Posted in NFTsRob Musiala, a Counsel in the Digital Assets and Data Management group and the co-leader of our Blockchain Technologies and Digital Currencies team, breaks down everything you need to know about NFTs, all in 10 minutes or less.
Questions & Comments: rmusiala@bakerlaw.com
Posted in Bitcoin, Cybersecurity, NFT
In this issue:
• Cryptocurrency Exchanges, ETFs and Payment Initiatives Announced
• Hollywood, Paradise and Banking: NFT Use Cases Continue to Expand
• Bitcoin Network Mining Difficulty Adjusts in Wake of China Crackdown
• DOJ, CFTC and SEC Target Crypto Fraud, Registration, Anti-Touting Violations
• US Ransomware Task Force Announced, Crypto Crimes Continue Across Globe
Cryptocurrency Exchanges, ETFs and Payment Initiatives Announced
By: Keith R. Murphy
Cryptocurrency firm Bullish announced its intention to go public on the New York Stock Exchange as it prepares to launch a cryptocurrency exchange, according to a recent report. The company reportedly intends to accomplish the public listing via a merger with a special-purpose acquisition company.
A major global payments company recently approved Australian company CryptoSpend to begin issuing cryptocurrency debit cards for its users, based on a report this week. CryptoSpend’s app will reportedly allow its users to spend their cryptocurrency directly, without the need to convert to fiat currency, including supported cryptocurrencies bitcoin, ether, XRP, bitcoin cash and litecoin.
Following approval by Brazil’s Securities and Exchange Commission, a blockchain investment firm plans to list an Ethereum exchange-traded fund (ETF) on Brazil’s stock exchange, according to a report this week. The firm plans to purchase ether and provide its investors with exposure to the asset without the need for separate wallets and keys.
Last week, a leading auction house accepted $12.3 million in cryptocurrency following the auction of a more than 100-carat rare diamond. According to a report, it is the first time the auction house has accepted cryptocurrency as a supported payment option.
For more information, please refer to the following links:
Hollywood, Paradise and Banking: NFT Use Cases Continue to Expand
By: Lauren Bass
According to recent reports, two major Hollywood movie studios have partnered with boutique platforms to offer limited-edition digital collectibles as nonfungible tokens (NFTs) featuring characters from the studios’ upcoming film franchises. One studio will offer its digital merchandise through an NFT-focused social media platform, while the other will showcase its through an augmented reality app.
In another NFT development, an American brewing company has reportedly enlisted a specialty digital media shop to create unique branded NFTs ranging from apparel to merchandise to one-of-a-kind experiences. The company reportedly hopes that branching out into the digital sphere will drive long-term revenue by allowing it to capitalize on its intellectual property holdings in the secondary market.
In recent weeks, a blockchain technology company reportedly launched an initiative to leverage the burgeoning NFT marketplace as a means by which to sell digital timeshares at a tropical paradise resort. In a first-of-its-kind transaction, the company will offer these limited-edition shares via a 13-day online auction. According to press releases, the company hopes its efforts will make real estate more accessible to the masses.
A boutique decentralized finance (DeFi) platform recently announced the development of a new lending and borrowing network that will allow customers to use NFTs and other digital collectibles as collateral. According to reports, the rollout will initially occur on the Binance Smart Chain, but plans are underway to expand to other blockchain networks.
For more information, please refer to the following links:
Bitcoin Network Mining Difficulty Adjusts in Wake of China Crackdown
According to reports, bitcoin mining has become more profitable as a result of the mining crackdown in China – where more than half the world’s bitcoin was previously mined. The decrease in miners triggered an automatic bitcoin code update, resulting in a 28 percent reduction in mining difficulty and, correspondingly, increased cash to miners who continue to operate the Network. In a related development, data recently published by the Cambridge Bitcoin Electricity Consumption Index indicates that Bitcoin’s power consumption has declined steeply, with estimated power consumed by Bitcoin down from its roughly 143 terawatt-hours high in May to as low as 60 terawatt hours in July – a drop of approximately 60 percent, according to CoinTelegraph. Reports indicate that this is the “lowest energy consumption rate recorded since early November 2020.” Meanwhile, according to another recent report, Bitcoin nodes are at an all-time high – crossing the 13,000 threshold for the first time ever, potentially indicating that the Network is becoming increasingly decentralized.
According to reports, the launch date for Ethereum’s fee market improvement proposal 1559 is scheduled to kick in on Aug. 4, 2021. The upgrade, among other things, will introduce a new minimum payment dubbed a “base fee” – a dynamically adjusted fee based on network activity that will be charged for sending Ethereum transactions. The adjustment is expected to “significantly increase transaction capacity.”
For more information, please refer to the following links:
DOJ, CFTC and SEC Target Crypto Fraud, Registration, Anti-Touting Violations
According to a U.S. Department of Justice (DOJ) press release, a Swedish man was recently sentenced to 15 years in prison for securities fraud, wire fraud and money laundering related to a $16 million fraud scheme called Eastern Metal Securities. The scheme involved receipt of investor funds in the form of cryptocurrencies and promised victims astronomical returns tied to the price of gold. As part of the sentence, the defendant was also ordered to forfeit a Thai resort and various other properties and accounts, and was issued a money judgment in the amount of $16,263,820.
The Commodity Futures Trading Commission (CFTC) recently announced that a judge in the U.S. District Court for the Southern District of Texas entered a default judgment against Laino Group Limited d/b/a PaxForex of St. Vincent and the Grenadines (PaxForex). The order imposes permanent trading, solicitation and registration bans against PaxForex entering into transactions involving commodity interests and prohibits it from violating provisions of the Commodity Exchange Act. The order also requires the defendant to pay a civil monetary penalty of $374,864. The ruling is based on the CFTC’s complaint that alleges PaxForex engaged in illegal, off-exchange transactions in ether, litecoin and bitcoin, as well as precious metals and foreign currency, with retail customers on a leveraged, margined or financed basis, and acted as a futures commission merchant without the required CFTC registration.
This week, the Securities and Exchange Commission (SEC) announced settled charges against the operator of Coinschedule.com, a website that profiled offerings of digital asset securities, for violations of the anti-touting provisions of the federal securities laws. According to the SEC’s order, Coinschedule.com presented its website visitors with seemingly independent profiles about digital token offerings in “listing” profiles, which included a “trust score” that purported to reflect Coinschedule’s evaluation of the “credibility” and “operational risk” for each digital token offering based on a “proprietary algorithm,” but failed to disclose the compensation it received from issuers of the digital asset securities.
In a separately issued public statement addressing Coinschedule.com, SEC Commissioners Peirce and Roisman agreed that touting securities without disclosing the fact that you are getting paid, and how much, violates the federal securities laws, but expressed disappointment that the SEC’s settlement did not explain which digital assets touted by Coinschedule.com were securities. The Commissioners emphasized this as consistent with the SEC’s reluctance to provide additional guidance as to how to determine whether a token is being sold as part of a securities offering, thereby forcing market participants to rely on litigated and settled SEC enforcement actions as the go-to source of guidance, which does not produce clear answers.
For more information, please refer to the following links:
US Ransomware Task Force Announced, Crypto Crimes Continue Across Globe
The White House recently announced a new cross-government task force to focus on offensive and defensive measures against ransomware. Under the task force’s oversight, federal agencies are reportedly taking measures to combat ransomware threats, including promoting digital resilience among critical U.S. infrastructure companies, halting ransomware payments made through cryptocurrency platforms and coordinating activities with U.S. allies. The State Department will also offer rewards totaling up to $10 million for information leading to the identification of alleged cyber criminals, especially hackers behind state-sanctioned breaches of critical U.S. infrastructure. According to a press release, “Reward payments may include payments in cryptocurrency.”
Researchers recently released a report showing that at least 93,000 people have bought fake Android applications for cryptocurrency mining. The report identified 170 Android apps scamming people interested in cryptocurrencies. While the apps advertise themselves as providing fee-based cloud cryptocurrency mining services, researchers found that users who paid for the apps as well as various fake upgrades and services offered in the applications received no legitimate services in return. The report estimates that users were scammed out of at least $350,000 in total.
