Reports Analyze Bitcoin Price, Energy Consumption; SEC Petitioned on NFTs, NFT Platform Sued; FDIC and FATF Focus on Crypto; Hacks and Fraud Continue

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

By: Jordan R. Silversmith

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.

For more information, please refer to the following links:

Market Actors Integrate Cryptocurrency into Payment and Investment Products, More NFTs Launched, SEC Staff Issues Crypto Statement, DeFi Hacked for $14M

In 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

By: Robert A. Musiala Jr.

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

By: Robert A. Musiala Jr.

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’

By: Veronica Reynolds

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.

For more information, please refer to the following links:

SEC Staff Statement Addresses Risks and Monitoring of Bitcoin Futures Funds

By: Teresa Goody Guillén

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:

  • Analyze the liquidity and depth (e.g., number of participants) of the Bitcoin futures market.
  • Analyze mutual funds’ ability to liquidate Bitcoin futures positions as necessary to meet daily redemption demands and the efficacy of mutual funds’ derivatives risk management.
  • Monitor funds’ valuations of holdings in the Bitcoin futures market and the impact of mutual fund participation in the Bitcoin futures market on valuations in that market.
  • Consider, as part of funds’ compliance with the open-end fund liquidity rule, mutual funds’ liquidity classification of any position in the Bitcoin futures market and the basis for such classification, and also consider the overall construction of a fund’s liquidity risk management program.
  • Assess the ongoing impact of the potential for fraud or manipulation in the underlying Bitcoin markets and its possible influence on the Bitcoin futures market.
  • Consider whether the Bitcoin futures market could accommodate ETFs.

For more information, please refer to the following link:

Report Provides Data on SEC Cryptocurrency Enforcement Activities

By: Teresa Goody Guillén

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:

  • Of the 75 enforcement actions, 43 were litigated in U.S. district courts (litigations) and 32 were resolved within the SEC as administrative proceedings.
  • The SEC has issued 19 trading suspension orders.
  • In 34 of the 43 litigations, the defendants were a mix of individuals and firms; in seven actions, the defendants were individuals only; and in two actions, the defendants were firms only.
  • The most common allegations over the study period involved fraud (52 percent) and unregistered securities offerings (69 percent).
  • Twenty-eight actions (37 percent) contained allegations of both fraud and unregistered securities offerings, and more than half of all enforcement actions alleged unregistered securities offering violations related to initial coin offerings, or ICOs.
  • The SEC also alleged failures to register as broker-dealers or exchanges and promotion of securities without disclosing compensation.
  • Less frequent allegations included violations of unregistered offerings of swaps to noneligible contract participants.
  • In litigations, the median time for complaint filing to case resolution was 305 days, and average time was 343 days.
  • SEC v. Telegram Group Inc. et al., SEC v. Haddow et al. and SEC v. Shavers et al. were some of the actions resolved with multimillion-dollar remedies in terms of disgorgement and/or civil penalties.

For more information, please refer to the following link:

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.

For more information, please refer to the following links:

CBDC Paper Released, Crypto Firms Launch Products, NFT Craze Continues, IRS Gains Access to Crypto Records, Task Force Addresses Crypto Ransomware

In this issue:

CBDC Paper Released, NY DFS Grants License, Study Cites Crypto Adoption

Traditional Financial Firms Launch Crypto Products, Data Shows DeFi Growth

Auction House Embraces Cryptocurrencies, NFT Sales Continue

Federal Court Authorizes IRS John Doe Summons on Cryptocurrency Exchange

Ransomware Task Force Issues Report to Reduce Ransomware Attacks

CBDC Paper Released, NY DFS Grants License, Study Cites Crypto Adoption

By: Jordan R. Silversmith

The Digital Dollar Project, a partnership created by the Digital Dollar Foundation, released a white paper this week highlighting use cases for a U.S. central bank digital currency (CBDC, or a digital dollar) and proposing several pilot programs for the technology. The pilot programs highlight applications of a digital dollar for various types of consumers, ranging from underbanked consumers to large financial market infrastructure payers.

This week, New York’s Department of Financial Services (NY DFS) announced the granting of a trust charter to a major custody and trust company to engage in the state’s growing virtual currency market. NY DFS approval ensures that the trust company can provide digital asset custody and other related services to New York customers. Including this charter, NY DFS has to date approved 30 charters and licenses for companies working in virtual currency business activity going back to 2015.

