve data management in the shipping industry. Like the Food Trust, TradeLens also operates on the Hyperledger Fabric blockchain protocol.

In another shipping industry development, the Port of Rotterdam Authority has announced that it “has unveiled a new pilot blockchain-based project to make container handling safer and more efficient by removing the need to use a pin code.” According to a press release, during the pilot, “the pick-up rights for the import of containers will be converted from a PIN code into a digital token with the aid of a blockchain-based application, a process the Port of Rotterdam Authority compares to passing the baton in a relay race.”

For more information, please refer to the following links:

SEC/CFTC Charge Blockchain App, DOJ Charges Allege Crypto Fraud Related to PPP

By Teresa Goody Guillén

According to a press release and order published this week, the Securities and Exchange Commission (SEC) charged Plutus Financial, Inc. d/b/a Abra of California (Abra) and a related firm, Plutus Technologies Philippines Corp. (Plutus), for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange. Without admitting or denying the allegations, Abra and Plutus agreed to a cease-and-desist order and to pay a combined penalty of $150,000. The SEC’s order finds, among other things, that Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities through blockchain-based financial transactions with Abra or Plutus. According to the order, those contracts were security-based swaps subject to U.S. securities laws, and Abra and Plutus violated federal securities laws by engaging in unregistered offers and sales of these security-based swaps.

In a parallel action, the Commodity Futures Trading Commission (CFTC) announced a settlement with Abra and Plutus arising from similar conduct in which the respondents agreed to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA). Among other things, the CFTC order found that the respondents entered into thousands of digital asset and foreign currency-based contracts that constituted swaps, in violation of Section 2(e) of the CEA, which requires swaps to be entered into on “a board of trade designated contract market.” The CFTC order also found that the respondents illegally operated as an unregistered futures commission merchant.

Also this week, the U.S. Attorney’s Office for the Southern District of Texas charged a 29-year-old Texas man for wire fraud, bank fraud, making false statements and unlawful money transactions for allegedly fraudulently obtaining $1.1 million through the Paycheck Protection Program (PPP) and using the PPP money to fund a cryptocurrency account. The Small Business Administration (SBA) launched the PPP program in April to offer relief to small businesses impacted by COVID-19.

For more information, please refer to the following links:

Hackers Use Bitcoin in Social Media Fraud, Research Highlights Crypto Threats

By Jordan R. Silversmith

On the evening of July 16, a massive and apparently coordinated attack on prominent social media accounts paralyzed a popular social network for several hours. Hackers logged into the accounts of high-profile users and industry-leading cryptocurrency exchanges. The hackers then tweeted out requests for bitcoin from the account followers. As the hack continued, the social media platform eventually prevented all verified users from tweeting until resolution of the hack. The hackers reportedly defrauded users of more than $100,000 in bitcoin.

In other news, researchers recently discovered websites distributing a malicious crypto-trading application targeted at a popular brand of personal computer devices. The Trojan-style malware steals information such as browser cookies and cryptocurrency wallets and uploads it to a secure website where hackers can access the information. Nigerian scammers used a similar means to steal funds from unsuspecting users, a recent FBI criminal complaint alleges. Using a business email compromise scheme, the hackers gained access to legitimate business email accounts and defrauded employees into transferring company funds to the criminals’ bank account. The complaint alleges that the schemers defrauded American companies of tens of millions of dollars and then converted $6.5 million into bitcoin via a major U.S. bitcoin exchange.

Blockchain analytics firm Crystal recently published a report analyzing the use of bitcoin by darknet entities. According to a press release, “the report analyzes darknet interactions with exchanges and other entities throughout the first quarter of 2020 and compares it to historical darknet activity from the past three years.” Among other things, the report found that while “the amount of bitcoin (measured in BTC) transferred between darknet entities and other entity types declined in Q1 2020 compared to the same period one year ago … the value of the amount of bitcoin transferred (measured in USD) grew by 65%.”