Meanwhile, abroad, Hong Kong officials have reportedly arrested four men involved in an alleged cryptocurrency money laundering syndicate. Customs authorities allege that the scheme, which took in approximately $155 million of funds from February 2020 to May of this year, operated by charging criminal clients a commission of 3 percent to 5 percent for crypto money laundering services.
Four individuals were also recently arrested in Japan related to a cryptocurrency money laundering scheme. The four men are accused of defrauding 20,000 investors out of more than $54.3 million by promising to generate large returns through artificial intelligence on their crypto trading platform.
According to reports, Ukrainian officials recently raided an allegedly illicit crypto farm in the country. The farm was located on the former premises of a Ukrainian electricity company, and the schemers allegedly hid their activities by manipulating electricity meters to steal electricity from the company, resulting in estimated losses of between $186,200 and $259,300.
For more information, please refer to the following links:
Posted in Blockchain, Cryptocurrency, NFT
In this issue:
• USDC Expands to 10 New Blockchains, Crypto Payment Initiatives Launch
• NFT Sales Continue Across Sports and Art Markets
• FATF Issues Review of Crypto Standards Amid Regulatory News in US and UK
• Major Crypto Exchange Faces Global Scrutiny, Announces Compliance Efforts
• DOJ Targets Unlicensed Crypto MSBs, Global Enforcement Actions Continue
USDC Expands to 10 New Blockchains, Crypto Payment Initiatives Launch
The Centre Consortium recently announced that USDC, a stablecoin that is backed 1:1 by U.S. dollars, will soon be added to 10 additional blockchain networks. In related news, Circle, “the principal operator” of USDC, has announced that it will go public through a business combination with a publicly traded special purpose acquisition corporation. According to a press release, the transaction values Circle at $4.5 billion.
As part of a recent deal between an enterprise payment company and digital-asset management firm NYDIG, 650 U.S. banks, including major community banks and credit unions, will soon be able to offer bitcoin purchases to an estimated 24 million customers. Rather than undertaking regulatory requirements related to having custody of cryptocurrencies, financial institutions choosing to make the bitcoin service available will rely on NYDIG’s custody services. Separately, the world’s largest interdealer broker recently announced that it intends to launch a cryptocurrency trading platform with two major U.S. financial services corporations in the second half of the year, with the goal of making cryptocurrency trading similar to the trading of traditional financial assets.
According to a recent press release, an international hotel chain has become the first international hotel group to accept cryptocurrencies. The growth in cryptocurrency payments was recently noted by a major U.S. credit card corporation, which said that its customers spent more than $1 billion using its cryptocurrency-linked cards in the first half of 2021.
For more information, please refer to the following links:
NFT Sales Continue Across Sports and Art Markets
The market for non-fungible tokens (NFTs) reached new highs during the second quarter of 2021, resulting in year-to-date sales of $2.5 billion as compared with sales of $13.7 million during the same period a year ago, according to a report this week. While the numbers vary depending on which types of NFT transactions are included, the included transactions are “on-chain” transactions, with sports and collectible NFTs leading in popularity among buyers.
Major League Baseball (MLB) recently closed its first NFT auction, which featured a clip of Lou Gehrig’s famous “luckiest man” speech, according to recent reports. MLB reportedly plans to auction an NFT that also includes as a package a physical 2020 Los Angeles Dodger World Series Ring and the chance to throw the first pitch at a Dodgers home game.
A major art auction house recently held several NFT-related auctions, including an NFT of an artwork celebrating rap artist Jay-Z’s debut album. A report discussing the sale notes that the NFT includes smart contract provisions enforcing royalties on secondary sales. Another auction by the house reportedly combines the sale of an actual painting by Pablo Picasso, along with an NFT of the painting created with a special scanner that can be used to confirm the painting’s authenticity. A third recent auction by the house involved an NFT of the source code for the creation of the World Wide Web by British computer scientist Tim Berners-Lee. The NFT reportedly sold to an anonymous buyer for $5.4 million.
According to a recent report, the digital artist known as Beeple has helped launch a platform that will sell moments in sports, politics, fashion and art as NFTs, including NFTs with tangible assets and opportunities, such as meetings with athletes. Separately, actor Anthony Hopkins is set to have his most recent film sold on an NFT marketplace for movies, according to a report this week, and the related NFT’s will include extras based on which token is purchased. And a popular social media forum has reportedly jumped on the NFT bandwagon by creating NFTs that take the form of cartoon avatars based on the company’s logo.
For more information, please refer to the following links:
FATF Issues Review of Crypto Standards Amid Regulatory News in US and UK
The Financial Action Task Force (FATF) recently published a report that provides FATF’s findings from its second 12-month review of the FATF Standards on virtual assets and virtual asset service providers (VASPs). The report states that “many jurisdictions and the VASP sector have continued to make progress in implementing the revised FATF Standards on virtual assets and VASPs but implementation is still far from sufficient.” The report notes that “[t]he lack of regulation or the lack of enforcement of regulation in jurisdictions is allowing for jurisdictional arbitrage and the raising of ML/TF [money laundering and terrorism financing] risks.” Among other things, the 46-page report includes findings related to the implementation of the travel rule, trends in the use of virtual assets for ML/TF purposes and virtual asset peer-to-peer market metrics. The report notes the following five areas where FATF intends to make updates to the FATF Standards on virtual assets and VASPs: (1) the definitions of virtual asset and VASP, (2) peer-to-peer transactions and unhosted wallets, (3) so-called stablecoins, (4) licensing and registration of VASPs, and (5) implementation of the travel rule.
The Financial Crimes Enforcement Network (FinCEN) recently announced the addition of its first-ever chief digital currency advisor, a role focused on preventing and mitigating illicit financial practices and exploitation involving cryptocurrencies. In a related development, according to reports, a team of engineers from five of the largest U.S. cryptocurrency exchanges and custodians recently demonstrated version 1.0 of a tech platform intended to drive compliance with the Travel Rule by VASPs. Separately, another recent report noted that in the UK, where new regulations require cryptocurrency firms to register with the Financial Conduct Authority, only six firms have registered while 64 have withdrawn their applications.
In tax regulatory news, last month the U.S. Internal Revenue Service published a memorandum addressing like-kind exchanges of certain cryptocurrencies completed prior to Jan. 1, 2018. According to the memorandum, “If completed prior to January 1, 2018, an exchange of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin, or (iii) Ether for Litecoin does not qualify as a like-kind exchange under § 1031 of the Code.”
For more information, please refer to the following links:
Major Crypto Exchange Faces Global Scrutiny, Announces Compliance Efforts
Binance, the world’s largest cryptocurrency exchange by volume, has of late received increased scrutiny from multiple global regulators. The Securities and Exchange Commission of Thailand, according to a recent notice posted on its website, has filed a criminal complaint against the company for operating a cryptocurrency exchange without a license after Binance failed to submit a response to the agency’s April 2021 warning letter. Japan’s Financial Services Agency similarly sent a warning to Binance last week, accusing the company of offering crypto services in the country without a registration.
The U.K. Financial Conduct Authority said in a recent statement that Binance Markets Limited “is not permitted to undertake any regulatory activity in the U.K.” Additionally, the Cayman Islands Monetary Authority, in a recent press release, noted that it “wish[ed] to inform the public” that Binance is not registered, licensed or otherwise authorized to operate from or within the Cayman Islands and that the Authority is currently investigating whether the companies may fall within the scope of its regulatory oversight.” Likewise, the Polish Financial Supervision Authority (PFSA) recently published a warning to consumers that the company is “neither regulated nor subject to supervision” by the PFSA.
Amid such crackdowns, Binance has suspended euro deposits via the Single Europe Payments Area, according to recent reports. Binance recently announced that it has hired a new director of compliance and chief administrative officer.
For more information, please refer to the following links:
DOJ Targets Unlicensed Crypto MSBs, Global Enforcement Actions Continue
A New Orleans resident was recently charged by the Department of Justice for illegally operating an unlicensed money transmitting business. According to court documents, the defendant owned and managed Nervous Light Capital LLC, through which he sold bitcoin and other cryptocurrencies. Similarly, last week a Texas resident pleaded guilty to running a business that converted U.S. dollars to cryptocurrency (primarily bitcoin) for a fee without registering to engage in a money transmitting business. Both individuals face up to five years in federal prison.
