New CBDC and NFT Data Released; OFAC Adds Mixer and Public Keys to SDN List; Multiple Crypto Enforcement Actions; Stablecoin Risks on Display

In this issue:

BIS Releases Survey on CBDC Initiatives; New Crypto Products Launch
2022 NFT Market Data Released; Brands Continue NFT Initiatives
OFAC Sanctions Cryptocurrency Mixer, Adds New Public Keys to SDN List
Multiple Crypto Enforcement Actions Announced by CFTC, DOJ and SEC
Multistate Enforcement Action Targets Metaverse Casino’s NFT Offering
Algorithmic Stablecoins Collapse; U.S. Treasury Secretary Warns of Risks

BIS Releases Survey on CBDC Initiatives; New Crypto Products Launch

By Jordan R. Silversmith

The Bank for International Settlements (BIS) recently released the results of its 2021 survey of central bank digital currencies (CBDCs). According to the survey, 90 percent of the 81 central banks surveyed are exploring CBDCs to varying degrees, with more than half of those respondents now developing CBDCs or running concrete experiments. The survey also found that central banks are particularly interested in retail CBDCs, and the share of central banks currently developing a CBDC or running a pilot increased from 14 percent in 2020 to 26 percent in 2021.

After a several-week delay, three new cryptocurrency exchange traded funds (ETFs) were approved by regulators to launch in Australia this week, giving Australian traders five crypto ETFs to choose from now. And in Brazil, this week the largest Brazilian digital bank by market value announced it was adding the option for customers to buy and sell bitcoin and ether on its platform. According to reports, while users will be able to buy and sell cryptocurrency with Brazilian reals, they initially will not be able to withdraw or deposit cryptocurrencies.

In a final development, S&P Global recently assigned a credit rating to a decentralized finance (DeFi) platform for the first time. The DeFi company, Compound Treasury, received a B-, or junk, rating by S&P Global. The DeFi company reportedly has a stable outlook, but ratings issuers cited the uncertainty of regulatory conditions around stablecoins and the company’s “very low” capital base as concerns leading to the rating.

For more information, please refer to the following links:

2022 NFT Market Data Released; Brands Continue NFT Initiatives

By Lauren Bass

According to a recent Chainalysis blog post, the “explosive” growth of the non-fungible token (NFT) market during 2021 may finally be “stabilizing” in 2022. Among other findings, the post explains that while the number of active participants in the NFT marketplace continues to grow, transaction volume has fluctuated greatly, with the “vast majority” of transactions now occurring at the retail level (below $10,000 worth of cryptocurrency) rather than the institutional level (over $100,000 worth of cryptocurrency). Despite such market volatility, according to Chainalysis, NFT collectors have sent over $37 billion to NFT marketplaces in 2022 as of May 1.

Hoping to capitalize on the spending trend, earlier this week a South Korean automotive manufacturer reportedly dropped a collection of 10,000 “shooting star” ethereum-based NFTs via its company-branded website. But there’s a catch. According to a press release, each of these unique NFTs has adopted a “reveal” method. This means that buyers currently see only a placeholder image as the connected media. The actual images – variations on the theme of “metamobility” – will reportedly be unveiled to NFT holders later this month.

In other NFT news, to celebrate mom on her special day, a U.S. floral gift retailer reportedly launched a free NFT giveaway via its social media channels. According to reports, the Polygon-minted NFTs feature limited edition digital artwork specifically designed “to reflect the special and unique bond fostered between a child and mother.”

For more information, please refer to the following links:

OFAC Sanctions Cryptocurrency Mixer, Adds New Public Keys to SDN List

By Veronica Reynolds

Late last week, for the first time ever, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned a virtual currency mixer. The mixer, Blender.io, was added to OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List) in connection with its use by Lazarus Group, a hacker group with strong ties to the Democratic People’s Republic of Korea (DPRK), which recently executed a nearly $620 million hack of a large online cryptocurrency gaming platform. According to a press release, a significant portion of the stolen funds was laundered by the hacker group through Blender.io. Mixers, touted for their privacy-enhancing functions, are often used by illicit actors to blend various transactions together in order to obfuscate the mixed funds’ origins and destinations. In addition to Blender.io, OFAC added to the SDN List multiple cryptocurrency public keys that were reportedly used by the Lazarus Group to launder illicit proceeds.

For more information, please refer to the following links:

Multiple Crypto Enforcement Actions Announced by CFTC, DOJ and SEC

By Christina O. Gotsis

Last week, the U.S. Commodity Futures Trading Commission (CFTC) announced that the U.S. District Court for the Southern District of New York (SDNY) entered consent orders with three co-founders of the BitMEX derivatives trading platform. The consent orders required each founder to pay civil penalties of $10 million and enjoined them from committing further violations of the Commodity Exchange Act. According to the orders, between 2014 and 2020, the founders failed to implement and enforce effective controls to prevent or detect BitMEX’s unlawful conduct, including operating a facility to trade or process swaps without having CFTC approval to operate as a designated contract market or a swap execution facility, operating as a futures commission merchant without CFTC registration, failing to implement a customer information program and know-your-customer procedures, and failing to implement an adequate anti-money-laundering program. The three individuals have also been indicted by the U.S. Attorney’s Office for the SDNY for alleged violations of the Bank Secrecy Act.

According to a recent press release from the U.S. Department of Justice (DOJ), an operator of various cryptocurrency investment pools was sentenced to 42 months in prison for operating a cryptocurrency Ponzi scheme that defrauded more than 170 victims. According to the press release, the defendant “distributed cryptocurrency worth approximately $2 million to investors substantially from funds previously deposited by other investors.” Another recent DOJ press release announced various charges against the CEO of a cryptocurrency mining and investment platform for allegedly orchestrating a $62 million global investment fraud scheme. According to the press release, the defendant sold investment plans called “mining packages” that would use investors’ money to mine cryptocurrency and “trading bots” that could allegedly engage in thousands of trades per second to generate daily returns. Instead, the defendant allegedly diverted the funds to wallets under his personal control and to his co-conspirators whom he recruited to promote the platform in pyramid scheme fashion.

The U.S. Securities and Exchange Commission (SEC) also announced fraud charges against the very same CEO and the company in connection with the unregistered offerings and fraudulent sales of the mining packages. According to the SEC’s complaint, since at least January 2018, the platform sold mining packages to over 65,000 investors worldwide and promised daily returns that were a result of “profit sharing” from mining, investing, trading stocks and engaging in foreign exchange activity. Investors were allegedly promised returns in bitcoin, but later, the defendants required investors to withdraw their investments in the form of the platform’s own tokens via a fake crypto asset trading platform the defendants created and managed. According to the SEC’s press release, when investors attempted to liquidate their funds, they encountered errors that required them to buy another mining package or forfeit their investments.

