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In this issue: • <a href="#Paper">Paper Explores Benefits of DeFi for FX; Australian Bank Launches Stablecoin</a> • <a href="#World">World Economic Forum Publishes DAO Toolkit; ETH Staking Continues to Grow</a> • <a href="#New">New BIS Bulletin and Thailand SEC Regulations Address Digital Asset Risks</a> • <a href="#SEC">SEC Charges U.S. Crypto Lender and Exchange with Securities Law Violations</a> • <a href="#Fin">FinCEN and DOJ Bring Parallel Actions Against Foreign-Based Crypto Exchange</a> • <a href="#Court">Court Orders $17M in Restitution Be Paid to Crypto Fraud Victims</a>

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Paper Explores Benefits of DeFi for FX; Australian Bank Launches Stablecoin

By <a href="https://www.bakerlaw.com/TeresaGoodyGuillen">Teresa Goody Guillén</a>

A recent industry paper found that DeFi can reduce costs and enhance transparency in foreign exchange (FX) markets. The paper concludes that on-chain FX, along with improved fiat-to-stablecoin conversion and improved user-friendly interfaces, enables faster and less costly transfers. The paper reportedly estimated that DeFi rails could reduce international money transfer costs by up to 80 percent. According to the paper, additional benefits of on-chain FX exchange and settlement include (1) eliminating settlement risk when one side of the transaction settles without the other; (2) reducing risks of benchmark rigging and market manipulation; (3) facilitating liquidity and market depth, and reducing risk of flash crashes; and (4) improving payments with nearly instantaneous and low-cost cross-border settlements.

In other news, this week the National Australia Bank announced that it will launch a stablecoin to be backed by the Australian dollar on the Ethereum and Algorand blockchain networks. This is reportedly the country’s second major financial institution to launch a stablecoin, after Australia and New Zealand Bank minted A$DC last year. The stablecoin is expected to allow customers to settle transactions in real time on the blockchain using Australian dollars. Australia reportedly pledged to “modernize the country’s financial system and update its regulatory framework to crypto and other innovations” under Prime Minister Anthony Albanese, and the country’s central bank is anticipating its pilot central bank digital currency (CBDC) project to be completed by mid-2023.&nbsp;

For more information, please refer to the following links:

<a href="https://www.circle.com/blog/on-chain-foreign-exchange-and-cross-border-payments">How DeFi Can Cut Costs &amp; Boost Transparency in Foreign Exchange Markets</a>

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<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4328948">On-Chain Foreign Exchange and Cross-Border Payments</a>

<a href="https://decrypt.co/119542/national-australia-bank-launch-stablecoin-ethereum-algorand">National Australia Bank to Launch Stablecoin on Ethereum, Algorand: Report</a>

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World Economic Forum Publishes DAO Toolkit; ETH Staking Continues to Grow

By <a href="https://www.bakerlaw.com/ChristopherLamb">Christopher Lamb</a>

The World Economic Forum (WEF) recently published a new toolkit for Decentralized Autonomous Organization (DAO) participants with participation from over 100 experts. According to reports, the WEF described the DAO toolkit as “a set of adaptable resources for key stakeholders to help realize the full potential of this emerging form.” The toolkit gives answers to the question “What are DAOs?” with information on DAO operations, governance and more, as well as recommendations for each included. According to the toolkit, it provides “a set of insights and resources for developers and policy-makers”; it states that “DAOs offer a significant new mechanism for managing and allocating capital or other valuable digital assets.” The toolkit also notes that DAOs are an “organizational development the impact of which may be felt across many sectors of business and social activity worldwide.”

According to a recent report, the Ethereum Network has passed a major milestone, with the number of staked ether (ETH) passing 16 million ETH. Network validators stake ETH for a chance to write and authenticate transactions, which grants them “interest” on the amount of ETH the validator has staked. The 16 million staked ETH represents more than 13 percent of the total ETH supply and nearly $22 billion, using an ETH price of $1,375. Over 25 percent of the currently staked ETH comes from a community-driven validator collective. ETH shifted to a proof-of-stake network (from its previous proof-of-work network) four months ago. According to the report, “a larger amount of staked ETH should theoretically make it more difficult for an individual actor to sabotage the Ethereum chain,” but “the bulk of Ethereum’s stake currently belongs to a handful of large actors.”