For more information, please refer to the following links:

New York Appellate Court Confirms Attorney General’s Broad Investigative Powers into the Cryptocurrency Industry

On July 9, the Appellate Division of the Supreme Court of New York, First Department (First Department) issued a significant decision in James v. iFinex that confirmed the broad authority of the New York State Attorney General (NYAG) to investigate potential fraud. The decision is significant because it is the first appellate decision to apply the Martin Act’s expansive powers to an NYAG investigation of foreign entities in the cryptocurrency industry. Given this decision, the NYAG now may be emboldened to use these powers to more actively police the emerging industry by seeking asset freezes and other preliminary injunctive relief against potential bad actors outside of the Empire State. Continue Reading

Blockchain Solutions Announced, U.S. Fund Announces Digital Securities, FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Privacy, Enforcement Actions Continue

In this issue:

Blockchain Solutions Announced in Auto, Shipping, Medical and Aid Sectors

Fund Issuing Digital Securities Obtains SEC Registration, Bitcoin ETP Lists on Xetra

FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Transaction Privacy

Crypto Enforcement Actions Continue by SEC, CFTC, State and Foreign Agencies

Blockchain Solutions Announced in Auto, Shipping, Medical and Aid Sectors

By: Jordan R. Silversmith

A prominent German automotive manufacturer announced this week that it has begun testing the use of blockchain technology for the company to monetize its supply-side data streams. The collaboration between the carmaker and a Singapore-based blockchain company will seek to promote decentralized sharing of internal sales and financial data between the manufacturer’s various production hubs and other partners in the supply chain.

A major Asian freight carrier also recently announced that it will take a trial run on Alibaba’s new Ant Blockchain technology. The Shanghai-based shipping company announced it would use Ant Blockchain, a product of Alibaba subsidiary Ant Financial, to cut costs and streamline operations.

At the end of June, the South Korean government announced a shift to blockchain to store clinical diabetes information. Blockchain startup Sendsquare was selected by government ministers to develop a proof-of-concept project to help the country, which has around 3.6 million people afflicted with diabetes, develop a blockchain registry to help analyze and store anonymized clinical data.

The European Union is also developing blockchain technologies to ameliorate societal problems: The European Innovation Council awarded over €5 million to six blockchain companies last week. The companies will work to develop various blockchain tools to address sustainability and industrial challenges, including using blockchain to promote trust and transparency on the Internet, strengthen intergovernmental sustainability goals and deliver cash aid to victims of natural catastrophes.

For more information, please refer to the following links:

Fund Issuing Digital Securities Obtains SEC Registration, Bitcoin ETP Lists on Xetra

By: Teresa Goody Guillén

This week, California investment firm Arca introduced its Arca U.S. Treasury Fund, which it says is the first U.S. Securities and Exchange Commission (SEC)-registered closed-end fund to offer digital securities. The fund is reportedly the first to be approved by the SEC under the Investment Company Act of 1940. Arca announced that the Arca U.S. Treasury Fund invests 80 percent of its portfolio assets in interest-bearing, short-duration U.S. Treasury securities and each ArCoin is a share in the Arca U.S. Treasury Fund. According to a press release, the securities will be digital only and thus can be transferred in peer-to-peer transactions using blockchain technology.

A Swiss-based product provider, 21Shares (formerly known as Amun), announced that its bitcoin exchange-traded product (ETP) was officially accepted to list on Xetra, Deutsche Boerse’s electronic trading venue.  21Shares reportedly launched its first bitcoin ETP at the end of 2018 on the SIX Swiss Exchange. The company is also reported to have launched products that track other cryptocurrencies, multiple digital assets and a “short bitcoin” ETP that inversely tracks bitcoin’s price.

For more information, please refer to the following links:

FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Transaction Privacy

By: Joanna F. Wasick

This week, two cryptocurrency-focused reports were issued by the Financial Action Task Force (FATF), an independent intergovernmental body that develops and sets policies to counteract money laundering, terrorist financing and similar crimes. One report was a 12-month review of the revised FATF standards on virtual assets and virtual asset service providers (VASPs), which laid out guidelines for regulation, supervision and monitoring. The review finds there is no current need to amend any of these standards. The other FATF report concerns stablecoins (digital assets backed by fiat currency) and finds they share many of the same potential financial crime risks as other virtual assets, due in part to their potential for anonymity and global reach. The report proposes a number of actions to decrease these risks, including implementing the same FATF standards on stablecoins as on virtual assets and VASPs.