For more information, please refer to the following links:

Multistate Enforcement Action Targets Metaverse Casino’s NFT Offering

By Alexandra Karambelas

This week, securities regulators in five states filed enforcement actions against Flamingo Casino Club, a metaverse casino with alleged ties to Russia, ordering the casino to halt the sale of its non-fungible tokens (NFTs). The cease-and-desist orders, filed in New Jersey, Alabama, Texas, Kentucky and Wisconsin, allege that Flamingo Casino Club sold unregistered “securitized NFTs,” purportedly giving would-be investors a portion of the casino’s profits.

In a joint press release, the five state agencies accuse Flamingo Casino Club of using a false office address and phone number in an attempt to conceal the identities of the principals. “State regulators … recognize that online scammers often take steps to remain anonymous and hide their true identities – which often enables them to ‘go dark’ and disappear when their schemes collapse,” said the state regulators.

Regulators also allege that the casino falsely claimed to have partnerships with and endorsements from various high-profile businesses, including a brick-and-mortar casino in Las Vegas. In a separate press release, the New Jersey Attorney General’s Office urged investors to be aware of red flags in the NFT market. “It is important to know the risks of buying unregistered securities such as the Securitized NFTs and investing in similar new opportunities. We ask investors to do their part to protect their money by looking past the hype and high return promises,” said Acting Bureau Chief Amy G. Kopleton in the press release.

For more information, please refer to the following links:

Algorithmic Stablecoins Collapse; U.S. Treasury Secretary Warns of Risks

By Joanna F. Wasick

Two algorithmic stablecoins recently fell steeply from their peg to the U.S. dollar, and regulators have taken notice. 

TerraUSD (UST or Terra), the fifth largest stablecoin by market capitalization, reportedly fell as low as 31 cents this week. NeutrinoUSD (USDN or Neutrino), 10th by market capitalization and which made headlines in April for dipping in value, had a week low of about 70 cents. A number of less popular stablecoins also had dips.

Notably, both UST and USDN are algorithmic stablecoins. Unlike so-called dollar-backed stablecoins, which are supposedly collateralized with stable assets like fiat currencies and commercial paper, algorithmic stablecoins are “backed” by an on-chain algorithm that facilitates a change in supply and demand between the stablecoin and one or more other cryptocurrencies. Terra is backed or “propped” by TerraLUNA (LUNA) (which suffered even greater losses this week). Neutrino, which works within the Waves blockchain ecosystem, is backed by the WAVES token. Algorithmic stablecoins are typically undercollateralized, but the algorithm is meant to secure the peg. In these instances, the algorithms failed. Early Thursday, Terra Labs, the team behind the Terra ecosystem, proposed several measures to rectify the issue. However, it later reportedly halted all new activity on its blockchain.

In a related development, this week a major U.S. financial agency issued a Financial Stability Report that spotlights the risk of market runs on stablecoins, emphasizing stablecoins alongside certain money market funds and bonds as areas of risk in the current financial system. The report notes that the increasing use of stablecoins to meet margin requirements in leveraged crypto trades may heighten redemption risks. On Tuesday, U.S. Department of the Treasury Secretary Janet Yellen also addressed stablecoins when speaking before the Senate Banking, Housing and Urban Affairs Committee, calling out the UST episode directly as a reason to regulate: “A stablecoin known as TerraUSD experienced a run and had declined in value,” Yellen said. “I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate.”

For more information, please refer to the following links:

Banks and Retailers Embrace Crypto, Bitcoin Environmental Costs Debated, New NFT Initiatives Launch, Various Agencies Address Crypto, DeFi Hacks Continue

In this issue:

Banks and Retailers Venture Further into Cryptocurrencies and Blockchain
Congress Spars with Industry on Environmental Impact of Bitcoin Mining
New NFT Offerings Revealed by Entertainment, Social and Crypto Companies
FinCEN Director and NY DFS Address Cryptocurrency Risks
DOJ Targets Crypto Fraud, SEC Doubles Crypto Staff, JF Issues NFT Red Flags
Hackers Continue to Target DeFi Sector with $1.6B Reported Losses in 2022

Banks and Retailers Venture Further into Cryptocurrencies and Blockchain

By Maria S. Luevano

According to reports, a major U.S.-based global investment bank has allowed a borrower to use bitcoin as collateral for a cash loan, for the first time in the bank’s history. In other financial news, according to reports, the Global Shipping Business Network (GSBN), a technology consortium that includes three China- and Hong Kong-based banks, recently unveiled two proof-of-concept trade finance products. The products are designed to collect data from the shipping industry using GSBN’s blockchain-enabled platform, allowing banks to directly access bill of lading data.

In other developments, a high-end fashion designer and retailer has announced that it will begin to accept payment in cryptocurrency in some U.S. stores by the end of May and plans to expand to stores across North America later this summer. According to the announcement, the retailer will accept payments from customer cryptocurrency wallets in more than 10 cryptocurrencies.

Meanwhile, the Wikimedia Foundation is reportedly ending its practice of accepting cryptocurrency donations. According to reports, 71% of the foundation’s members voted to end the practice due to concerns around energy consumption, use by sanctioned individuals and exposure to potential scams.

For more information, please refer to the following links:

Congress Spars with Industry on Environmental Impact of Bitcoin Mining

By Joanna F. Wasick

The debate over the environmental effects of cryptocurrency mining continues. Last month, Rep. Jared Huffman (D-Calif.) sent a letter to the U.S. Environmental Protection Agency (EPA), warning of “significant greenhouse gas emission” and “major electronic waste challenges” caused by the proof-of-work (PoW) mining industry. The letter, which was signed by 22 additional congressional representatives, urged the EPA to evaluate mining facilities’ compliance with environmental statutes, and investigate and address any harm existing PoW facilities are causing communities.

This week, the bitcoin and mining industry responded with its own letter to the EPA, published by the Bitcoin Mining Counsel and signed by a number of bitcoin industry leaders, including Michael Saylor of MicroStrategy and Jack Dorsey of Block Inc. The response asserts that the congressional letter is based on a number of misconceptions, and that at least some of the data on which it was based, including the backup for assertions on electronic waste, is faulty and biased. The response letter further asserts that mining centers are no different from data centers run by major U.S. technology firms and should be assessed the same way by the EPA. The letter concludes by stating that public officials need further education to understand that the digital asset mining sector does not contribute to the environmental issues raised in the congressional letter, and that bitcoin and PoW are critical to the financial and economic well-being of the country.

For more information, please refer to the following links:

New NFT Offerings Revealed by Entertainment, Social and Crypto Companies

By Keith R. Murphy

According to a recent report, a major entertainment studio and its comics publisher have a new non-fungible token (NFT) collection that features unique bat cowls inspired by the character Batman. The company reportedly is employing integrated storytelling via a new collection of comics enabling the NFT holders to be part of the creation of the narrative and their own superheroes. According to the head of NFT Commercial Development for the company, the outcome will be a new comic collaboratively developed with fans.  