Last week, detectives from London’s Metropolitan Economic Crime Command reportedly seized cryptocurrency valued at £114 million – the largest cryptocurrency seizure in the U.K. The detectives were investigating money laundering offenses. A recent article in The Korea Times reports that South Korean officials, while investigating a suspected crypto fraud and money laundering scheme, found $1.48 billion in illegal overseas cryptocurrency transactions. According to the report, 33 people have been implicated by the Seoul Central Customs for contravening the country’s ban on overseas cryptocurrency trading.
According to reports, earlier this week Israel’s National Bureau for Counter Terror Financing issued a seizure order against 84 cryptocurrency addresses allegedly controlled by Hamas or otherwise associated with donation campaigns carried out by Hamas. These addresses collectively received over $7.7 million in cryptocurrencies, in a wide range of denominations including tron, dogecoin, tether, bitcoin and ether. This action comes after a material rise in donations to Hamas in May, when fighting between Hamas and Israeli forces escalated.
For more information, please refer to the following links:
In this issue:
• NFT Initiatives Continue, Cryptocurrency Advertising Restrictions Ease
• Blockchain Traceability Solutions Expand in Food, Shipping and Jewelry Sectors
• SEC Settles ICO Fraud, US Crypto Enforcement Reaches $2.5 Billion
• Regulators in Canada, UK and Portugal Address Cryptocurrency Market
• China Crypto Crackdown Continues, South Korea Seizes Tax Evader Crypto
NFT Initiatives Continue, Cryptocurrency Advertising Restrictions Ease
By: Veronica Reynolds and Danielle A. Richardson
In New Dehli, a blockchain-powered platform is hosting an exhibition displaying 27 art pieces by Bengal-born artist Lalu Prasad Shaw. According to a recent press release, the artwork is certified using non-fungible tokens (NFTs) and focuses on various aspects of middle-class Bengali life.
An entertainment firm that distributes non-fungible tokens (NFTs) to music fans recently released a limited collection of 3,000 NFTs and launched its own music-only NFT marketplace. According to reports, the firm is the first to use NFTs with decentralized finance (DeFi) to allow fans to obtain a share of artist royalties. Users can reportedly “stake” (hold for a period of time) their NFTs in “music pools” for a period of 90 days to five years and then access a portion of the income from royalty streams at the end of the staking period.
A large American network television corporation and its animation studio have launched a $100 million creative fund to produce NFTs around new content. The new unit will provide creators and advertising partners with a blockchain development ecosystem to build and launch NFTs. According to reports, the first NFT in development is related to a new comedy series and will be the “first animated series to be curated entirely on the blockchain.”
Earlier this month, one of the world’s largest search engines announced revisions to its ad services policy that narrow its ban on cryptocurrency-related advertisements. Reports indicate that starting Aug. 3, 2021, cryptocurrency-related businesses certified by the search engine may advertise their products and services within the search engine’s ad network.
For more information, please refer to the following links:
Blockchain Traceability Solutions Expand in Food, Shipping and Jewelry Sectors
A major U.S. credit card company recently announced the rollout of E-Livestock Global’s first-of-its-kind blockchain-based traceability solution to bring end-to-end visibility to the cattle supply chain in Zimbabwe. After an outbreak of tick-borne disease in 2018 led to the death of 50,000 cattle, the lack of traceability in Zimbabwe’s cattle market has left the country unable to export beef to lucrative markets in Europe and the Middle East. The E-Livestock Global solution will seek to resolve these concerns by helping buyers guarantee product quality.
A blockchain-enabled digital shipping platform, three years after its development by a major shipping company and a major business computer corporation, has recently added new members in China months after its launch for general availability in the country. According to reports, the platform recently added two Chinese port groups and eight intermodal and inland logistics providers.
A major jewelry manufacturer recently announced a partnership with a major business computer corporation to improve the jewelry company’s ability to scale its global omnichannel e-commerce capabilities. The jewelry company will reportedly use the computer corporation’s proprietary blockchain-based e-commerce platform to help increase supply chain resiliency and business agility and to better mitigate disruptions and risk.
For more information, please refer to the following links:
SEC Settles ICO Fraud, US Crypto Enforcement Reaches $2.5 Billion
This week, the U.S. Securities and Exchange Commission (SEC) charged an ICO issuer and its CEO with securities fraud and conducting an unregistered securities offering. The SEC alleged that the company and its CEO raised $7.6 million from investors by offering and selling digital tokens called “LOCIcoin” and, in promoting the ICO, made numerous materially false statements to investors and potential investors. The order also finds that LOCIcoins constituted securities, and the offering of those securities neither was registered with the SEC nor qualified for an exemption from registration. The order further finds that the CEO misused $38,163 in investor proceeds to pay his personal expenses. Among other things, the SEC’s order imposes a $7.6 million civil penalty against the company, and an officer and director bar as to the CEO.
A blockchain analytics firm recently published an analysis of U.S. regulatory enforcement actions showing that $2.5 billion in penalties have been imposed against firms and individuals dealing in crypto since the inception of bitcoin in 2009. This includes penalties imposed by the SEC ($1.69 billion), Commodity Futures Trading Commission ($624 million), Financial Crimes Enforcement Network ($183 million) and Office of Foreign Assets Control ($606,000). According to the report, the majority of these penalties relate to unregistered securities offerings ($1.38 billion), fraud ($928 million) and anti-money laundering violations ($183 million). The penalties are comprised of civil penalties ($722 million), disgorgements ($1.62 billion) and restitutions ($161 million).
GSA Auctions, a service of the U.S. General Services Administration (GSA), recently held its latest cryptocurrency auction for 11 lots of cryptocurrency, totaling 8.93 bitcoins and 150.2 litecoins and with a combined market value of nearly $377,000. GSA Auctions is the federal government’s online clearinghouse for surplus federally owned assets and equipment, such as office furniture, vehicles, scientific equipment and collectibles.
For more information, please refer to the following links:
Regulators in Canada, UK and Portugal Address Cryptocurrency Market
By: Joanna F. Wasick
This Monday, the Enforcement Staff of the Ontario Securities Commission (OSC) issued a Statement of Allegations (SOA), initiating a proceeding against cryptocurrency exchange Bybit Fintech Limited (Bybit) to hold Bybit accountable “for disregarding Ontario securities law and to signal that crypto asset trading platforms flouting Ontario securities law will face regulatory action. In March, the OSC notified exchanges with Canadian customers that the exchanges had until April 19, 2021, to contact the OSC to discuss their efforts and obligations to comply with Ontario securities laws and otherwise operate legally in Canada. According to the SOA, Bybit never contacted the OSC. Bybit faces various penalties, including being forced to cease operations and pay fines.
The Financial Conduct Authority (FCA), Britain’s markets watchdog, stated earlier this week that more than 100 unregistered cryptocurrency asset firms were high risk, volatile, unregulated and a threat to the broader financial system. In January, these firms were required to obtain FCA registration before being able to trade; however, according to the FCA, only a handful did so.
The Central Bank of Portugal (CBP) recently licensed two cryptocurrency exchanges for the first time. A new Portuguese law for cryptocurrency trading platforms took effect earlier this year. Since then, the CBP reportedly stated that it received five formal registration requests and a total of 60 informal requests.
For more information, please refer to the following links:
China Crypto Crackdown Continues, South Korea Seizes Tax Evader Crypto
According to reports this week, the People’s Bank of China (PBOC), China’s central bank, has urged the country’s major financial institutions to stop facilitating cryptocurrency transactions, citing concerns about cryptocurrency’s role in criminal activities. This announcement comes on the heels of China’s State Council’s statement last month that it intends to continue to tighten restrictions on the trading and mining of cryptocurrencies. In a related development, Chinese authorities recently arrested 1,110 people suspected of laundering the proceeds of crimes related to internet and telephone scams through cryptocurrencies. And a third recent report noted that authorities in Ya’an City, a city in the Sichuan province, have ordered local bitcoin mining operations to shut down pending inspection.
In South Korea, officials recently seized more than $53 billion (US$47 million) in cryptocurrencies from approximately 12,000 people accused of tax evasion. According to reports, the seizures are part of a months-long probe that officials have called the largest “cryptocurrency seizure for back taxes in Korean history.”