A major American financial conglomerate’s recently released payments index, conducted across 18 markets around the world, has shown that 93 percent of people will consider using at least one new emerging payment method —such as cryptocurrencies, biometrics, contactless payment methods and QR codes — in the next year. The report also showed that 40 percent of people intend to use cryptocurrency payments in the next year, while 63 percent of respondents agreed they have tried a new payment method during the pandemic. The report states that digital currencies, biometrics, contactless payments and QR codes are trending as emerging payment technologies as consumer comfort with them grows, with 71 percent of respondents saying they expect to use cashless payments going forward.

For more information, please refer to the following links:

Traditional Financial Firms Launch Crypto Products, Data Shows DeFi Growth

By: Veronica Reynolds

This week, one of the world’s leading derivatives marketplaces announced Micro Bitcoin futures, allowing investors the ability to avoid the high costs often associated with cryptocurrency investments and to “fine-tune” their cryptocurrency exposure. The offering adds to the company’s existing cryptocurrency derivatives offerings.

A multinational financial services corporation recently released a digital assets data and analytics product that centralizes data and analytics tools in one place to help institutional investors navigate the digital asset landscape. Data aggregated by the tool is reportedly sourced from network, trading, social media activity, news and other digital asset research, and is combined with analytics capabilities to provide asset analysis. According to a press release, the new product will allow investors to make informed investment decisions and discover insights by monitoring market developments in a more sophisticated manner.

The first security token offering registered with the Securities and Exchange Commission closed this week. The Ethereum-based initial public offering was launched by INX, a trading platform for digital assets, and generated an estimated $85 million from over 7,200 investors. According to reports, “the exchange plans to offer cryptocurrency and digital securities trading.”

Meanwhile, Decentralized Finance (DeFi), comprised primarily of lending, trading and betting activities executed on the blockchain, continues to grow, with recent reports tallying its market cap at approximately $128 billion. Originating on the Ethereum blockchain, DeFi has also blossomed on other networks, with reports estimating the total locked value of deposited cryptocurrency assets on Binance Chain at $38 billion.

For more information, please refer to the following links:

Auction House Embraces Cryptocurrencies, NFT Sales Continue

By: Keith R. Murphy

Recent reports indicate that the art and entertainment industries continue to embrace blockchain and cryptocurrencies. A major auction house has announced that it will begin accepting bitcoin and ether as a means of payment for an upcoming auction involving a painting by the artist Banksy, according to a recent report. The auction house is partnering with a major U.S. cryptocurrency exchange to enable the new payment method.

In one of the latest non-fungible token (NFT) events, based on several reports, from May 6 to May 20 an NFT studio plans to auction three rare NBA Top Shot NFTs as a set featuring a renowned basketball player. One of the NFTs reportedly holds the record for the most expensive Top Shot moment sold to date.

For more information, please refer to the following links:

Federal Court Authorizes IRS John Doe Summons on Cryptocurrency Exchange

By: Robert A. Musiala Jr.

According to a press release this week from the U.S. Department of Justice (DOJ), a federal court in the Northern District of California has entered an order authorizing the IRS to serve a John Doe summons on a major U.S. cryptocurrency exchange. The John Doe summons reportedly seeks information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The summons seeks information related to the IRS’ “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with internal revenue laws.” The summons directs the cryptocurrency exchange to produce records related to these U.S. taxpayers and their cryptocurrency transactions.

According to recent reports, the U.S. Marshals Service (USMS) has signed a $4.5 million contract with BitGo, a major U.S. cryptocurrency custody provider, to assist USMS in storing and selling cryptocurrencies seized in criminal investigations. According to a website that tracks the amount of bitcoin auctioned off by U.S. authorities, the total value of seized bitcoin that has been sold in U.S. government auctions is approximately 185,230 BTC.

For more information, please refer to the following links:

Ransomware Task Force Issues Report to Reduce Ransomware Attacks

By: Teresa Goody Guillén

The Ransomware Task Force (RTF), which is comprised of a team of more than 60 experts from software companies, cybersecurity vendors, government agencies, nonprofits and academic institutions, recently issued a major report focused on strategies to resist, disrupt and develop resilience to the ransomware threat.