An announcement from an American multinational chain of coffeehouses this week reveals that the company plans to create a series of branded NFT collections. Ownership of the NFTs reportedly will grant community membership and access to exclusive experiences and perks, with the initial collection based on coffee art and storytelling coming sometime later this year.

In a final development, a well-known cryptocurrency exchange platform recently went live with a beta version of its Web3 social marketplace for NFTs, according to a release from the company. Among other features noted, the marketplace is intended to allow “creators and collectors [to] build and engage their communities,” and will provide users with personalized recommendations for NFTs, which will improve based on whom users follow, what they buy and what is trending.

For more information, please refer to the following links:

FinCEN Director and NY DFS Address Cryptocurrency Risks

By Robert A. Musiala Jr.

Late last week, Acting Director of the U.S. Financial Crimes Enforcement Network (FinCEN) Himamauli Das addressed digital assets during testimony before the U.S. House of Representatives Financial Services Committee. According to reports, in his responses to questions from the committee, Das addressed Section 311 of the PATRIOT Act, saying, “Currently, the Section 311 authority is not right-sized for the types of threats that we’re seeing through the use of cryptocurrency.” Das also reportedly commented on money laundering risks related to unhosted cryptocurrency wallets, saying, “Unhosted wallets often engage in transactions with cryptocurrency exchanges, which are subject to AML/CFT regulation …. Law enforcement can engage with cryptocurrency exchanges with respect to suspicious activity reporting and other reports that might be applicable to them in terms of getting some degree of understanding in terms of transactions with unhosted wallets as well.”

In a related development, the New York Department of Financial Services (NY DFS) recently published new guidance for cryptocurrency businesses licensed under the NY DFS BitLicense regime. The new guidance emphasizes “the importance of blockchain analytics to effective policies, processes, and procedures, including, for example, those relating to customer due diligence, transaction monitoring, and sanctions screening.” Among other things, the guidance “emphasizes the importance of blockchain analytics … in addressing … anti-money laundering requirements … and across a range of BSA/AML and OFAC-related compliance controls, including but not limited to: Augmenting Know Your Customer (or ‘KYC’)-related controls; Conducting transaction monitoring of on-chain activity; and Conducting sanctions screening of on-chain activity.”

For more information, please refer to the following links:

DOJ Targets Crypto Fraud, SEC Doubles Crypto Staff, JF Issues NFT Red Flags

By Teresa Goody Guillén

The U.S. Department of Justice (DOJ) recently charged Japheth Dillman and David Mata each with one count of wire fraud (18 U.S.C. § 1343) in connection with an alleged scheme to defraud victims into investing in a San Francisco-based cryptocurrency trading fund, Block Bits Fund I, LP (Block Bits). According to a DOJ press release, the complaint alleges Dillman misrepresented the status and functionality of a cryptocurrency arbitrage autotrader technology that was being developed to invest investor funds and made false representations regarding the use of investor proceeds, and that Block Bits investors lost approximately $508,000 as a consequence of the scheme. 

This week, the U.S. Securities and Exchange Commission (SEC) announced that it is nearly doubling the size of its Crypto Assets and Cyber Unit (the Unit) to 50 staff members, which is stated to include supervisors, investigative staff attorneys, trial counsel and fraud analysts. According to the SEC press release, the Unit will focus on investigating securities law violations related to (1) crypto asset offerings, (2) crypto asset exchanges, (3) crypto asset lending and staking products, (4) decentralized finance (DeFi) platforms, (5) NFTs and (6) stablecoins. Replying to the SEC’s tweet of the announcement, Commissioner Hester Peirce tweeted, “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?”

Late last week, the Joint Chiefs of Global Tax Enforcement (J5) issued the first-of-its-kind intelligence bulletin titled “J5 NFT Marketplace Red Flag Indicators,” which provides guidance to banks, law enforcement partners and private investigators regarding indicators of potential misconduct related to NFTs. Some of the “strong” fraud indicators J5 listed are (1) a network of sending and receiving parties to the same transaction or group of transactions; (2) clearly overpriced/underpriced NFTs that are traded frequently in short time frames; (3) artificial increases in sale value through a series of trades between linked accounts, known as “wash trading”; (4) newly minted NFTs immediately sold at high price points that are not in line with those of other NFTs in the collection; and (5) NFTs sold for large sums and reacquired by the same party or a third party for smaller amounts. This month, J5 members are expected to meet for the fourth iteration of the J5 Challenge, in which experts from each country team up and optimize investigative data and use analytical tools to generate leads and identify tax offenders using cryptocurrency.

For more information, please refer to the following links:

Hackers Continue to Target DeFi Sector with $1.6B Reported Losses in 2022

By Alexandra Karambelas

DeFi lenders Rari Capital and Fei Protocol became the latest victims in a string of cyberattacks on DeFi platforms, according to reports this week. The hacker reportedly exploited a vulnerability in Rari’s lending protocol and made off with more than $80 million in stolen cryptocurrencies. In a statement released on social media soon after the attack, Fei Protocol offered a $10 million bounty in exchange for return of the stolen funds.

According to reports, hackers are using malicious ads as part of a phishing campaign targeting holders of UST, a popular stablecoin that is pegged to the value of the U.S. dollar. The ads reportedly direct users to fraudulent websites, mimicking services used by UST holders. Reports indicate that over $4.3 million in UST has been stolen through this scheme over the course of less than two weeks.

Recent reports estimate that more than $1.6 billion in cryptocurrencies has been stolen through DeFi exploits in 2022 alone. Less than six months into the year, this figure is driven by a number of high-value hacks, including the Ronin Bridge attack in March of this year, when hackers stole $600 million in user funds. The ongoing attacks reportedly coincide with a significant decline in the total value locked (TVL) in DeFi this past month, with TVL dipping below $200 billion for the first time since 2016.

For more information, please refer to the following links:

SEC Signals Ramp-Up in Crypto Enforcement by Nearly Doubling Its Crypto Assets Cyber Unit Staff

On May 3, the U.S. Securities and Exchange Commission (SEC) announced the expansion of its Crypto Assets and Cyber Unit (the Unit f/k/a the Cyber Unit) to 50 staff members, nearly double the Unit’s former size, including supervisors, investigative staff attorneys, trial counsel and fraud analysts. The Unit is a group within the Division of Enforcement. It was created in 2017 to target cyber-related misconduct and establish a retail strategy task force that develops initiatives to identify misconduct that impacts retail investors.

Read the full alert.