The U.S. Court of Appeals for the Fifth Circuit recently issued a decision finding that an individual’s bitcoin transactions are not protected by the Fourth Amendment. The case, United States v. Gratkowski, involves a defendant who was the subject of a federal investigation regarding a child pornography website. The government had identified bitcoin addresses on the bitcoin blockchain linked to transactions with the illicit site. The government then subpoenaed a major U.S. cryptocurrency exchange for its records to identify the owners associated with those addresses, one of which was Gratkowski, who later argued that the government’s recovery of the bitcoin transaction information was unconstitutional because he had a reasonable expectation of privacy in those blockchain and cryptocurrency exchange records. The court disagreed and noted the inherent problem of making privacy arguments about a public blockchain, which openly reflects every bitcoin address and its respective transfers. The court also likened the exchange’s transaction records and related information to regular bank records, which the Supreme Court has already found to be outside the Fourth Amendment’s scope.

The District of Columbia Bar recently issued an ethics opinion that lawyers in Washington, D.C., can accept cryptocurrency as payment, provided that the fee agreement is fair and reasonable and the lawyer can safeguard the virtual assets. In recognition of cryptocurrency’s volatility, the opinion advises that the fairness of the fee arrangements should be assessed at the time they are made. The opinion also recognizes the IRS’s position that cryptocurrency be treated as property and notes that cryptocurrency fee payment is akin to payment in property, not in fiat currency. And earlier this week, new research was published finding that 89 percent of cryptocurrency holders worry about dying with their assets. Despite this worry, however, the same research finds that only 23 percent of holders have wills or other plans for their estates.

For more information, please refer to the following links:

Crypto Enforcement Actions Continue by SEC, CFTC, State and Foreign Agencies

By: Veronica Reynolds

Last month, the Securities and Exchange Commission (SEC) announced a court-approved settlement with Telegram Group Inc. and its wholly owned subsidiary, TON Issuer Inc., which requires the companies disgorge $1.2 billion to investors and pay an $18.5 million fine in connection with Telegram’s 2018 sale of digital currencies in an alleged violation of securities law. The settlement also requires Telegram to notify the SEC of any future digital offerings. Read more about the history of the Telegram case here. This week, another securities enforcement action emerged in Texas, with the state securities commissioner issuing an emergency order halting the proliferation of an allegedly fraudulent multilevel marketing scheme perpetuated by Mirror Trading International PTY LTD and four of its stateside multilevel marketing agents. The order alleges that the organization and its agents peddled fraudulent investment “opportunities” in a cryptocurrency trading pool.

Criminal enforcements proliferated in non-securities-related sectors as well in recent weeks. The United States Commodities Futures Trading Commission announced plans to file for default judgment against Benjamin Reynolds, the director of the now-defunct cryptocurrency scheme Control-Finance Limited, for failure to respond or otherwise defend allegations that he engaged in the execution of an elaborate $147 million Ponzi scheme. And stablecoin issuer the CENTRE Consortium blacklisted an Ethereum address subject to a law enforcement request. CENTRE did not confirm the reason for freezing the Ethereum address, but reports speculate that the address may be linked to criminal activity. In a related development, new research has found that Tether, the issuer of the USDT cryptocurrency, has reportedly blacklisted 24 Ethereum addresses this year that hold USDT, including an address that holds $4.56 million in cryptocurrencies.

Chinese authorities recently have cracked down on alleged money laundering schemes occurring through over-the-counter (OTC) platforms. In 2017, China banned cryptocurrency exchanges from facilitating trades between cryptocurrencies and the Chinese yuan. As a result, OTC platforms emerged as the primary destination for peer-to-peer cryptocurrency trading in the country. Anonymous reports claim that China is engaged in a “systematic effort” to curb money laundering purportedly facilitated by Chinese OTC platforms.

For more information, please refer to the following links:

Canada’s Largest Cryptocurrency Exchange Found to Have Operated Like a Ponzi Scheme

On June 11, 2020 the Ontario Securities Commission (OSC), one of Canada’s provincial securities regulators, issued a report finding that QuadrigaCX (Quadriga), which went into bankruptcy a few months after founder and CEO Gerald Cotten was reported to have died in India, “was an old-fashioned fraud wrapped in modern technology.”[1] The report, dated April 2020, details that at the time Quadriga filed for bankruptcy protection, the cryptocurrency exchange owed 76,000 clients a combined $215 million in assets.[2] Although these clients spanned the globe, approximately 40% hailed from Ontario.[3]

OSC staff undertook a review of Quadriga’s operations to determine how the platform was run and what caused its collapse. Over a 10-month period, staff reviewed and analyzed trading and blockchain data, interviewed witnesses, and collaborated with various regulatory bodies in Canada and elsewhere to determine, among other things, where the money went.[4] They found that a $169 million asset shortfall resulted from Cotten’s fraudulent conduct. Continue Reading