According to recent reports, the founders of a South African cryptocurrency investment firm, Africrypt, have reportedly disappeared—with approximately $3.6 billion worth of investors’ bitcoin. An investigation reportedly found that Africrypt’s pooled funds had been transferred from its South African accounts and client wallets. Global exchanges have been warned to look for any attempts to convert or liquidate the bitcoin.
For more information, please refer to the following links:
Posted in Blockchain, NFTs, Securities & Exchange Commission
In this issue:
• Reports Address CBDCs and Security Tokens, Banks Launch Crypto Initiatives
• NFT Sales Continue at Auction House, US Space Force and News Organization
• Blockchain Initiatives Announced in Food, Automotive and IP Sectors
• US Congress Members and Foreign Regulators Pursue Cryptocurrency Reforms
• SEC Charges ICO Fraud, SEC/CFTC Warn Bitcoin Futures Are Highly Speculative
Reports Address CBDCs and Security Tokens, Banks Launch Crypto Initiatives
A recent report released by the Bank for International Settlements (BIS) analyzes results from a survey of 50 central banks in the first quarter of 2021 on the cross-border use of central bank digital currencies (CBDCs). Among other things, the report finds that “28% of surveyed central banks are considering options to make CBDCs interoperable by forming multi-CBDC arrangements.” Even so, the report indicates that while many central banks are considering permitting CBDCs to be used within their own borders, fewer are open to use of the same CBDCs outside of their jurisdictions, due in part to risks of tax avoidance and other enforcement issues. The risks of CBDCs were recently highlighted by analysts at a major investment bank, who reportedly have warned that in a bear case scenario, deployment of a digital euro could siphon 8 percent of banks’ customer deposits in the European region.
A recently launched division at a global financial services and bank holding company will focus on CBDCs and other cryptographic assets. According to a press release, one objective of the newly launched division is to build a multi-asset platform that will support cryptographic assets alongside other asset classes. In a related development, a multinational investment bank announced plans this week to expand its trading desk by offering ether derivatives to customers in the coming months.
Coin telegraph published its first report on security tokens earlier this month. Among other things, the report suggests that by 2030, most securities will be tokenized due to demands for greater transparency, instant settlement and liquidity. The report cites a projection that the security token market could increase to $8 trillion by 2025 and predicts that the emergence of self-custody securities will grow, with investors attracted by the ability to use their securities as collateral for loans or earn interest by depositing their securities and allowing exchanges to lend shares to other borrowers. The report also provides a survey of the current regulatory frameworks applicable to security tokens.
For more information, please refer to the following links:
NFT Sales Continue at Auction House, US Space Force and News Organization
By: Veronica Reynolds and Sally Kim
One of the world’s largest fine art auction houses recently sold “CryptoPunk 7523,” a non-fungible token (NFT) of digital artwork, for a record price of $11.7 million last Thursday. The piece was one of 28 NFTs sold at the auction over the course of a week, for a total sale of $17.1 million. The same auction house also recently opened its first-ever virtual gallery powered by Ethereum, and in May it announced its acceptance of cryptocurrencies bitcoin and ether as payment for physical artworks.
The United States Space Force launched its first NFT collection this week, to commemorate its launch of the fifth vehicle of its GPS III fleet of satellites in honor of Neil Armstrong, the first astronaut to set foot on the moon. The collection, titled “Armstrong Satellite NFT Launch with Space Force,” features augmented reality NFTs and is the first official, corresponding NFT campaign for a space launch. The collection also includes a limited-edition digital twin NFT of the satellite and a 3D NFT depicting at least 30 satellites currently in orbit.
Also this week, a major news organization announced the launch of tokenized collectible historic moments, such as space travel, technological advances and election results, and a vault for buyers to store the moments. The news organization will retain the copyright and ownership of the content and will not require cryptocurrency in order to purchase the NFTs.
For more information, please refer to the following links:
Blockchain Initiatives Announced in Food, Automotive and IP Sectors
In a first, a cattle ranch in western Nebraska announced it will begin using new blockchain-based digital tracking technology to trace cattle through the supply chain. Twenty steers at the ranch received an implanted Bluetooth sensor that will track the animals’ health and catalog proof-of-life records. The data will be stored in a private digital wallet and can be shared with inspectors, buyers and other cattle producers.
A major Japanese general trading company announced on Monday it is participating in the Los Angeles-based Mobility Open Blockchain Initiative (MOBI), a nonprofit working to set blockchain standards for the automotive sector supply chain. MOBI and the Japanese company will focus on creating an efficient global supply chain for in-demand lithium-ion batteries and will work together to create a global decarbonized society.
A global cybersecurity company recently announced that it has developed functionality on its new TrustedNFt.IO platform to tokenize patents, thereby allowing intellectual property to be treated as unique business assets. The platform, which converts patents into NFTs, makes each patent a unit of data on the blockchain. The company believes that this will make patents easier to license, sell and commercialize.
For more information, please refer to the following links:
US Congress Members and Foreign Regulators Pursue Cryptocurrency Reforms
By: Keith R. Murphy
This week, the top-ranking Republican on the Senate Banking Committee cautioned that a proposed Financial Crimes Enforcement Network counterparty rule could have a detrimental effect on cryptocurrency firms, while simultaneously not aiding in the combat of illicit activity. According to a report, Sen. Pat Toomey raised his concerns in a letter to Janet Yellen, the U.S. Treasury secretary, arguing that cryptocurrencies have the potential to significantly improve consumers’ privacy and access to financial services, and that the proposed regulation could negatively impact financial technology, among other pitfalls.
In related news, several members of the House of Representatives Blockchain Caucus recently joined in a letter sent to the commissioner of the Internal Revenue Service (IRS) requesting that the commissioner amend a certain tax form utilized for charitable giving to eliminate an unnecessary, and perhaps unintended, cryptocurrency reporting requirement. According to a report, the existing provision prevents donors from reporting the fair market value of a donation by reference to the exchange price or an index price, and instead imposes a burden of obtaining a written appraisal by a qualified IRS appraiser.
Last week the Intergovernmental Fintech Working Group, a group of South African financial sector regulators, released a position paper on cryptocurrency assets. According to a summary, the paper recommends that South Africa implement a staged process to bring cryptocurrency assets within the country’s regulatory structure via regulation of cryptocurrency asset service providers, and sets forth 25 recommendations for a revised South African legal, regulatory and policy position with respect to cryptocurrency assets and associated activities.
According to a report this week, regional authorities in China have begun cracking down on cryptocurrency mining operations in several areas of the country in response to China’s recent ban on such activity. Despite enforcement of the new restrictions, the report notes that China has indicated its intention to create an “advanced blockchain industrial system” in connection with its goal to become a world blockchain leader by 2025.
For more information, please refer to the following links:
SEC Charges ICO Fraud, SEC/CFTC Warn Bitcoin Futures Are Highly Speculative
This week, the U.S. Securities and Exchange Commission (SEC) charged three additional individuals for their roles in a $30 million initial coin offering (ICO) fraud that was spearheaded by a convicted criminal. In January 2020, the SEC had charged the convicted criminal, his associate and their companies, CG Blockchain Inc. and BCT Inc. SEZC, in connection with the scheme. The SEC’s complaint charges the three additional defendants with violating and aiding and abetting violations of the antifraud provisions of the federal securities laws and with violating securities registration requirements. The complaint seeks disgorgement of ill-gotten gains plus interest, penalties and injunctive relief.
The SEC’s Office of Investor Education and Advocacy and the Commodity Futures Trading Commission’s (CFTC) Office of Customer Education and Outreach recently issued a joint investor bulletin that urges investors to “weigh carefully the potential risks and benefits” of an investment in bitcoin futures. The bulletin warns that bitcoin futures are “highly speculative,” and discusses bitcoin’s price volatility and the “lack of regulation and potential for fraud or manipulation” in the bitcoin market. The bulletin notes that bitcoin is a commodity in the U.S., and therefore, bitcoin futures trading is required to take place on futures exchanges regulated and supervised by the CFTC. Before investing in a fund that buys or sells bitcoin futures, the bulletin advises investors to consider (1) the investor’s risk tolerance, (2) the fund’s disclosure of its risks, (3) the potential loss of the investment and (4) the difference in investment outcome.