Global Tax Enforcement Group Provides NFT Red Flag Guidance

Answering the call for guidance regarding potential issues concerning the popular cryptocurrency assets NFTs, on April 28, the J5 issued a first-of-its-kind intelligence bulletin warning the public of the dangers of dealing with NFTs. Titled the “J5 NFT Marketplace Red Flag Indicators,” the bulletin provides real-world guidance to banks, law enforcement partners and private investigators intended to help improve their fraud detection measures. The guidance is based on information obtained by members of the global task force and shared as part of its mission to prevent tax evasion. “This space is changing so fast, and technologies and products have the ability to become the ‘next big thing’ without any due diligence or regulation on the part of the creator of the product,” says Special Agent Oleg Pobereyko, J5 Crypto Group lead. “We tried to put together a product that would help keep people safe while law enforcement catches up to these particular concerns.” The J5 report on NFTs follows a study published by the Treasury Department in February highlighting the use of the NFT marketplace to facilitate money laundering and terrorist financing, underscoring the time and attention that regulatory agencies are dedicating to NFTs and the potential fraud risks that market participants face.

Read the full alert here.

Crypto and NFT Pilots Launch Across Industries; Paper Analyzes Bitcoin Use in El Salvador; Crypto Enforcement Continues in US; New Foreign Crypto Regs

In this issue:

Crypto Pilots Launch in Social Media, 401(k) Plans and Municipal Bitcoin Mining
NBER Publishes Paper Analyzing Bitcoin Usage in El Salvador
Brands Enter NFT Market Across Industries, New NFT Platforms Launch
Crypto Firm Enters AML Consent Order; Stablecoins and Wallets in Focus
Foreign Governments Publish New Crypto Legislation and Policy Papers
DOJ Indicts Accomplices in Crypto Sanctions Evasion; NFTs Hacked for $40M

Crypto Pilots Launch in Social Media, 401(k) Plans and Municipal Bitcoin Mining

By Robert A. Musiala Jr.

A major U.S. fintech firm recently announced the launch of a “crypto payouts” pilot that will allow a select group of creators to receive cryptocurrency payments through a major social media platform. According to a press release, the pilot “will make it possible for creators who opt in to have their earnings paid out to a cryptocurrency wallet.” The pilot will reportedly leverage the Polygon Network and support payments in the USDC stablecoin.

In other developments, according to reports, a major U.S. cryptocurrency exchange recently achieved a license to operate in Abu Dhabi under the new licensing regime in the United Arab Emirates. Separately, the largest retirement plan provider in the U.S. recently announced that it intends to offer investors the option to invest in bitcoin through their 401(k) plans. According to reports, the U.S. Department of Labor has expressed “grave concerns” about the initiative.

In a final notable item, the city of Fort Worth, Texas, will reportedly soon begin Bitcoin Network mining using three ASIC Bitmain AntMiner S9 rigs donated by the Texas Blockchain Council. The mining rigs will reportedly “operate on a private network in a climate-controlled data center at City Hall.”

For more information, please refer to the following links:

NBER Publishes Paper Analyzing Bitcoin Usage in El Salvador

By Joanna F. Wasick

The National Bureau of Economic Research (NBER) recently published a report on whether bitcoin can serve as a significant medium of exchange. To address the question, NBER surveyed adults from 1,800 households in El Salvador, which in September 2021 became the first country to adopt bitcoin as legal tender, at which time it also launched an app, “Chivo Wallet,” that facilitates bitcoin payments with no transaction fees. Users were given a bonus of $30 worth of bitcoin to start.

The report finds that while a large percentage of El Salvadorians downloaded Chivo Wallet, over 60 percent stopped using it after spending the $30 bonus, leading NBER to conclude that at this stage, usage of bitcoin is relatively low. The report also finds that El Salvadorians who do use bitcoin are likely to be banked, educated, young and male. However, according to the report, 20 percent of businesses in El Salvador have begun accepting bitcoin as a payment method, and bitcoin is gaining ground compared with other payment methods, like credit cards.

For more information, please refer to the following links:

Brands Enter NFT Market Across Industries, New NFT Platforms Launch

By Lauren Bass

A South Korean automotive manufacturer will reportedly collaborate with a popular non-fungible token (NFT) brand to enter the “community based” market. According to reports, the partnership plans to release 30 limited edition NFTs, each of which will depict a “mobility solution” for the manufacturer’s metaverse. In related news, last month a German car company’s South African subsidiary launched an interactive NFT campaign. According to reports, over the course of the five-day campaign, the company released 100 unique NFTs and additional “real world” consumptive prizes—all to promote the arrival of the manufacturer’s new vehicle.

In other NFT news, a multinational food and beverage company has reportedly entered the NFT market with a limited edition series based on a popular breakfast cereal. According to reports, 100 percent of the proceeds from the digital collectible auction—running through May 13 on OpenSea—will benefit charity.

To mark the occasion of its 2022 draft, a major U.S. sports league is reportedly launching an NFT collection, which includes digital collectibles inspired by each of the league’s teams. According to reports, the collection is minted on the Flow blockchain and contains, for each team, 52 NFTs that resemble playing cards.

In a final item, a major cryptocurrency platform has reportedly launched its own NFT marketplace, which will (i) support the minting and trading of NFTs on multiple blockchains, (ii) charge zero transaction fees for retail investors and (iii) not limit the royalty rates that creators can set for secondary purchases of their work. According to a press release, in addition to a “curation of industry-leading collections,” the new platform also intends to “feature rising NFT projects led by women, BIPOC, and underrepresented groups in the ecosystem.”

For more information, please refer to the following links:

Crypto Firm Enters AML Consent Order; Stablecoins and Wallets in Focus

By Teresa Goody Guillén and Joanna F. Wasick

Anchorage Digital and the Office of the Comptroller of the Currency (OCC) agreed to a consent order filed last week in which the OCC alleged that Anchorage failed to meet Bank Secrecy Act requirements. According to the order, in which Anchorage neither admits nor denies the OCC’s findings, Anchorage did not have an anti-money laundering (AML) program that met federal requirements regarding customer due diligence. Among other things, the company agreed to create a compliance committee, composed predominantly of members who are not Anchorage employees, to oversee Anchorage’s compliance with the consent order. The company also agreed to engage an independent third-party consultant to conduct a “SAR Look-Back” investigation.

This week Acting Comptroller of the Currency Michael J. Hsu issued a statement on standards for stablecoins. He discussed the importance of well-designed standards in promoting “inclusive and responsible innovation” and referenced the Internet—“an open, royalty-free network”—as an example. He recommended a standard-setting initiative for stablecoins similar to the process undertaken by Internet standard-setting bodies and indicated that there is a “willingness of governmental bodies like NIST and the OCC to engage in such efforts.”

The Congressional Research Service (CRS) recently published an In Focus on digital wallets and addressed related policy issues. Specific policy issues addressed by the In Focus include (1) data privacy and security, including what information digital wallets and payments companies generate and collect about users; (2) consumer protection and investor protections, such as whether wallet users mistakenly believe that their wallet balances are insured; (3) systemic risk and market power issues, including whether uninsured balances pose systemic risk, and whether the authority under the Dodd-Frank Act to designate financial institutions and payment systems as systemically important and subject to heightened prudential standards applies to wallet providers; and (4) financial inclusion, including issues as to whether wallets increase access to accounts as opposed to simply increasing user convenience, and noting that wallets are “typically used on smartphones that the unbanked may not possess.”