Blockchain Food Tracing Initiatives Add Members, Report Addresses Central Bank Digital Currencies, NY DFS Publishes Crypto Guidance, Enforcement Actions Continue

In this issue:

Seafood Association, Restaurant Chain Announce Blockchain Supply Chain Partnerships

Sweden Report Addresses Central Bank Digital Currencies, Fintech Firms Explore Crypto

NY DFS and UK FCA Publish Crypto Guidance, Firms Announce Compliance Initiatives

U.S. and Foreign Agencies Take Enforcement Actions, Crypto Threat Reports Published

Seafood Association, Restaurant Chain Announce Blockchain Supply Chain Partnerships

By: Jordan R. Silversmith

This week, a major global technology firm and the Norwegian Seafood Association announced a new collaboration using the Food Trust blockchain technology platform. Norwegian seafood exporters will now be able to use blockchain technology to keep a verified ledger sharing supply chain data throughout the country’s seafood industry. Several Norwegian companies have already announced new relationships with blockchain technology suppliers.

A major Mexican family restaurant chain also announced a new partnership with a blockchain enterprise company. The restaurant chain will work with the blockchain platform SIMBA Chain to develop a blockchain-based traceability solution for the company’s coffee supply chain. The partnership will provide for the creation of a distributed application prototype to register and trace coffee beans as the beans travel through the restaurants’ supply chain.

For more information, please refer to the following links:

Sweden Report Addresses Central Bank Digital Currencies, Fintech Firms Explore Crypto

By: Veronica Reynolds

Sweden’s Central Bank recently released its Economic Review 2020, which provides an overview of the bank’s analysis of the relevance of digital currencies and factors to consider when assessing the viability of a proposed Swedish Central Bank-released digital currency, e-krona. The report notes that cash continues to be marginalized, which raises concerns about reduced competition within the payments markets and of the role of the Central Bank, which issues cash, being potentially marginalized as well. The report offers four separate models for a Central Bank-supported digital currency, with an analysis of the advantages and disadvantages of each in relation to overall policy goals. According to the report, these policy goals include providing a stable store of value and unit of account, providing citizens access to the global monetary system, and supporting the financial stability of the payments market.

Reports circulated this week that two massive fintech companies plan to allow direct sales of cryptocurrencies directly from within their respective digital platforms. Sources say that the companies may offer built-in wallet functionality and work directly with cryptocurrency exchanges to source liquidity.

A recent report released by cryptocurrency analytics firm Chainalysis observes that 60% of all bitcoin currently mined is held long term by investors. The individuals and businesses that comprise the 60%, according to the report, have never sold more than 25% of their bitcoin holdings, with the remainder held for many years. The report also indicates that only 19% of all bitcoin currently mined is being actively traded in the market, but that this trading activity buoys the market and determines the price of bitcoin.

For more information, please refer to the following links:

NY DFS and UK FCA Publish Crypto Guidance, Firms Announce Compliance Initiatives

By: Robert A. Musiala Jr.

This week, the New York Department of Financial Services (NY DFS) announced a series of major initiatives that are intended to “make it easier for virtual currency companies to successfully operate in New York.” These include the following:

  • Final guidance related to the ability of entities currently authorized under the NY DFS BitLicense regime to “self-certify the use of new coins” that establishes an approach “by which DFS will provide a list of approved coins that all licensees can easily adopt.”
  • A notice of NY DFS license application practices “aimed at creating a more transparent and timely process for the evaluation of virtual currency license applications.”
  • A virtual currency FAQs document that will be updated on an ongoing basis to reflect questions and feedback received by NY DFS from the blockchain and crypto industry.
  • A new proposed conditional licensing framework intended to make it easier for startups to enter the New York market.
  • A memorandum of understanding with the State University of New York expressing intent to launch a virtual currency program, “SUNY BLOCK.”

In the U.K., the Financial Conduct Authority (FCA) published a notice this week to remind cryptocurrency businesses operating in the U.K. that under new rules, these businesses must register with the FCA by Jan. 10, 2021, or they “will have to cease carrying on business.” According to the notice, to ensure that registration applications are processed on time, completed applications should be submitted to the FCA by June 30.