For more information, please refer to the following links:
Posted in Bitcoin, Blockchain, Supply Chain
In this issue:
• Bank Offers Ether-Backed Loans, Auction and Property Sales Accept Crypto
• Supply Chains Innovate with Blockchain, China Launches Copyright Blockchain
• CFTC and WEF Comment on DeFi, Basel Addresses Cryptoasset Exposure
• Texas Enacts New Blockchain Law, El Salvador Makes Bitcoin Legal Tender
• DOJ Seizes Bitcoin from Ransomware Attack as Crypto Enforcement Continues
Bank Offers Ether-Backed Loans, Auction and Property Sales Accept Crypto
Digital asset bank Anchorage recently announced that its institutional clients will now be able to obtain Ethereum-backed loans through the bank’s financing wing, which will provide access to a USD line of credit backed by ether (ETH). According to a press release, the new offering will allow crypto-native funds that have investments in ETH to obtain funding in USD without liquidating ETH-based holdings.
A major British auction house recently said it would accept cryptocurrencies as a form of payment for artwork by Banksy worth millions. The auction house joins several other major competitors in now accepting cryptocurrencies as a form of payment. Bidding at the auction will be conducted in Hong Kong dollars and the winner will have the option to pay in either dollars or cryptocurrencies. The exchange rate of bitcoin, ETH and the Hong Kong dollar will be cited from a U.S. crypto exchange on auction day, and the seller will bear the risk of exchange rate volatility. Cryptocurrencies are also entering the real estate market: a Miami penthouse recently sold for $22.5 million in cryptocurrency, making it the most expensive known U.S. residential crypto real estate transaction to date.
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Supply Chains Innovate with Blockchain, China Launches Copyright Blockchain
By Veronica Reynolds and Danielle Richardson
This week, a leading Spanish seafood company announced a collaboration with a multinational technology company to trace seafood products using a blockchain-based network tailored for tracing products across the supply chain. The goal of the seafood traceability system is to improve the sustainability of the seafood industry by creating secure records of seafood production from their origin to the consumer. A global chemistry supplier also recently announced a blockchain-based supply chain initiative. The chemistry supplier plans to use blockchain technology to create secure digital records and ensure product traceability and authenticity.
An Austrian energy provider partnered with a large European blockchain interface company to launch MyPower, an energy tokenization platform, this week. According to a press release, MyPower’s blockchain-powered platform tokenizes solar photovoltaic (PV) assets and allows energy consumers to purchase shares in PV plants, allowing consumers to also participate in energy production. Consumers receive tokens based on the energy produced at PV plants and can use the tokens for various purposes, including paying electric bills.
Also, overseas, the Copyright Society of China (CSC) has reportedly launched the China Copyright Chain to facilitate the protection of copyrights in the nation. According to reports, the newly launched blockchain platform can “document proof of digital assets, monitor infringement activities, collect evidence online, issue notices to remove piracy products and help courts settle copyright-related disputes and process lawsuits.” Blockchain-authenticated evidence became legally binding in China in September 2018, and Internet courts in certain Chinese cities have reportedly started using blockchain technology to conduct meetings and document court records.
For more information, please refer to the following links:
CFTC and WEF Comment on DeFi, Basel Addresses Cryptoasset Exposure
This week, Commissioner Berkovitz of the Commodities Futures Trading Commission (CFTC) addressed DeFi products in his remarks at the Asset Management Derivatives Forum 2021. The commissioner said that he views unlicensed DeFi markets for derivatives instruments as a “bad idea” and added, “I also do not see how they are legal” under the Commodities Exchange Act (CEA). He explained that the CEA provides that (1) futures contracts must be traded on a designated contract market (DCM) licensed and regulated by the CFTC; (2) it is unlawful for any person other than an eligible contract participant to enter into a swap unless the swap is entered into on, or subject to, the rules of a DCM; and (3) any facility that provides for the trading or processing of swaps must be registered as a DCM or a swap execution facility (SEF). Berkovitz indicated that DeFi markets, platforms or websites that are not registered as DCMs or SEFs are unlawful and warned of instability in the financial markets posed by DeFi.
The World Economic Forum (WEF), in collaboration with the Wharton Blockchain and Digital Asset Project, recently published a white paper, the DeFi Policy-Maker Toolkit, with the goal of identifying potential policy approaches and important considerations for the DeFi context. The paper explains that financial regulatory regimes vary depending on the jurisdiction and explores how to regulate and assert jurisdiction over DeFi activities. The toolkit provides (1) an overview of the DeFi space and major classes of DeFi protocols, (2) potential benefits and challenges associated with DeFi, (3) a detailed breakdown of the risks that DeFi may pose, and (4) potential legal and regulatory responses to DeFi.
This week, the Basel Committee on Banking Supervision issued a public consultation on preliminary proposals for the prudential treatment of banks’ cryptoasset exposures. The committee invites submissions on the proposals by Sept. 10. The proposals split cryptoassets into two broad groups: (1) those eligible for treatment under the existing Basel Framework with modifications and (2) those that are subject to a new conservative prudential treatment (e.g., bitcoin). The press release stated that banks’ current exposures to cryptoassets are limited, but the continued growth and innovation in cryptoassets and related services, along with the rising interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.
For more information, please refer to the following links:
Texas Enacts New Blockchain Law, El Salvador Makes Bitcoin Legal Tender
Texas Gov. Greg Abbott recently signed into law a measure creating a legal framework for cryptocurrencies and blockchain. The new law amends Texas’ Uniform Commercial Code to better adapt commercial law to blockchain and digital assets, formally defines virtual currencies, and offers individuals and businesses a legal environment for crypto investment. Abbott tweeted, “Blockchain is a booming industry that Texas needs to be involved in.” According to the National Law Review, approximately 25 states are considering blockchain- and/or digital asset-related measures in their 2021 legislative sessions.
This week, El Salvador’s Legislative Assembly voted in favor of President Nayib Bukele’s proposal for the country to adopt bitcoin as legal tender. According to reports, the approved bill will mandate that all businesses accept bitcoin for goods or services, but the government will act as a backstop for entities that are unwilling to bear the risk of a volatile cryptocurrency. The government is expected to establish a trust at the Development Bank of El Salvador to instantly convert bitcoin to U.S. dollars for merchants. Government officials from El Salvador are planning to meet with the International Monetary Fund to discuss the plan.
For more information, please refer to the following links:
DOJ Seizes Bitcoin from Ransomware Attack as Crypto Enforcement Continues
On Monday, the Department of Justice (DOJ) announced the seizure of $2.3 million in bitcoin paid to a hacker group known as DarkSide, which carried out the ransomware attack against the Colonial Pipeline in early May, resulting in the shutdown of critical infrastructure. The DOJ reportedly located the funds by tracking multiple bitcoin transfers and by discovering and using the attackers’ private keys – the rough equivalent of a password needed to access assets from specific bitcoin addresses. Reports of ransomware continued this week, with a major New York newspaper reporting that the world’s largest meat company paid $11 million in bitcoin in late May in a ransomware attack.
Late last week, the DOJ announced that a Latvian national was arraigned in federal court on multiple charges stemming from her role in a cybercrime organization responsible for creating and deploying Trickbot, a type of malware designed to steal financial information and deploy bitcoin ransomware. The government alleges that the individual and her cohorts operated in Russia, Belarus, Ukraine and Suriname, and primarily targeted victim computers at hospitals, schools, public utilities and governments, including those in the United States.
Earlier this week, Europol announced the arrest of roughly 800 criminals, and the seizure of over $48 million in various fiat currencies and cryptocurrencies, by a law enforcement operation known as OTF Greenlight/Trojan Shield. According to a press release, beginning in 2019, the FBI, with assistance from the Australian Federal Police, developed and covertly operated an encrypted device company called ANOM, which grew to service more than 12,000 encrypted devices to over 300 criminal syndicates worldwide. The FBI and 16 countries exploited the intelligence from the 27 million messages obtained and reviewed from the devices, which led to the arrests.