The report includes a framework with recommendations organized around four goals: (1) deter ransomware attacks through a comprehensive, nationally and internationally coordinated strategy; (2) disrupt the ransomware business model and reduce criminal profits; (3) help organizations prepare for ransomware attacks; and (4) respond to ransomware attacks more effectively.

The report recommends that the cryptocurrency sector, which enables ransomware crime, should be more closely regulated. The report notes that governments should require cryptocurrency exchanges, crypto kiosks and over-the-counter trading “desks” to comply with existing laws, including Know Your Customer (KYC), Anti-Money Laundering (AML) and Combatting Financing of Terrorism laws. The report’s other recommendations include the following:

  • Coordinated, international diplomatic and law enforcement efforts must proactively prioritize ransomware through a comprehensive, resourced strategy, including using a carrot-and-stick approach to direct nation-states away from providing safe havens to ransomware criminals.
  • The United States should lead by example and execute a sustained, aggressive, whole-of-government, intelligence-driven anti-ransomware campaign, coordinated by the White House and including (1) an Interagency Working Group led by the National Security Council in coordination with the nascent National Cyber Director, (2) an internal U.S. Government Joint Ransomware Task Force and (3) a collaborative, private industry-led informal Ransomware Threat Focus Hub.
  • Governments should establish Cyber Response and Recovery Funds to support ransomware response and other cybersecurity activities, mandate that organizations report ransomware payments, and require organizations to consider alternatives before making payments.
  • An internationally coordinated effort should develop a clear, accessible and broadly adopted framework to help organizations prepare for, and respond to, ransomware attacks, including incentives or regulations to drive adoption.

For more information, please refer to the following links:

Cryptocurrency and Blockchain Initiatives Continue in Payments, NFTs and Media; Crypto Enforcement and Threats Also Continue Across Globe

In this issue:

Crypto Adoption Continues in Credit Cards, OCC Approval, Restaurant Payments

NFT Initiatives Continue, Advertising and Media Firms Integrate Cryptocurrencies

Cryptocurrency Enforcement Actions Continue in US, Turkey and South Korea

Reports Detail Crypto Crime Statistics, $50M Hack, Anti-Cryptojacking Initiative

Crypto Adoption Continues in Credit Cards, OCC Approval, Restaurant Payments

By: Robert A. Musiala Jr.

According to recent reports, a major U.S. financial services firm and Gemini, one of the largest U.S. cryptocurrency exchanges, will soon launch a credit card that gives users cryptocurrency rewards on purchases. According to a blog post, the Gemini Credit Card will allow cardholders to “earn up to 3% back on qualifying purchases in bitcoin or any of the more than 30 cryptocurrencies available on Gemini.”

According to press releases issued this week, the office of the Comptroller of the Currency (OCC) has granted preliminary conditional approval to allow U.S. cryptocurrency firm Paxos to operate under a national trust bank charter. Paxos will reportedly also maintain its current New York state trust charter.

This week, a major U.S. bank and two Singapore-based financial services firms announced an initiative to launch Partior, a blockchain-based payment platform to “digitize commercial bank money” and “reduce current frictions and latency for cross-border payments, trade transactions and foreign exchange settlements.” According to a press release, “Partior will be actively engaging leading banks to join the platform to establish the scale required to benefit the industry.”

In a final notable item, according to reports, a major U.S. restaurant chain will soon begin accepting bitcoin as payment at most of its restaurants. Select restaurants of the chain will reportedly start accepting bitcoin as soon as this week.

For more information, please refer to the following links:

NFT Initiatives Continue, Advertising and Media Firms Integrate Cryptocurrencies

By: Jordan R. Silversmith

Earlier this week, an NBA basketball team announced that they would be auctioning a series of non-fungible tokens (NFTs), the first time a U.S. professional sports team has launched official NFTs. While NFTs for basketball and baseball have become popular, this is the first time a U.S. sports franchise has offered its own team-licensed NFTs. European sports teams are also launching NFTs: Five more Italian soccer teams recently joined a European digital soccer collectibles platform, bringing the total from Italy’s top league to 11.