<a href="https://www3.weforum.org/docs/WEF_Decentralized_Autonomous_Organization_Toolkit_2023.pdf">World Economic Forum: Decentralized Autonomous Organization Toolkit</a>

<a href="https://cointelegraph.com/news/wef-publishes-new-in-depth-guide-to-daos-to-air-issues-encourage-development">WEF publishes new in-depth guide to DAOs to air issues, encourage development</a>

<a href="https://www.coindesk.com/tech/2023/01/12/number-of-staked-eth-passes-16m/">Staked ETH Passes 16M</a>

New BIS Bulletin and Thailand SEC Regulations Address Digital Asset Risks

By <a href="https://www.bakerlaw.com/AmosKim">Amos Kim</a><a href="https://www.bakerlaw.com/VeronicaReynolds"></a>

Last week, the Bank for International Settlements (BIS) published a bulletin addressing the risks associated with cryptocurrency in light of “the recent high-profile failures of FTX and other crypto firms. …” Among other things, the bulletin notes the following key takeaways: (1) recent high-profile failures have reignited the debate on the appropriate policy response to address crypto risks, including through regulation; (2) the “shadow functions” enabled by crypto markets share many of the vulnerabilities of traditional finance, and these risks are exacerbated by specific features of crypto; (3) authorities may consider different – not mutually exclusive – lines of action to tackle crypto risks, including containment, regulation or an outright ban; and (4) central banks and public authorities could work to make “TradFi” more attractive, including through innovation with central bank digital currencies (CBDCs).

In other news, the Securities and Exchange Commission (SEC) of Thailand recently issued new regulations requiring digital asset businesses that provide custodial services of clients’ digital assets “to establish a digital wallet management system to accommodate efficient custody of digital assets and keys and ensure safety of clients’ assets.” These new regulations affect the policy and guidelines surrounding digital wallets and include requirements for a “contingency plan in case of occurrence of any event that may affect the management of digital wallets and keys.” The new regulations took effect on January 16, 2023.

<a href="https://www.bis.org/publ/bisbull66.htm">BIS: Addressing the risks in crypto: laying out the options</a>

<a href="https://www.bis.org/publ/bisbull66.pdf">Addressing the risks in crypto: laying out the options</a>

<a href="https://www.sec.or.th/EN/Pages/News_Detail.aspx?SECID=9827">Thai SEC issues rules on management of digital wallets for custody of digital assets and keys</a>

SEC Charges U.S. Crypto Lender and Exchange with Securities Law Violations

By <a href="https://www.bakerlaw.com/KeithRMurphy">Keith R. Murphy</a>

The U.S. Securities and Exchange Commission (SEC) recently charged a major U.S. digital asset lender (Lender), and a major U.S. digital asset exchange and custodian (Exchange), with the unregistered offer and sale of securities to retail investors through a crypto-asset lending program offered by the Exchange. According to a press release from the SEC, the companies purportedly raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors, with customers of the Exchange being offered the opportunity to loan their crypto assets to the Lender in exchange for the Lender’s promise to pay interest. According to the SEC press release, the Lender “exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest.” The press release notes that withdrawals by investors from the program have been halted since November 2022 due to lack of liquidity and further notes that as of November 2022, the Lender “held approximately $900 million in investor assets from 340,000 … investors.”

The interest-based program, which began in February 2021, had the Exchange acting as agent for the Lender in order to facilitate transactions, and the Exchange purportedly deducted an agent fee from returns paid by the Lender to the customers, according to the SEC press release. Regarding the charges, SEC Chair Gary Gensler stated, “We allege that [the defendant firms] offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” and that the charges “build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.” Relief sought in the complaint includes permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.

<a href="https://www.sec.gov/news/press-release/2023-7">SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program</a>