This week, more firms announced initiatives aimed at driving compliance in the cryptocurrency industry. A Big Four accounting and consulting firm has launched “Chain Fusion, a patent pending suite of advanced analytics capabilities, built on leading cryptoasset data & technology products to streamline the ability for financial services companies and fintechs to offer cryptoasset services on an institutional scale.” Separately, according to reports, a major global bank based in the Netherlands has developed the “Travel Rule Protocol” with support from several other crypto industry firms. The solution aims “to assist with the Financial Action Task Force’s Travel Rule requirement for crypto exchanges and firms dealing in digital assets.” Finally, blockchain analytics firm Chainalysis published a blog intended to provide a guide to complying with anti-money laundering requirements in the cryptocurrency industry.

For more information, please refer to the following links:

U.S. and Foreign Agencies Take Enforcement Actions, Crypto Threat Reports Published

By: Joanna F. Wasick

Last Friday, the U.S. Securities and Exchange Commission (SEC) announced it filed an emergency action and froze the assets of two Pennsylvania brothers and three related entities in order to stop their fraudulent endeavor and theft of investor funds. According to the SEC, from at least July 2019 through May 2020, the brothers offered securities in a private fund that purported to invest in digital assets but were misrepresenting fund performance, fabricating financial statements and forging audit documents.

In New Zealand, police recently froze $140 million as part of a global investigation into Alexander Vinnick, who previously operated BTC-e, a cryptocurrency exchange that reportedly traded more than $4 billion dollars’ worth of bitcoin. In 2017, Vinnick was arrested in Greece by local police on a U.S. extradition warrant that accused him of facilitating money laundering, identity theft, drug trafficking and computer hacking. Since then, his alleged criminal proceeds were traced to New Zealand accounts targeted in the recent asset freeze—the largest recorded restraint of funds in New Zealand police history.

This month, Scamwatch, an arm of the Australian Competition and Consumer Commission, issued a report finding that Australians lost more than $14 million dollars in cryptocurrency scams in 2019. Most of these frauds were basic Ponzi schemes, with no real cryptocurrency involved. Younger Australians aged 25 to 34 were most heavily affected. While the monetary loss from this type of fraud is significant, according to the report, greater losses were recorded in business email compromise scams ($132 million), traditional investment scams ($126 million) and “dating and romance scams” ($83 million).

This week, an Israeli cybersecurity firm released a report concluding that, over the past two years, one criminal group was responsible for stealing $200 million in numerous hacks of five different exchanges. These hacks followed a particular pattern: The hacker group gains access to the exchange executives’ private email accounts, then uses spear-phishing (in which the hacker impersonates a high-ranking employee from either the target company or a company with which it regularly deals) to obtain information that grants access to user wallets. Despite the efficacy of the group, the security firm finds that the hacking group is small, i.e., less than five individuals, and likely lacks military training or support.

For more information, please refer to the following links:

U.S. Air Force Explores Blockchain, Global Blockchain Survey Published, Crypto Debit Card Launches, Compliance Initiatives Announced, Quadriga CX Report Published

Abstract Digital network communication digital conceptIn this issue:

U.S. and Australia Explore Blockchain Solutions, Global Blockchain Survey Published

U.S. Cryptocurrency Debit Card Launches, Gaming Firm Announces Token Initiative

SEC and Industry Promote Regulatory Compliance Solutions for Blockchain Market

OSC Issues Report Finding QuadrigaCX Operated Like a Ponzi Scheme

U.S. and Australia Explore Blockchain Solutions, Global Blockchain Survey Published

By: Robert A. Musiala Jr.

This week, Simba Chain announced that it has been awarded “a two-year, $1.5 million contract by the U.S. Air Force to fund a Phase II Small Business Innovation Research (SBIR) project.” According to a press release, Simba Chain will work with “one of the world’s largest aerospace corporations” on areas that include “introducing blockchain into the Air Force’s cybersecurity, logistics, and programming training curriculum and research.”

The Australian government, in partnership with several private sector firms, recently published a report on its “RENeW Nexus” project, which “was conceived to understand the potential of localised energy markets and how technology can facilitate better outcomes for the energy system.” The report includes a section on “Blockchain specific benefits” for the electricity markets that discusses the potential for faster settlement of energy transactions through “the use of blockchains, smart contracts and smart metering.”