A major cryptocurrency exchange recently announced plans to introduce its own NFT marketplace where users can create, buy and sell NFTs. The exchange said it would operate two markets: a premium venue for top auctions and exhibitions and a standard market for anyone to mint new NFTs. The premium market will reportedly give 90% of its proceeds to artists. The feature is set to debut in June.

A large U.S. media agency has announced that it will begin accepting cryptocurrency payments from its clients. While the agency plans to accept bitcoin, it will also accept whichever forms of currency its clients want. The agency reportedly based its decision on a desire to remove difficulties for clients that want to use cryptocurrency as payment for advertising services and media buys.

A Canadian medical cannabis chain-of-custody compliance and data platform recently announced plans to launch a Uniswap token as part of its digital marketing campaign aimed at decentralized finance users. According to a press release, the company believes that the Uniswap community targets its key customer demographic.

For more information, please refer to the following links:

Cryptocurrency Enforcement Actions Continue in US, Turkey and South Korea

By: Joanna F. Wasick

Earlier this week, U.S. officials arrested Roman Sterlingov in connection with his running Bitcoin Fog, a cryptocurrency mixing service, or “tumbler,” that obscures the source of cryptocurrencies. The criminal charges include unlicensed money transmission and money laundering. According to the government, Bitcoin Fog, over the course of its decade-long operation, moved over 1.2 million bitcoin – valued at approximately $335 million at the time of the transactions – most of which came from darknet marketplaces and was tied to illegal narcotics, computer fraud and abuse activities, and identity theft. Also this week, the U.S. Department of Justice announced that Eric Meiggs pled guilty to conducting a scheme involving “SIM-swapping,” i.e., obtaining victims’ cell phone numbers and SIM cards by lying to their phone carriers and tricking them into transferring the data and cards. According to the government, once Meiggs and his co-conspirators stole the phone numbers and SIM cards they were able to hack into various victim accounts and steal more than $530,000 in cryptocurrencies.

Late last week, Turkish officials detained dozens of people as part of an investigation into Thodex, a Turkish cryptocurrency platform accused of fraud, which froze user accounts and whose founder and CEO, Faruk Fatih Ozer, had gone into hiding at the beginning of the controversy – allegedly taking billions of dollars’ worth of user funds with him. Ozer has since resurfaced in Albania, and Turkey is reportedly working with Interpol to arrest him. The Thodex case comes on the heels of Turkey’s announcement, made earlier this month, that it was banning the use of cryptocurrencies for payments. According to reports, the Turkish government is currently contemplating new regulations for the cryptocurrency industry.

In South Korea, tax officials have reportedly begun an initiative aimed at individuals who have been hiding assets using cryptocurrencies. According to recent reports, government officials recently seized approximately $22 million in cryptocurrencies from exchange accounts of 676 alleged tax offenders.

For more information, please refer to the following links:

Reports Detail Crypto Crime Statistics, $50M Hack, Anti-Cryptojacking Initiative

By: Keith R. Murphy

Chainalysis, a blockchain analysis company, recently issued its “2021 Crypto Crime Report” in which it concludes that cryptocurrency thieves are relying on a surprisingly small number of service providers to liquidate their stolen assets. Among other statistics, the report states that 55% of all funds moved from illicit addresses are run through only five fund-receiving services, and with respect to money laundering activity, just 1,867 deposit addresses received 75% of all cryptocurrency value from illicit addresses.

This week, an automated market maker platform on the Binance Smart Chain revealed that its token migration event had been targeted by a hacker, resulting in a loss of approximately $50 million in bitcoin, ether and Binance coin, among other cryptocurrencies. This is the second hack of the market maker platform this month, according to the report.

A major chip manufacturer and one of the largest multinational technology companies recently announced a collaboration to advance endpoint detection and response to address advanced threats, such as cryptojacking malware, through greater integration of the chip company’s threat detection technology. According to a press release, the initiative is aimed at combating a growing shift in cybercrime from ransomware to cryptojacking.

