In this issue:

Satisfying Tax and Other Liabilities With Cryptocurrency

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

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

Cryptocurrencies Continue to Permeate Capital Markets as Blockchain Permeates Settlement Systems

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

Satisfying Tax and Other Liabilities With Cryptocurrency

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

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

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

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

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

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

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

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

By: Jordan R. Silversmith

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

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

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

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Cryptocurrencies Continue to Permeate Capital Markets as Blockchain Permeates Settlement Systems

By: Robert A. Musiala Jr.

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

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

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

By: Diana J. Stern

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

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

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

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

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