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In this issue:
• Crypto Investment and Payments Products Launch, Payment Data Published
• Acquisition Targets ‘Smart Agreements’ Tech, BiTA Platform Launched
• SEC and OFAC Take Crypto Enforcement Actions, FCA Extends AML Exemption
Crypto Investment and Payments Products Launch, Payment Data Published
Last week Securitize announced the launch of Securitize Capital, which will serve as an investment manager of digital asset funds for institutional and accredited investors seeking exposure to cryptocurrencies and decentralized finance. Securitize Capital plans to launch two digital asset funds in early June. In a related development, the innovation and ventures unit of a major multinational financial services firm is reportedly working with the parent company of digital asset platform OSL to launch a new digital assets brokerage and exchange. The new venture will focus on providing investors access to digital asset liquidity pools.
According to a recently released report by PYMNTS and a major U.S. cryptocurrency payments provider, 18 percent of adults in the U.S. plan to make purchases using cryptocurrencies this year. Approximately 25 percent of those who currently own cryptocurrency have used cryptocurrency to pay for day-to-day goods such as groceries and streaming services. The report also cites research indicating that 12 percent of consumers currently own at least one cryptocurrency. As to demographics, the report indicates that 19 percent of millennials own cryptocurrency and that men are more likely than women to invest in the digital asset space.
This week Coinbase announced that consumers can use the Coinbase Card, a debit card that allows cryptocurrency to be used for payments and purchases, to make cryptocurrency mobile payments, in partnership with two major mobile app payment providers. In other crypto payments news, a large Mid-Atlantic restaurant and convenience store chain recently announced plans to accept cryptocurrency payments, citing increased adoption of cryptocurrencies by the mass public as well as improved security.
For more information, please refer to the following links:
Acquisition Targets ‘Smart Agreements’ Tech, BiTA Platform Launched
A U.S. company specializing in managing electronic agreements recently announced its acquisition of a startup specializing in “smart agreements” (SAs). Like smart contracts, SAs use computer code to execute tasks automatically to promote efficiency and lower costs. SAs also have the ability to integrate with blockchain systems. The startup’s technology will be used for the company’s Agreement Cloud platform, which can help parties catch erroneous data in a contract or agreement.
The Blockchain in Transport Alliance (BiTA) recently introduced a new open-source collaboration platform to promote supply chain efficiency. According to a press release, BiTA’s collaboration platform will be the new workspace to provide feedback, iterate on works in progress and distribute new BiTA standards.
For more information, please refer to the following links:
SEC and OFAC Take Crypto Enforcement Actions, FCA Extends AML Exemption
By: Keith R. Murphy
The Securities and Exchange Commission recently filed suit against five individuals, alleging that they raised more than $2 billion from retail investors through their promotion of a global, unregistered digital asset securities offering. As noted in a recent press release, the complaint alleges that the defendants acted as promoters for BitConnect to market and sell securities without registering the securities offering or being registered as broker-dealers. The complaint seeks injunctive relief, disgorgement and civil penalties.
In an effort to provide additional surveillance tools to its investigators, the United States Office of Foreign Asset Control (OFAC) has sought another subscription to blockchain analytics software offered by a major blockchain analytics company, according to a recent report. The requested subscription reportedly is intended to help members of OFAC’s Office of Global Targeting collaborate with international partners on investigations into money laundering and terrorist financing.
A newly released report by another major blockchain analytics company addresses current issues and trends in cryptocurrency sanctions compliance. The report notes examples of increased sanctions activity and civil enforcement penalties by OFAC, and addresses proposed steps to help navigate compliance efforts, including identifying and avoiding interactions with cryptocurrency exchanges, miners and other services in countries such as North Korea, Iran and other jurisdictions that remain subject to broad financial and economic sanctions.
The Financial Conduct Authority in the United Kingdom has extended the date of its temporary registrations regime, according to a press release this week. The extension allows existing cryptocurrency businesses to continue to operate while undergoing review of their compliance with money laundering regulations.
One of the world’s largest Internet technology companies has advised that as of Aug. 3, 2021, anyone who seeks to advertise cryptocurrency exchanges and wallets to U.S. customers on its Internet search engine must be registered with the U.S. Treasury’s Financial Crimes Enforcement Network or a federal or state chartered bank regulator, based on a report this week. Certifications issued by the company prior to that date will be revoked at that time.
For more information, please refer to the following links:
Posted in Blockchain, Cryptocurrency, NFTs
In this issue:
• BD-ATS to Issue Blockchain Securities, Crypto Hedge Fund Report Published
• NFTs and Loyalty Tokens Launch, Regulators Target Crypto Ads as Scams Spike
• Nebraska Passes Digital Asset Bank Charter, Tax Case Addresses Crypto Mining
• China and Hong Kong Implement New Crypto Regulation, Iran Halts Mining
• Report Provides New Data on Cryptocurrencies and Sanctions Evasion
BD-ATS to Issue Blockchain Securities, Crypto Hedge Fund Report Published
Blockchain-based trading platform tZERO recently announced an agreement with an energy projects funding platform to digitize approximately $25 million of equity interest in an energy fund that will invest in oil and gas assets throughout the United States. According to a press release, the “digital security” will be “built on the Ethereum Blockchain” and “is expected to become tradeable on the tZERO ATS.” The energy projects funding platform reportedly expects to launch its Regulation D 506(c) offering this month.
A major U.S. bank has reportedly announced plans to offer a cryptocurrency investment platform for its wealthy clients by mid-June. The bank’s investment institute reportedly wrote that “[c]ryptocurrencies have gained stability and viability as assets, but the risks lead us to favor investment exposure only for qualified investors, and even then through a professionally managed fund.”
A Big Four accounting and consulting firm recently issued its annual crypto hedge fund report. Key takeaways from the report include:
For more information, please refer to the following links:
NFTs and Loyalty Tokens Launch, Regulators Target Crypto Ads as Scams Spike
The Associated Press (AP) announced a non-fungible token (NFT) drop this week to celebrate 175 years of photojournalism. The organization plans to auction 10 NFTs that represent iconic photographs taken throughout history, some coupled with music scores. Proceeds from the auction will support the organization’s journalism efforts.
In Europe, the Italian post office, which operates an online marketplace in addition to mail delivery, has turned to Hyperledger Besu to build an integrated loyalty points system. According to a press release, the system allows customers to accrue points through merchant apps and convert those points into fungible loyalty tokens that can be redeemed across the platform for a variety of rewards.
Spanish economic authorities have launched a royal decree that grants the country’s financial services regulator the authority to regulate crypto-asset advertising. According to reports, the decree is based on the premise that cryptocurrencies pose risks related to anonymity, self-custody of private keys and accessibility.
In the United Kingdom, a self-regulating ad industry organization recently banned an advertising campaign by Luno, a cryptocurrency exchange, “for being misleading and irresponsible.” The ads reportedly encouraged people to buy bitcoin, stating that “it’s time to buy,” without warning consumers that the asset is highly volatile and risky. The exchange has reportedly agreed not to post such ads in the future and to include a “risk warning” on future ads.
According to a recent press release from the Federal Trade Commission (FTC), consumers have lost more than $80 million to cryptocurrency scams since October 2020 – a more than 10-fold year-over-year increase. The median amount individual consumers reportedly lost as a result of the scams was $1,900. According to the FTC, consumers between the ages of 20 and 49 “were over five times more likely than older age groups to report losing money to a cryptocurrency investment scam.”
For more information, please refer to the following links:
Nebraska Passes Digital Asset Bank Charter, Tax Case Addresses Crypto Mining
By: Keith R. Murphy
Nebraska’s state legislature recently passed a bill to create a state bank charter for digital asset depository institutions, which was signed into law by the state’s governor on Wednesday this week. According to recent reports, new businesses are able to obtain a state banking charter as digital asset depositories, and existing state-chartered banks are now permitted to open cryptocurrency banking divisions. The reports further note that while the digital asset depositories can engage in custody and payment services relating to digital assets, they are not able to accept deposits or make loans in fiat currency, and must maintain 100 percent of their assets in reserve under the law.
A Tennessee couple is challenging in court the right of the IRS to tax the mining or staking of cryptocurrency, arguing that mining is an act of creation and therefore not taxable, according to multiple news sources. The couple, who are seeking a refund for taxes paid, claim that the IRS instead must wait until cryptocurrency is sold or exchanged in order for a taxable event to have occurred.