For more information, please refer to the following links:

Firms Enable Crypto Payments; Blockchain Deployed for Luxury Goods, A&D and Postal Services; NFT Hype Continues; Turkey Bans Crypto; DeFi Hacked for $80M

In this issue:

Companies Enable Crypto Payments, Reports Address Market Developments

Blockchain Solutions Deployed for Luxury Goods, A&D and Postal Services

Charitable NFTs Raise Millions, Soccer Player Pelé Announces His First NFT

DOJ Actions Cite Crypto Use, Turkey Bans Crypto, DeFi Hacked for $80 Million

Companies Enable Crypto Payments, Reports Address Market Developments

By: Keith R. Murphy

A major U.S. fintech and payments company recently announced that it has begun allowing its customers to buy, sell and hold cryptocurrency directly through its peer-to-peer payments app. Users are permitted to choose among bitcoin, ether, litecoin and bitcoin cash for their transactions, and they also can access in-app tutorials to learn more about cryptocurrencies. The company’s parent company previously obtained a BitLicense from the New York State Department of Financial Services, which enabled this new offering, according to the company’s press release. In related developments this week, a major U.S. news magazine announced that it is now accepting payment in cryptocurrency for digital subscriptions to its content, and a global shared-workspace provider announced that it will begin accepting payment in various cryptocurrencies.

Gemini, a regulated cryptocurrency exchange, has issued its “2021 The State of U.S. Crypto Report,” accessible on the company’s website. The report contains the results of a survey of nearly 3,000 investors and cryptocurrency-curious consumers and focuses on key trends identified by the survey.

A Big Four accounting firm released its newly launched “Global CBDC Index,” which the firm states was issued to allow readers to monitor the ongoing transformation caused by Central Bank Digital Currencies (CBDCs) globally. According to a press release, the index is “designed to measure a central bank’s level of maturity in deploying their own digital currency” and focuses on two main CBDC operational designs: retail CBDCs, which are held by individuals and corporates, and interbank, or wholesale, CBDCs, relating to financial institutions.

Also this week, a large international bank and credit-card issuer released its Global Perspectives and Solutions report, which addresses CBDCs, China’s work in developing its own CBDC, stablecoins and cryptocurrencies, among other major topics. The report notes the soaring interest in cryptocurrencies and notes that among other effects, the tokenization of money could modify, reduce or eliminate the roles of incumbent financial intermediaries and existing payment forms, such as checks and cards.

For more information, please refer to the following links:

Blockchain Solutions Deployed for Luxury Goods, A&D and Postal Services

By: Jordan R. Silversmith

A French luxury goods conglomerate recently announced a new partnership with two other major European luxury goods businesses to develop the first global luxury blockchain, Aura Blockchain Consortium. The goal of founding Aura is to provide customers greater transparency and traceability through the life cycle of a product. With authenticity and traceability so crucial to the industry, the conglomerate said that “it made sense for these competitors to work together to drive change and develop a shared solution.”

An American aerospace and defense (A&D) company recently signed a strategic partnership with a blockchain company that will grant it access to the blockchain company’s secure supplier intelligence platform, which connects Original Equipment Manufacturers (OEMs) to members of Swissmem, the Swiss association of mechanical and electrical engineering industries. The blockchain platform will allow for OEMs to be matched with subject matter expert supplier capabilities across Switzerland.

In another recent development, the U.S. Postal Service has certified a U.S. company to begin producing blockchain-generated ePostage labels. According to a press release, USPS ePostage labels will use nonfungible token (NFT) mail technology to create the world’s first blockchain-supported postage.

For more information, please refer to the following links:

Charitable NFTs Raise Millions, Soccer Player Pelé Announces His First NFT

By: Veronica Reynolds

Last week, Mick Jagger auctioned an NFT to support indie music venues. The token includes a 30-second visual of a person running through skulls with “Eazy Sleazy” (a song recently released by Jagger and Dave Grohl) playing in the background. The token sold via a 24-hour auction on Nifty Gateway and fetched a price of $50,000. Proceeds went to two local charities that support independent music venues in the United Kingdom and the United States (Music Venue Trust and the National Independent Venue Association).

Another charitable NFT depicting Edward Snowden auctioned for $5.44 million on Foundation (a platform that facilitates NFT auctions) last week. The token is called “Stay Free,” and the $5.44 million closing bid makes it one of the most expensive NFT sales. Like “Eazy Sleazy,” proceeds from “Stay Free” will go to charity – this time to the Freedom of the Press Foundation. The NFT is based on a photo by the visual artist Platon and includes Snowden’s face overlaying court documents related to the 2013 leak that exposed the NSA’s domestic surveillance program.