For more information, please refer to the following links:

Foreign Governments Publish New Crypto Legislation and Policy Papers

By Jordan R. Silversmith

The government of Gibraltar recently announced new virtual asset legislation to define market integrity standards. The legislation will require all distributed ledger technology providers operating in Gibraltar to conduct themselves in a manner that maintains or enhances the integrity of the market in which they participate. The legislation was drafted by the Gibraltar Financial Services Commission and a specialist Market Integrity Working Group, which consisted of a mix of government representatives and leaders in the blockchain and digital assets space.

APRA, the statutory authority of the Australian government and the prudential regulator of the Australian financial services industry, recently released a policy paper outlining a road map for crypto-asset risk management issues. The paper notes that while activities associated with crypto-assets are still limited in Australia, the potential scale and scope of their growth created an imminent need to address their possible role in the economy. In that context, APRA decided to issue guidance on initial risk management expectations for all regulated entities working with crypto-assets in Australia.

The government of the Bahamas recently released a policy white paper outlining the future of digital assets in the country. The paper states that the digital assets policy and framework it sets out should guide the country’s policy between the present and 2026, in the hopes of already having grown the burgeoning sector by 2025. According to the paper, the Bahamas sees the growth of its digital assets sector as critically important to rebuilding the country’s economy, which was badly damaged by the effects of Hurricane Dorian and the COVID-19 pandemic.

For more information, please refer to the following links:

DOJ Indicts Accomplices in Crypto Sanctions Evasion; NFTs Hacked for $40M

By Maria S. Luevano

This week the U.S. Department of Justice announced the unsealing of a Superseding Indictment charging Alejandro Cao de Benos and Christopher Emms with conspiring to violate U.S. sanctions on the Democratic People’s Republic of Korea (DPRK or North Korea). The indictment alleges that Cao de Benos and Emms partnered to organize the “Pyongyang Blockchain and Cryptocurrency Conference” held in the DPRK in 2019 and recruited Virgil Griffith, an American cryptocurrency expert, to teach and advise members of the North Korean government about cutting-edge cryptocurrency and blockchain technology that would assist them in evading U.S. sanctions. Griffith was arrested in November 2019; he pled guilty to conspiring to assist North Korea in evading sanctions and was sentenced to 63 months in prison and ordered to pay a $100,000 fine.

According to reports, the developers of a popular NFT collection recently fell victim to hackers who breached their Instagram account and shared phishing scam links to a website that was used to steal NFTs from users who connected their MetaMask wallets to the website. Approximately 100 NFTs were stolen during the attack, which conservative estimates believe to be valued at more than $40 million worth of assets. According to reports, it is still unclear how hackers gained access to the breached Instagram account.

For more information, please refer to the following links:

Banks Expand Digital Asset Offerings; Crypto Market Actors Critique SEC Proposal; New OFAC Crypto Sanctions; Agencies Issue Warnings; DeFi Hacked

In this issue:

Banks Expand Digital Asset Offerings, BIS Report Addresses CBDCs
Cryptocurrency Market Actors Publish Critiques of Recent SEC Proposal
OFAC Sanctions North Korean Crypto Hackers and Russian Crypto Miner
Law Enforcement in US, Australia Issue Warnings as DeFi Hacks Continue

Banks Expand Digital Asset Offerings, BIS Report Addresses CBDCs

By Keith R. Murphy

This week Anchorage Digital, a digital asset platform and infrastructure provider that is also the first federally chartered cryptocurrency bank, announced that it has added custody support for 11 new digital assets. According to a press release, the newly supported assets include NFTs for Bored Ape Yacht Club and Mutant Ape Yacht Club, as well as tokens for Provenance and SuperRare. The company also announced in a separate release that it has joined the Nasdaq Crypto Index (NCI) as a Core Custodian, which reportedly will allow approved asset managers to select Anchorage to provide investment-grade infrastructure to support any NCI tracking product.

According to reports, the Portuguese central bank Banco de Portugal recently granted a license to Bison Bank to operate as a virtual asset service provider. In related news, a spokesperson for one of Germany’s largest banks has reportedly confirmed that the bank applied for a license to offer cryptocurrency exchange and custody services earlier this year. The bank is reportedly Germany’s second largest listed bank and is partly owned by the German government. And in Australia, the country’s first bitcoin exchange-traded fund (ETF) is expected to be listed on the Cboe equities trading platform next week, according to a report. 

A newly released report from the Financial Stability Institute of the Bank for International Settlements explores whether central bank digital currencies (CBDCs) can be used to help accomplish financial inclusion. Among other things, the report notes that low-income populations and people in remote areas still struggle with barriers to digital payments, which could be ameliorated through the use of CBDCs in situations where the private sector is not sufficiently motivated to innovate or where there is an existing oligopoly.

For more information, please refer to the following links:

Cryptocurrency Market Actors Publish Critiques of Recent SEC Proposal

By Joanna F. Wasick

Two prominent members of the crypto space recently issued comments critiquing proposed rule amendments by the U.S. Securities and Exchange Commission (SEC) that would expand the definitions of “exchange” and alternative trading systems under the Securities Exchange Act of 1934. Last week, Coin Center, an independent nonprofit research and advocacy center focused on cryptocurrency policy, stated that the SEC’s language raised substantial First Amendment issues and would “impose an unconstitutional prior restraint on the protected speech activities of countless software developers and technologists.” Earlier this week, the largest U.S. crypto exchange published its own comment letter stating that the SEC’s proposal (which, the exchange stresses, makes no express mention of digital assets) goes well beyond the SEC’s statutory authority. The letter also asserts that the proposed rule would bring decentralized exchanges (DEXes) and DAO (decentralized autonomous organization) participants under regulatory control without any consideration of how the new rule would impact these market participants. The letter closes by stating that if the SEC seeks to regulate certain broker-dealer activity, it should do so directly “rather than through statutorily unsupportable expansions of the definition of ‘exchange,’” and that if the SEC seeks to regulate digital asset securities or DEXes, it should re-propose rules that specifically analyze the rules’ impact on these markets.

For more information, please refer to the following links:

OFAC Sanctions North Korean Crypto Hackers and Russian Crypto Miner

By Christina O. Gotsis

Last week, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) announced new sanctions against Lazarus Group—a North Korean state hacking group that has targeted crypto entities since at least 2017—for its suspected association with the second-largest crypto theft of all time. OFAC made related updates to the Specially Designated Nationals List that include the addition of an Ethereum public key associated with the hack. The designation comes two weeks after the Ronin Network announced that it had been hacked for $540 million in cryptocurrencies. According to reports, the attacker has laundered a portion of the stolen funds, but at least $433 million of the stolen cryptocurrencies remains in the attacker’s original wallet.