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China and Hong Kong Implement New Crypto Regulation, Iran Halts Mining
By: Keith R. Murphy
Three major Chinese banking and finance associations recently issued a directive significantly limiting access to and protection for cryptocurrency in that country. According to a recent report, the restrictions prohibit banks from allowing their customers access to cryptocurrency trading or storage, and prohibit banks from providing insurance to cryptocurrency businesses or investments. The restrictions also reportedly prohibit web platforms from hosting cryptocurrency coin companies and running advertisements for cryptocurrency-related activities.
In Hong Kong, according to recent reports, the government has issued proposals to restrict cryptocurrency exchanges to professional investors, and to require that the exchanges be licensed by the city’s market regulator. The current existing rules reportedly provide for an “opt-in” approach pursuant to which exchanges may apply to the Securities and Futures Commission, but they are not required to do so.
Citing power grid concerns, the president of Iran has issued a moratorium on all cryptocurrency mining in the country until late September, according to a recent report. As noted in the report, a combination of authorized and unauthorized miners are utilizing more than 2,000 megawatts of electricity, and the country is experiencing hydropower shortages as a result of an unusually dry spring this year.
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Report Provides New Data on Cryptocurrencies and Sanctions Evasion
By: Joanna F. Wasick
A recent report by a major blockchain analytics firm finds that more than 4.5 million unique bitcoin addresses are linked to more than 72,000 unique Iranian IP addresses, which were either involved in direct cryptocurrency transactions or used to query the blockchain to verify funds in cryptocurrency addresses that they control. The report continues to find that many of the identified bitcoin addresses were linked to multiple Iranian IP addresses, indicating the usage of mobile wallets connected to multiple internet sources. A result of this, according to the report, is that financial institutions have little to no visibility into the connection between a bitcoin address and users in sanctioned countries, such as Iran. The report cautions that financial institutions should supplement all sanctions risk mitigation strategies to ensure that cryptocurrencies are not being used to transact with sanctioned countries.
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In this issue:
• Reports Analyze Bitcoin Price Crash and Network Energy Consumption
• SEC Petitioned on NFTs, NFT Platform Sued in Class Action as More NFTs Launch
• FDIC Seeks Info on Crypto, FATF Focuses on DeFi, Payment Solutions Announced
• Reports Cover Pipeline Ransomware, Crypto Schemes and DeFi Hacks
Reports Analyze Bitcoin Price Crash and Network Energy Consumption
By: Keith R. Murphy
A well-known blockchain analytics company has issued a report commenting on this week’s crash of the prices of cryptocurrency, including bitcoin. The report suggests there are significant differences between this week’s price decline and declines in prior years such as the major price declines in March 2020 and December 2017. According to the report, among other things the differences include the very large investments in bitcoin that have taken place since those prior declines. The report also notes that during this week’s price decline, “bitcoin inflows into exchanges are relatively low compared to past sell-offs,” which “suggests that much of the selling is from people with assets already on exchanges, who tend to be retail investors.”
Continuing the trend of bitcoin analysis, a research report issued this month by a digital asset financial services firm provides an analysis of the long-standing inquiry regarding the acceptability of the Bitcoin Network’s energy consumption. While recognizing the subjective nature of the question, the report draws comparisons of the network’s energy consumption to the energy footprints of long-established asset classes represented by the gold industry and the banking system. The report suggests that the energy used by each of the latter asset groups is more than double that consumed by the Bitcoin Network.
In other news, according to recent reports, a Wall Street banking giant has joined the Paxos Trust network utilizing blockchain technology in a move to make same-day stock trade settlements available to its clients, pending its approval as a clearing agency. Paxos previously applied its Ethereum-based system to effectuate same-day settlement capability for two other financial services firms in March of this year, according to the reports.
For more information, please refer to the following links:
SEC Petitioned on NFTs, NFT Platform Sued in Class Action as More NFTs Launch
By: Teresa Goody Guillén and Veronica Reynolds
A broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently petitioned the SEC for rulemaking regarding non-fungible tokens (NFTs). According to the petition, the issue of when an NFT is a security is unclear and requires analysis by qualified legal counsel, which is cost-prohibitive to early-stage companies, which are the main drivers of innovation in the fintech space. The petition states that an NFT that is a security triggers the securities regulatory regime, which could also require companies with activities that involve NFTs to register as a broker-dealer, an exchange or an alternative trading system. The petitioner notes that NFTs have not been the subject of SEC interpretative guidance and the SEC has not initiated an enforcement action against the creator of an NFT or the operator of a platform that facilitates the offer and sale of NFTs. Consequently, the petitioner requests that the SEC publish a concept release on the regulation of NFTs and propose rules to address when NFTs are securities, to bring clarity to the market.
Dapper Labs, creator of NBA Top Shot, a digital marketplace for NFTs sold as collectible highlight videos called “moments,” is being sued in a private class action lawsuit, with plaintiffs asserting that the NFT Top Shot moments are securities. The basis of the lawsuit centers on the argument that the Top Shot NFTs are securities because they satisfy the Howey Test – a four-pronged analysis that courts and the SEC use to determine whether an instrument is a type of security called an investment contract. Among other things, the complaint alleges that Dapper Labs “used their control over the platform to prevent investors from cashing out” their NFT purchases.
Across the pond, an English soccer club recently announced plans to launch its own NFT collection to commemorate its Premier League title victory. The collection includes four pieces by artist Jon Noorlander, with one of the NFTs available to fans via a sweepstakes. The collection is being offered on the NFT marketplace, MakersPlace, starting May 24.
For more information, please refer to the following links:
FDIC Seeks Info on Crypto, FATF Focuses on DeFi, Payment Solutions Announced
By: Joanna F. Wasick
On Monday, the Federal Deposit Insurance Corp. (FDIC) issued a request for information and comment (RFI) about depository institutions’ activities related to digital assets (e.g., cryptocurrencies), in order to inform the FDIC’s understanding of digital asset activities and related risk and compliance management issues. The RFI categorizes these activities into five use cases: (1) technology solutions, such as token-based systems and distributed ledgers; (2) asset-based activities, such as investments and margin lending; (3) liability-based activities, such as deposit services and reserves; (4) custodial services; and (5) other activities, which could include market-making and decentralized financing. The submission deadline is July 16, 2021.
This summer, final guidance from the Financial Action Task Force (FATF) is expected to address various issues in DeFi, which is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain, often geared toward disrupting financial intermediaries. The forthcoming guidance focuses on six areas: (1) clarification of the definitions of virtual assets and virtual asset service providers (VASPs); (2) stablecoins; (3) the risks and potential risk mitigants for peer-to-peer transactions; (4) licensing and registration of VASPs; (5) implementation of the Travel Rule; and (6) principles of information-sharing and cooperation among VASP supervisors. FATF issued a draft guidance in March.
Earlier this week, Ripple announced a partnership with the National Bank of Egypt (NBE) and a United Arab Emirates (UAE)-based financial service provider to process cross-border payments from the UAE to Egypt. A head executive of NBE stated: “NBE’s partnership with Ripple will help to improve overall efficiency by enabling NBE to establish new alliances across wider markets with reduced cost and quicker integration time.” Here in the United States, the city of Williston, North Dakota, announced a partnership with BitPay to begin accepting cryptocurrency payments for utility bills. And a leading luxury yacht charter company, which accepts bitcoin payments, said it expects a 40 percent growth in bitcoin transactions this year.
For more information, please refer to the following links:
Reports Cover Pipeline Ransomware, Crypto Schemes and DeFi Hacks
After a six-day outage, Colonial Pipeline reportedly paid almost $5 million in bitcoin to Eastern European hackers to restore functionality to the largest pipeline in the U.S., according to reports. Analysts have traced the bitcoin wallet used by the hackers to one owned by the DarkSide ransomware affiliate, which announced it would be ending operations after its servers were seized and its cryptocurrency was drained.
Eleven individuals were arrested in Europe on May 11 for their links to a criminal network involved in investment fraud, money laundering and a trading scheme resulting in almost €30 million in losses. According to a press release, the criminal network created different fraudulent trading platforms advertising substantial profits from cryptocurrencies.
This week, the Office of the Comptroller of the Currency (OCC) issued a warning concerning a fraud scheme in which consumers have been receiving fictitious email messages, alleging to be initiated by the OCC or senior officials of the agency, regarding funds purportedly under the control of the OCC. The scheme reportedly involves requests for users to provide bitcoin wallet addresses for a purported transfer of funds.