According to reports, the U.S. member of the most widely used supply chain standards body in the world recently completed “[t]he first phase of a multi-phase proof-of-concept focused on supply chain visibility and included solutions that leveraged blockchain, cloud and other traceability technology.” And finally, this week a Big Four accounting and consulting firm published its third annual Global Blockchain Survey. Some highlights from the survey include the following:

  • Blockchain’s standing as a top-five strategic priority continued in 2020 with a clear majority of respondents.
  • Respondents are open to using an array of digital assets in their business models, with “enterprise controlled” digital assets, “general asset backed” digital assets and decentralized cryptocurrencies having the most interest.
  • Financial transactions and data privacy top the list of areas that respondents see benefiting most from a global digital identity.
  • Blockchain consortia face a full array of challenges to attract new members, with rules and participant roles and responsibilities heralding the list.

For more information, please refer to the following links:

U.S. Cryptocurrency Debit Card Launches, Gaming Firm Announces Token Initiative

By: Jordan R. Silversmith

Earlier this week, BitPay announced the release of its prepaid debit card. According to a press release, the product is the first-ever prepaid debit card in the U.S. to use cryptocurrency funds. The press release notes that the card “can be loaded with dollars that are converted from cryptocurrency” and automatically reloads when funds run out. Meanwhile, an iconic gaming company announced a partnership with Unikrn, an esports betting company, to better integrate the company’s Ethereum-based ERC20 token with Unikrn’s cryptocurrency ecosystems. According to a press release, through the partnership, Unikrn will gain access to the gaming company’s signature video game catalog while providing crypto technology and new wagering opportunities and experiences through Unikrn’s platform.

A recent report highlighted data from Crystal Blockchain finding that Seychelles, a small island nation at the edge of the Somali Sea, led the world in cross-border bitcoin transactions in 2019. The Crystal Blockchain analysis examined flows of bitcoin between exchanges around the world and found that Seychelles, with fewer than 100,000 people, beat out the second-place United States in both funds sent and received. The Crystal dataset includes an interactive map showing the flow of bitcoin transactions around the world.

For more information, please refer to the following links:

SEC and Industry Promote Regulatory Compliance Solutions for Blockchain Market

By: Robert A. Musiala Jr.

Late last week, the U.S. Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (FinHub) announced the launch of a series of “virtual peer-to-peer meet-ups (P2Ps)” to facilitate “meeting with FinTech industry participants to help inform regulatory approaches and engage on particular projects and issues.” The first theme of the series is regulatory technology (RegTech), with virtual meetings taking place the week of July 6.

Several blockchain firms announced regulatory compliance initiatives this week. The Algorand Foundation announced a partnership with blockchain analytics firm Chainalysis that will seek to implement transaction monitoring and compliance processes for the ALGO token. Fireblocks, which provides wallet infrastructure and settlement solutions, also announced a partnership with Chainalysis that will reportedly allow the Fireblocks platform “to monitor cryptocurrency transactions in real-time, setting a new security and compliance standard for its customers.”

Additionally, this week the Stellar Development Foundation announced proposed updates to the Stellar blockchain protocol that are intended to make it “easier to tokenize regulated assets like securities.” According to a blog post, the protocol updates would allow issuers of regulated tokenized assets on the Stellar blockchain to require certain authorizations before the tokens can be transferred by third parties.

For more information, please refer to the following links:

OSC Issues Report Finding QuadrigaCX Operated Like a Ponzi Scheme

By: Teresa Goody Guillén

The Ontario Securities Commission (OSC) has issued a report of its staff’s findings from their review of Quadriga and its operations. The review was undertaken to determine how the platform was run, the cause of its collapse and where the money went. The key finding is that Quadriga operated like a Ponzi scheme. The report indicates that the now-defunct cryptocurrency exchange, which went into bankruptcy a few months after founder and CEO Gerald Cotten was reported to have died in India, “was an old-fashioned fraud wrapped in modern technology” and the collective loss of investor funds was at least $169 million. The OSC report indicates that the facts it uncovered about Quadriga apply only to Quadriga and should not be construed as indicative of similar misconduct on other crypto asset trading platforms. The report includes the below key regulatory takeaways for investors and crypto asset trading platforms.

Key takeaways for investors:

  • In Canada, many crypto asset trading platforms are not registered.
  • Using a crypto asset trading platform carries risks.
  • Platform clients should conduct due diligence and be alert for signs of fraud.

Key takeaways for crypto asset trading platforms:

  • Crypto asset trading platforms may have to register with the OSC and should take appropriate steps to comply with Ontario securities law.
  • Platforms should ensure that they have systems and controls in place to manage risks.
  • Platforms should disclose key information to clients.

For more information, please refer to the following links:

LexBlog