This week OFAC also announced sanctions against a Russia-based cryptocurrency mining company, BitRiver, and several subsidiaries and associated persons, for allegedly facilitating the Russian government’s circumvention of U.S. sanctions leveled in response to the invasion of Ukraine. According to a press release, this is the first time the U.S. Department of the Treasury (Treasury) has designated a virtual currency mining company. Brian Nelson, under secretary at the Office of Terrorism and Financial Intelligence, commented, “Treasury can and will target those who evade, attempt to evade, or aid the evasion of U.S. sanctions against Russia, as they are helping support Putin’s brutal war of choice.”

For more information, please refer to the following links:

Law Enforcement in US, Australia Issue Warnings as DeFi Hacks Continue

By Alexandra Karambelas

A joint cybersecurity advisory issued this week by the Federal Bureau of Investigation, the Cybersecurity and Infrastructure Security Agency (CISA) and Treasury highlighted the cybersecurity threat posed by North Korean state-sponsored actors. According to the advisory, law enforcement has seen an increase in attacks against blockchain-related organizations, including cryptocurrency exchanges and decentralized finance (DeFi) protocols. “These actors will likely continue exploiting vulnerabilities of cryptocurrency technology firms, gaming companies, and exchanges to generate and launder funds to support the North Korean regime,” the advisory said. The advisory warned users to be on guard against social engineering tactics employed by these malicious cyber actors.

According to reports, this week Assistant Director of Investigations for the United States Secret Service David Smith said that the agency has seized more than $102 million in cryptocurrency since 2015. Smith reportedly attributed the agency’s success in tracing stolen cryptocurrency to the transparent nature of the blockchain. “One of the guiding principles of the blockchain is that it is a public ledger that’s shared and everyone with a little bit of computing power has access to it, including law enforcement,” said Smith.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) released a guide on digital financial crime this week. The guide is aimed at businesses and includes advice on recognizing potential scams involving digital currencies and money laundering red flags, as well as an outline of emerging financial risks in DeFi protocols.

In the latest in a series of high-profile DeFi hacks, $182 million was stolen from Beanstalk Farms, an Ethereum-based stablecoin protocol, earlier this week. According to reports, the attacker laundered the stolen funds through an Ethereum mixer. This hack comes less than a month after $625 million was stolen from the Ronin blockchain in an attack that U.S. officials have reportedly linked to North Korean state actors.

For more information, please refer to the following links:

NFT Initiatives Continue; EU Issues Blockchain Healthcare Report; Crypto Addressed by Various US Regulators; State Actions Target Bitcoin ATMs, NFTs

In this issue:

Sports Teams and Messaging Apps Go All-In on NFTs, Potential Hack Foiled
Report on Blockchain in the European Healthcare Sector Published
US Treasury Secretary, FDIC, Acting Comptroller and EU Address Crypto
• State Enforcement Actions Target Bitcoin ATM Operator and NFT Sellers

Sports Teams and Messaging Apps Go All-In on NFTs, Potential Hack Foiled

By Lauren Bass

A major U.S. football team has reportedly inked a lucrative sponsorship deal with a popular digital asset platform. According to reports, the partnership comes just weeks after the team’s league amended its temporary crypto ban.

In related news, a major U.S. basketball league has reportedly filed several trademark applications signaling a possible intent to launch a series of collectible non-fungible tokens (NFTs) under the registered moniker. The basketball league has also reportedly purchased two Ethereum Name Service domains. According to reports, these moves suggest that the league—which has previously partnered with entities on earlier NFT projects—may be making a play to launch an NFT campaign on its own.

According to reports, an Italian fútbol club recently partnered with a digital studio to create a unique 3D NFT featuring the image of a special team jersey that was discovered by a Danish war photographer during a trip to South Sudan. Proceeds from the NFT sale will benefit the club’s charitable foundation.

In Japan, a popular social messaging app has reportedly partnered with a major entertainment conglomerate to launch a branded NFT marketplace. According to reports, the marketplace is the latest in the messaging app’s crypto add-ons, which already include a wallet, an exchange and a cryptocurrency payment method.

In a final development, a multinational security firm recently identified a vulnerability in the coding of a major U.S. NFT marketplace. The vulnerability reportedly would have allowed a malicious actor to send any marketplace user an NFT link that when clicked would provide full access to that user’s wallet, thereby allowing a hacker to drain all assets. If exploited, the bug could have led to 2 million marketplace users losing all their NFTs in a single transaction. According to reports, the platform has since fixed the issue.

For more information, please refer to the following links:

Report on Blockchain in the European Healthcare Sector Published

By Alex Karambelas

Earlier this week, the EU Blockchain Observatory published its fifth thematic report, titled “Blockchain Applications in the Healthcare Sector.” The report covers a wide range of issues, from the regulatory hurdles facing distributed ledger technology in the European healthcare industry to the ways in which blockchain solutions are being used to combat the COVID-19 pandemic. While acknowledging legal and technological challenges, the report’s authors take an optimistic view on the potential for blockchain technologies to alleviate inefficiencies in the healthcare sector and improve patient outcomes. The report highlights the potential for distributed ledger technologies in a number of areas, including improved supply chain and inventory management, anti-counterfeiting, medical credentialing, health data accuracy, infectious disease contact tracing, and greater patient access to healthcare information. The report also discusses regulatory, privacy and ethical considerations.

For more information, please refer to the following links:

US Treasury Secretary, FDIC, Acting Comptroller and EU Address Crypto

By Teresa Goody Guillén

U.S. Department of the Treasury Secretary Janet Yellen recently gave a speech on digital assets policy, innovation and regulation. She remarked that “[d]igital assets may be relatively new, but they are part of a larger trend—the digitization of finance—that has been in the making for decades.” In her speech, Yellen shared five “lessons” to apply in navigating emerging technologies: (1) “[o]ur financial system benefits from responsible innovation”; (2) “[w]hen regulation fails to keep pace with innovation, vulnerable people often suffer the greatest harm”; (3) “[r]egulation should be based on risks and activities, not specific technologies”; (4) “[s]overeign money is the core of a well-functioning financial system and the U.S. benefits from the central role the dollar and U.S. financial institutions play in global finance”; and (5) “policymakers, businesspeople, advocates, scholars, inventors, and citizens … need to work together to ensure responsible innovation.”

Last week, a major U.S. banking regulator issued a Financial Institution Letter directing FDIC-supervised institutions that are engaged in, or intend to engage in, activities related to crypto-assets (also referred to as “digital assets”) to notify the FDIC. The letter further states the FDIC will review the information, may request additional information and will provide supervisory feedback. The FDIC cited concerns of risks posed by crypto-assets and crypto-related activities that are not yet well understood, including potential risks to safety and soundness, financial stability, consumers, and insured depository institutions.