FinCEN and DOJ Bring Parallel Actions Against Foreign-Based Crypto Exchange

By <a href="https://www.bakerlaw.com/JoannaFWasick">Joanna F. Wasick</a>

On Wednesday, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced that it had issued an order against Bitzlato Limited, a Hong Kong-registered cryptocurrency exchange, identifying it as a “primary money laundering concern” in connection with Russian illicit finance. Specifically, the order states that Bitzlato laundered proceeds from ransomware attacks, facilitated darknet markets and scams, and engaged in significant volume of Russian illicit finance transactions. “Bitzlato poses a global threat by allowing Russian cybercriminals and ransomware actors to launder the proceeds of their theft. ... We will continue to leverage the full range of our authorities to prohibit these institutions from gaining access to the U.S. financial system and using it to support Russian illicit finance,” said the FinCEN Acting Director. In the announcement, FinCEN also noted that the order was the first order issued pursuant to section 9714(a) of the Combating Russian Money Laundering Act, and that it highlights the serious threat that business operations that support Russian illicit finance pose to U.S. security and the U.S. financial sector. According to the FinCEN announcement, “As described in the order, effective February 1, 2023, covered financial institutions are prohibited from engaging in a transmittal of funds from or to Bitzlato, or from or to any account or CVC address administered by or on behalf of Bitzlato.”

On the same day, the U.S. Department of Justice (DOJ) published a press release announcing the unsealing of a complaint charging Bitzlato’s founder and majority shareholder in connection with Bitzlato’s illicit activity. According to the press release, Bitzlato’s founder was arrested in Miami. Concurrent with his arrest, French authorities, working with Europol and partners in Spain, Portugal and Cyprus, dismantled Bitzlato’s digital infrastructure and also took enforcement actions. Among other things, the DOJ press release notes that Bitzlato “marketed itself as requiring minimal identification from its users”; “received more than $15 million in ransomware proceeds”; and had as its largest counterparty “Hydra Market … the largest and longest running darknet market in the world.” According to the DOJ press release, “although Bitzlato claimed not to accept users from the United States, it did substantial business with U.S.-based customers, and its customer service representatives repeatedly advised users that they could transfer funds from U.S. financial institutions.”

<a href="https://www.fincen.gov/news/news-releases/fincen-identifies-virtual-currency-exchange-bitzlato-primary-money-laundering">FinCEN Identifies Virtual Currency Exchange Bitzlato as a “Primary Money Laundering Concern” in Connection with Russian Illicit Finance</a>

<a href="https://www.justice.gov/usao-edny/pr/founder-and-majority-owner-bitzlato-cryptocurrency-exchange-charged-unlicensed-money">Founder and Majority Owner of Bitzlato, a Cryptocurrency Exchange, Charged with Unlicensed Money Transmitting</a>

Court Orders $17M in Restitution Be Paid to Crypto Fraud Victims

By <a href="https://www.bakerlaw.com/RobertAMusiala">Robert A. Musiala Jr.</a>

According to a recent press release from the U.S. Department of Justice (DOJ), a federal district court has “ordered … that over $17 million in restitution be distributed to approximately 800 victims from over 40 different countries due to their investment losses in BitConnect, a massive cryptocurrency investment scheme, which defrauded thousands of investors worldwide.” The founder of BitConnect was previously indicted for his role in the multimillion-dollar fraud, and its top U.S.-based promoter has pleaded guilty to conspiracy to commit wire fraud.

In a final notable enforcement action, the European Union Agency for Criminal Justice Cooperation (Eurojust) recently published a press release announcing a coordinated action with Europol that “has led to the dismantling of a cryptocurrency fraud network operating from Bulgaria, Cyprus and Serbia.” According to the press release, “[t]he network operated professionally to set up call centres, which defrauded numerous victims in Germany, Switzerland, Austria, Australia and Canada for at least tens of millions of euros.” The press release notes that as part of the action, enforcement agencies seized “over 150 computers, various electronic equipment and data back-ups, three cars, two luxury apartments and one million US dollars in cryptocurrencies and 50 000 EUR in cash.”

<a href="https://www.justice.gov/opa/pr/crypto-fraud-victims-receive-over-17-million-restitution-bitconnect-scheme">Crypto Fraud Victims Receive Over $17 Million in Restitution from BitConnect Scheme</a>

<a href="https://www.eurojust.europa.eu/news/takedown-fraudulent-cryptocurrency-network-bulgaria-cyprus-and-serbia">Eurojust: Takedown of fraudulent cryptocurrency network in Bulgaria, Cyprus and Serbia</a>

Chicago

Partner

Robert A. Musiala Jr.

New York

Keith R. Murphy

Orlando

Associate

Christopher W. Lamb

Joanna F. Wasick

Paper Touts DeFi FX Benefits; New Stablecoin Launched; DAO Toolkit Published; BIS Addresses Crypto Risk; SEC, FinCEN, and DOJ Bring Enforcement Actions