Meanwhile, although crypto hacks and thefts are bringing smaller amounts of money to illicit actors this year, a new report shows an alarming trend in DeFi hacks. According to the report, while DeFi hacks made up approximately 25 percent of total hack and theft volume in 2020, they now make up more than 60 percent of the total volume. The report also notes that, at $156 million, the amount taken from DeFi-related hacks in the first five months of 2021 already surpasses the $129 million stolen in DeFi-related hacks throughout all of 2020.
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Posted in Bitcoin, Cryptocurrency, NFTsIn this issue:
• Market Actors Continue to Integrate Cryptocurrency into Payment Systems
• US Firms Launch Bitcoin Investment Products and Enhance Crypto Offerings
• Auction Houses Continue with NFT Sales, Dictionary Adds ‘Non-Fungible Token’
• SEC Staff Statement Addresses Risks and Monitoring of Bitcoin Futures Funds
• Report Provides Data on SEC Cryptocurrency Enforcement Activities
• DeFi Protocol Hacked for $14 Million as Ether Increasingly Moves to DeFi
Market Actors Continue to Integrate Cryptocurrency into Payment Systems
According to a press release this week, California-based Silvergate Bank announced that it will become the issuer of Diem USD, a new cryptocurrency “stablecoin” with each Diem USD unit backed by U.S. dollars. Diem USD will reportedly be issued on the “Diem payment system,” a “blockchain-based payment system to support financial inclusion and responsible financial services innovation.”
Another central bank digital currency (CBDC) pilot was announced this week. According to reports, Israel’s central bank is “considering issuing a digital shekel that would create a more efficient payments system.” The Bank of Israel is reportedly asking for public comments on CBDCs and has established a panel to perform a feasibility study.
This week, a major U.S. money transfer service announced a partnership with “the largest licensed cryptocurrency cash exchange in the U.S.” According to a press release, the partnership “will bring bitcoin to thousands of new point-of-sale locations in the U.S., with plans to expand to select international markets in the second half of 2021.” In a separate announcement, a major U.S. fintech firm announced that its “Cash App generated $3.51 billion of bitcoin revenue and $75 million of bitcoin gross profit during the first quarter of 2021, each up approximately 11x year over year.”
More companies announced that they will begin accepting cryptocurrencies as payment this week. A U.S.-based “digital insurance platform and pay-per-mile auto insurer” will soon allow policyholders to pay for insurance and receive payment for eligible and approved insured claims in bitcoin. And a luxury condominium complex in Miami is reportedly now accepting cryptocurrency as payment for sales of its multimillion-dollar residences.
For more information, please refer to the following links:
US Firms Launch Bitcoin Investment Products and Enhance Crypto Offerings
According to reports this week, a major U.S. investment bank has “opened up trading with non-deliverable forwards, a derivative tied to Bitcoin’s price that pays out in cash.” As part of the new offering, the bank will reportedly seek to protect itself from volatility by buying and selling bitcoin futures in block trades on a major U.S. futures exchange and through a partnership with a Chicago-based cryptocurrency over-the-counter trading firm. The same investment bank also recently executed the first trades through its newly launched cryptocurrency trading desk, according to sources.
Another U.S.-based investment firm has reportedly launched a new exchange-traded fund (ETF) in Europe that offers investments in cryptocurrencies and blockchain. The fund will reportedly track an index of companies that generate at least 50 percent of their revenue from digital assets or have 50 percent of their assets invested in digital asset holdings or projects.
According to recent reports, Bitfarms, a Canadian bitcoin mining firm, has been approved to list its shares on the Nasdaq Global Market. And in the private markets, tZERO, a registered broker-dealer and alternative trading system (BD-ATS), issued a press release to announce that it has formed partnerships with three firms that will enhance its BD-ATS services, which enable issuance and secondary trading of blockchain-based private securities.
For more information, please refer to the following links:
Auction Houses Continue with NFT Sales, Dictionary Adds ‘Non-Fungible Token’
Two well-known auction houses generated millions this week via cryptocurrency-related auctions. The first involved an auction for nine rare CryptoPunks, early non-fungible tokens (NFTs) that launched in 2017, which collectively went for nearly $17 million. The CryptoPunks that were sold in the auction all were among the first 1,000 minted by creator Larva Labs, and they were sold from the company’s own collection. The second involved the sale of seminal artist Banksy’s protest piece “Love is in the Air.” The physical artwork sold for $12.9 million, and bidders had the option to bid in bitcoin or ether, with transactions to be effectuated through Coinbase Commerce. According to reports, the sale “marks the first time cryptocurrency was accepted as a payment option for a piece of physical artwork.”
Also this week, Merriam-Webster added to its dictionary a definition of “non-fungible token” and commemorated the announcement by auctioning an NFT version of the definition on OpenSea, a popular NFT marketplace. The auction ends today, with proceeds being donated to Teach For All, “a network of organizations from 60 countries aiming to tackle educational inequality around the world.”
One of the world’s largest online peer-to-peer marketplaces has begun experimenting with NFTs as well, for the first time allowing sellers to peddle NFTs on its platform. A select number of sellers will be provided with NFT inventory, with plans by the marketplace to expand its NFT offerings over time, according to reports.
With “Bitcoin Pizza Day” just around the corner, customers of a large pizza restaurant chain in the U.K. will have an opportunity to receive bitcoin for purchases that reach a certain threshold of value. Customers will be able to claim their bitcoin through the Luno cryptocurrency exchange. Bitcoin Pizza Day is a commemorative “holiday” that celebrates May 22, 2010, the day that is generally recognized as the first time a person engaged in a commercial transaction of cryptocurrency in exchange for two pizzas.
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SEC Staff Statement Addresses Risks and Monitoring of Bitcoin Futures Funds
The Division of Investment Management (IM) staff of the U.S. Securities and Exchange Commission (SEC) issued a statement this week on funds registered under the Investment Company Act of 1940 (Investment Company Act) that invest in the Bitcoin futures market. The statement strongly encourages investors interested in investing in a mutual fund with Bitcoin futures market exposure to carefully consider the risk disclosure of the fund, the investor’s risk tolerance and the possibility of investor loss. Among other things, the statement advised that IM staff and Division of Examinations staff will closely monitor and assess such mutual funds’ and investment advisers’ ongoing compliance with the Investment Company Act and other federal securities laws, including the impact of mutual funds’ investments in Bitcoin futures on investor protection, capital formation, and the fairness and efficiency of markets. As part of this monitoring, the staff expects to:
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Report Provides Data on SEC Cryptocurrency Enforcement Activities
An economic consulting firm recently issued a report on SEC cryptocurrency enforcement from July 1, 2013, to Dec. 31, 2020. According to the report, in that time period, the SEC brought 75 cryptocurrency-related enforcement actions along with a number of subpoenas and follow-on administrative orders. Defendants and respondents included cryptocurrency issuers, brokers, exchanges and other service providers. Highlights of the report include:
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DeFi Protocol Hacked for $14 Million as Ether Increasingly Moves to DeFi
By: Joanna F. Wasick
On Wednesday, decentralized finance (DeFi) protocol xToken announced it suffered an exploit through which $14 million in SNX and BNT tokens were drained by an attacker using flash loans, a new type of near-instant, uncollateralized lending made possible with blockchain technology. While these loans have gained popularity, they also have made recent headlines, as they are being used to exploit a number of vulnerable DeFi protocols. xToken stated that minting paused on all contracts as it further investigates exactly what happened. Late last week, Glassnode, an on-chain analytics provider, published a comparison of the number of ether deposited in Ethereum-based smart contracts to the number held on centralized exchanges. According to the report, over the past 17 months, the percentage of ether locked in smart contracts increased from 13 percent to 22.8 percent, while the share of supply on exchanges dropped more than a quarter, from about 17 percent to 12 percent.
On Wednesday, Elon Musk said his electric-car company is discontinuing bitcoin payments, just months after announcing it would accept the cryptocurrency and after purchasing over a billion dollars’ worth of it. Musk cited environmental concerns arising from the electricity requirements for bitcoin mining and transacting as the reason for the reversal. Bitcoin’s environmental impact has been a known issue for years and was discussed in a report published by blockchain analysis company Chainalysis earlier this week.
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