Acting Comptroller of the Currency Michael Hsu recently delivered remarks on the architecture of stablecoins. Hsu discussed the “carefully architected monetary and banking system” currently in place and noted that policy errors in the architecture of a USD stablecoin system could “impede the potential for the dollar to serve as the base currency in a future digital economy.” Hsu emphasized the importance of balancing stability with efficiency. He also discussed concerns related to stablecoin interoperability, noting risks related to stablecoins that are not fungible across different blockchains, and risks related to stablecoins that are not interoperable with each other or the U.S. dollar. To mitigate intraday trading risk, Hsu recommended that “blockchain-based activities, such as stablecoin issuance, be conducted in a standalone bank-chartered entity, separate from any other insured depository institution (IDI) subsidiary and other regulated affiliates.”  

In a final notable development, the European Union (EU) recently issued its fifth package of Russia sanctions, targeted at closing certain loopholes related to cryptocurrency wallets, banks, currencies and trusts. With regard to crypto, the EU extended requirements on EU-based crypto exchanges to prohibit deposits into certain crypto wallets, in addition to already existing sanctions that bar transactions from targeted individuals.

For more information, please refer to the following links:

State Enforcement Actions Target Bitcoin ATM Operator and NFT Sellers

By Christina Gotsis

This week, Manhattan District Attorney Alvin L. Bragg Jr. announced the indictment of Robert Taylor for operating an illegal Bitcoin ATM business across New York City, New Jersey and Miami. The indictment alleges that between 2017 and 2018, Taylor operated at least 46 Bitcoin ATM kiosks, primarily located in laundromats, that secretly converted more than $5.6 million of cash into bitcoin for clientele. The indictment further alleges that Taylor marketed his business to individuals engaged in criminal activity and charged a 10 percent to 20 percent fee for the promise of anonymity. Taylor’s kiosks allegedly did not employ any “know your customer” procedures. Taylor faces multiple counts of operating an unlicensed money transmission business, criminal tax fraud in the third degree and offering a false instrument in the first degree.  

In another enforcement action this week, securities regulators in Texas issued an emergency cease-and-desist order to Sand Vegas Casino Club (Sand Vegas) and its co-founders to stop selling NFTs, deeming the sales illegal offerings of unregistered securities. According to the Texas State Securities Board, Sand Vegas promised NFT buyers that they would share in the profits of a virtual casino—up to as much as $81,000 annually—and used social media and Internet platforms to broadcast casino development, target influencers and enthusiasts, and host virtual lotteries with lucrative rewards. Sand Vegas also allegedly assured potential buyers, falsely, that its Gambler and Golden Gambler NFTs were not regulated as securities and that regulation could be avoided by implementing illusory features or using different terminology. This cease-and-desist order represents the first action of its kind related to NFTs and the metaverse.

For more information, please refer to the following links:

New Crypto Payment Initiatives; Regulators Address Crypto in Speeches; Lawmakers Propose Legislation; OFAC Sanctions Crypto Actors; DeFi Hacked 

In this issue:

Crypto Payment Initiatives Announced in Stablecoins, Lightning Network, Mining
SEC Chairman and Comptroller of the Currency Address Crypto in Speeches
SEC Addresses Crypto Accounting, Commissioner Peirce Voices Criticisms
Stablecoins Take Center Stage in Proposed Legislation, Reports and UN Donation
OFAC Sanctions Russian Dark Markets, Adds 100 Crypto Public Keys to SDN List
DOJ Forfeits $34M in Crypto Tied to Dark Markets, DeFi Hacks Continue

Crypto Payment Initiatives Announced in Stablecoins, Lightning Network, Mining

By Jordan R. Silversmith

Late last week, the issuer of USD Coin (USDC) announced that it had selected a major U.S. bank as a primary custodian for USDC reserves. According to a press release, there were over $52 billion USDC in circulation as of March 2022.

In another recent development, a major bitcoin payment processor headquartered in Atlanta announced that it would begin to support Bitcoin Lightning Network payments. The Bitcoin Lightning Network is a secondary layer of the Bitcoin blockchain that was created to improve the cost and scalability of bitcoin transactions. According to a press release, the integration will allow merchants and customers using the company’s payment processing services to complete bitcoin transactions with lower fees. 

In the Bitcoin mining sector, a major U.S. computer-chip producer recently announced details for its upcoming Bitcoin mining chip, which will ship in Q3 2022. The chip is focused on improving energy efficiency and sustainability. According to reports, each chip will deliver up to 580 gigahashes per second (GH/s) of hash rate with up to 26 joules per terahash (J/TH) of power efficiency and will support up to 256 integrated circuits per chain.

In a final development, this week a major U.S. cryptocurrency exchange released its 2022 Global State of Crypto report. Among other things, the report found that nearly half of all current crypto owners in the United States, Latin America and Asia Pacific first bought crypto in 2021. According to the report, respondents in countries that have experienced a 50 percent or more devaluation of their currency against the USD over the past 10 years were more than five times as likely to say they plan to purchase crypto in the coming year.

For more information, please refer to the following links:

SEC Chairman and Comptroller of the Currency Address Crypto in Speeches

By Teresa Goody Guillén

In a speech this week, Chairman Gary Gensler of the U.S. Securities and Exchange Commission (SEC) made remarks addressing three areas of the SEC’s current focus in the crypto markets: platforms, stablecoins and tokens. Gensler stated that he believes crypto trading and lending platforms (centralized or decentralized) are likely trading securities. Accordingly, he has asked the SEC staff to work on several projects: (1) getting platforms registered and regulated like exchanges and the potential application of exemptions, such as alternative trading systems; (2) how to register and regulate platforms in which securities and non-securities are trading, including working with the Commodity Futures Trading Commission (CFTC); (3) how to register and regulate platforms that custody crypto-assets, to include the appropriateness of segregating custody; and (4) if platforms also act as market makers, the potential requirement to segregate that activity.

As to stablecoins, Gensler raised three policy issues: (1) financial policy and monetary policy considerations, such as what backs the tokens such that they can be converted to dollars on a one-to-one basis; (2) how tokens will potentially be used for illicit activity; and (3) investor protection concerns regarding potential conflicts of interest and market integrity questions. With regard to digital asset tokens, he reiterated remarks from former SEC Chair Jay Clayton, that “[w]ithout prejudging any one token, most crypto tokens are investment contracts under the Howey Test,” and emphasized the importance of getting crypto tokens that are securities registered with the SEC.

In another recent speech, Acting Comptroller of the Currency (OCC), Michael Hsu, warned banks to consider the tail risks of trading crypto derivatives. He noted several risks worth considering: (1) limited or unreliable price histories of crypto-assets; (2) crypto positions being netted for purposes of risk aggregation in risk reporting, regulatory capital and risk management (e.g., net risk positions reported as hedged and thus manageable); and (3) heightened wrong-way risk with crypto derivatives (such that a bank’s exposure to a counterparty and the risk of the counterparty’s default are both increased).

For more information, please refer to the following links:

SEC Addresses Crypto Accounting, Commissioner Peirce Voices Criticisms

By Teresa Goody Guillén

The U.S. Securities and Exchange Commission (SEC) staff recently issued Staff Accounting Bulletin Number 121 (SAB 121), which addresses the obligations to safeguard crypto-assets by an entity that holds them for platform users. According to SAB 121, among other things, companies should record each crypto holding for users as a liability and corresponding asset on their balance sheet at fair market value; disclose the nature and amount of crypto-assets the entity holds for its platform users (with a separate disclosure for each significant crypto-asset); and disclose the vulnerabilities that the entity has as a consequence of any concentration in its crypto-related activities. 

SEC Commissioner Hester Peirce issued a statement calling SAB 121 “another manifestation of the [SEC’s] scattershot and inefficient approach to crypto.” Peirce’s criticisms of SAB 121 include the following: (1) timing, in that the staff issued this now, when the impetus seems to be an October 2020 report; (2) the staff’s failure to acknowledge the SEC’s role in creating the legal and regulatory risks that are indicated as the justification for the accounting treatment; (3) questions regarding whether this is the appropriate method to make accounting changes and communicate those changes to the public; and (4) questions regarding whether this is the appropriate process to make these changes as opposed to a “more deliberate approach to changing rules,” such as consulting with affected parties, rulemaking with public notice and comment period, or Financial Accounting Standards Board standard setting.

For more information, please refer to the following links:

Stablecoins Take Center Stage in Proposed Legislation, Reports and UN Donation

By Veronica Reynolds and Robert A. Musiala Jr.

This week, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) released draft legislation that, if enacted, would establish a stablecoin regulatory framework with the goal of allowing crypto-innovation to flourish “while protecting consumers and minimizing potential risks from stablecoins to the financial system.” Key components of the draft legislation include (1) authorizing three methods by which stablecoin issuers may lawfully operate (pursuant to a new federal license, under current state money transmitter laws or through insured depository institutions); (2) requiring stablecoin issuers to comply with certain consumer protection protocols, such as disclosures concerning the existence of assets backing the stablecoin and accounting audits; (3) clarifying that certain types of stablecoins are definitively not securities; and (4) applying privacy protections to stablecoin and virtual currency transactions.

In the U.K., the nation’s public finance and economic policy department, Her Majesty’s Treasury (HM Treasury), published an “approach to cryptoassets, stablecoins, and distributed ledger technology [(DLT)] in financial markets” in response to its 2021 Consultation and Call for Evidence related to the same. Among other things, the report summarizes the government’s intent to legislate certain activities related to the issuance and use of stablecoins used for payment purposes and other crypto-asset activities.

This week the United Nations refugee agency, USA for UNHCR, announced that it has accepted its first stablecoin cryptocurrency donation to support humanitarian aid “for families forced to flee Ukraine to neighboring countries.” According to a press release, the donation of $2.5 million in the stablecoin BUSD was received from Binance Charity, an entity affiliated with the Binance cryptocurrency exchange.

Developments in stablecoins and central bank digital currency (CBDC) are addressed in a recent report from a Big Four accounting and consulting firm. Among other things, the report notes that stablecoin market capitalization reached approximately $190 billion in early 2022.

For more information, please refer to the following links:

OFAC Sanctions Russian Dark Markets, Adds 100 Crypto Public Keys to SDN List

By Keith R. Murphy

According to a press release this week from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), OFAC “sanctioned the world’s largest and most prominent darknet market, Hydra Market (Hydra).” The operation targeting Hydra was a collaborative initiative among multiple U.S. enforcement agencies and “the German Federal Criminal Police, who … shut down Hydra servers in Germany and seized $25 million worth of bitcoin.” The press release notes that OFAC “identified approximately $8 million in ransomware proceeds that transited Hydra’s virtual currency accounts” and “approximately 86 percent of the illicit Bitcoin received directly by Russian virtual currency exchanges in 2019 came from Hydra.” In addition, OFAC added over 100 cryptocurrency public keys associated with Hydra’s operations to OFAC’s Specially Designated Nationals (SDN) List.

The OFAC press release also announced sanctions against Garantex, a cryptocurrency exchange that operated out of the same office building in Moscow, Russia, as two other OFAC-sanctioned cryptocurrency exchanges, SUEX and CHATEX. According to the press release, “[a]nalysis of known Garantex transactions shows that over $100 million in transactions are associated with illicit actors and darknet markets, including nearly $6 million from Russian RaaS gang Conti and also including approximately $2.6 million from Hydra.”

For more information, please refer to the following links:

DOJ Forfeits $34M in Crypto Tied to Dark Markets, DeFi Hacks Continue

By Joanna F. Wasick

On Monday, the U.S. Department of Justice announced that federal prosecutors successfully forfeited approximately $34 million worth of cryptocurrency tied to illegal darknet activity. As alleged in the government’s complaint, a South Florida resident stole and sold illicit items and hacked online account information, and then laundered stolen funds by using tumblers (which can hide the source of cryptocurrencies) and illegal money transmitter services and by “chain-hopping,” that is, jumping between different cryptocurrencies in rapid succession, to evade detection. The forfeiture, which is reportedly one of the largest cryptocurrency forfeiture actions ever filed by the United States, is the result of Operation TORnado, a joint investigation that stems from the ongoing efforts of OCDETF, a partnership between federal, state and local law enforcement agencies, tasked with identifying, disrupting and dismantling priority drug traffickers, money launderers and other priority criminal organizations.

Meanwhile, major hacks in the DeFi space continue to make headlines. Ethereum-based lending protocol Inverse Finance recently announced it was attacked, with hackers making off with $15.6 million worth of stolen cryptocurrency. According to Inverse, the hack targeted its Anchor money market by artificially manipulating token prices to borrow loans against extremely low collateral. Separately, DeFi lending protocol Ola Finance also recently suffered a $3.6 million hack.

In a development related to the recent hack of the Ronin Network, which lost more than $600 million in crypto as a result of a bridge hack, according to reports about 70 percent of the hacked funds have been laundered through Tornado Cash, a cryptocurrency privacy tool. According to recent reports, bridge hacks have resulted in more than $1 billion in cryptocurrency being stolen in just over a year across seven different incidents.

For more information, please refer to the following links:

Money Laundering Concerns Prompt EU Parliament to Approve Privacy-Reducing Crypto Rules

On March 31, 2022, two European Parliament committees – the Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs (the “Committees”) – voted in favor of new rules  (the “Rules”) that would change the way cryptocurrency transactions are treated by the European Union (EU) and would require that certain identifying information about transacting parties be recorded. Proponents of the Rules state that their implementation will prevent digital currency from being used for money laundering and other unlawful activities. Critics argue that the Rules raise serious privacy concerns and will chill innovation in the crypto space.

Read more.

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