The famed soccer player Pelé recently announced he will be launching his first NFT. The artists, Kingsletter and Visual Lab, have been working on the soccer player’s digital trading card collection for months, and the first card will be released on May 2 with Ethernity Chain. Ethernity Chain was built on the Ethereum Network and specializes in donating proceeds from digital art to charitable causes. Ninety percent of proceeds from Pelé’s collection will go to his namesake foundation.

For more information, please refer to the following links:

DOJ Actions Cite Crypto Use, Turkey Bans Crypto, DeFi Hacked for $80 Million

By: Joanna F. Wasick

Last Thursday, the U.S. Department of Justice (DOJ) announced that two men were charged with producing false identity documents and aggravated identity theft in connection with operating an illegal e-commerce business known as “SecondEye.” From at least 2011, the individuals, through various versions of its website, electronically produced, sold and transferred digital versions of false government-issued identity and other documents. As part of the operation, the defendants accepted more than $1.5 million in bitcoin transfers from customers.

This week, the DOJ announced that another individual, Sheng-Wen Cheng, pled guilty to various fraud charges for engaging in a scheme to fraudulently obtain more than $7 million in government-guaranteed loans designed to provide relief to small businesses during the COVID-19 pandemic. Part of Cheng’s fraud involved lying to investors in his blockchain-based peer-to-peer lending platform.

The Central Bank of the Republic of Turkey recently introduced legislation banning the use of cryptocurrency for payments throughout the country. The payments ban is set to go into effect on April 30; the trading of cryptocurrencies appears to be unaffected by the regulation. In related news, following the announcement of the new regulation, hundreds of thousands of users of a Turkish cryptocurrency exchange, Thodex, were allegedly left unable to access their digital assets after the trading platform abruptly halted trading Wednesday, spurring fraud allegations and criminal complaints. The CEO of the exchange is reportedly missing.

Earlier this week, a decentralized finance (DeFi) Polygon Network-powered protocol, EasyFi, reported it suffered a hack in which $80 million of assets were stolen. The hacker reportedly transferred out 2.98 EAST tokens and $6 million from liquidity pools in U.S. dollars, Dai and USDT. Amounts were then allegedly transferred to an unknown wallet on the Ethereum network. A $1 million reward has been offered by the company’s CEO and founder to the hacker for returning the funds in full.

For more information, please refer to the following links:

Crypto Exchanges Launch Initiatives, NFT Hype Continues, Token Safe Harbor Proposal Updated, Digital Euro Study Published, Hacked Bitcoin is On the Move

In this issue:

Cryptocurrency Exchanges Forge New Paths, Bitcoin ETF Applications Continue

MLB Gets In on NFT Hype, Chinese Alliance Seeks to Bring NFTs to Streamers

Token Safe Harbor Proposal Updated, IRS Memo Addresses Bitcoin Hard Fork

ECB Publishes Survey on Digital Euro, Study Addresses Bitcoin Electricity Usage

Judgment Entered in Crypto Fraud Case, Hacked Bitcoin Seen on the Move

Cryptocurrency Exchanges Forge New Paths, Bitcoin ETF Applications Continue

By: Keith R. Murphy

This week one of the largest U.S. cryptocurrency exchanges, Coinbase, completed its initial public offering through a direct listing of its shares on Nasdaq. Separately, according to a press release, last week cryptocurrency platform Exodus opened its blockchain-based SEC-qualified public offering of common stock, with each share of common stock represented by a “Common Stock Token.” The company, which offers a multi-asset cryptocurrency wallet, reportedly has received subscriptions for nearly $60 million from more than 4,000 accredited and non-accredited investors.

A well-known financial services company focused on digital assets and cryptocurrencies recently filed a bitcoin exchange traded fund (ETF) application with the Securities and Exchange Commission (SEC), according to a recent report. Another recent report noted that the SEC recently began review of a separate bitcoin ETF application by an ETF sponsor and index developer. The SEC has not yet approved any bitcoin ETFs, although multiple applications are currently pending at the agency.

Binance recently issued a press release announcing that it has launched no-commission, digital tradeable tokens that allow users to buy and trade fractional stocks.  The release states that the tokens are backed by a depositary portfolio of underlying securities, and that holders of the tokens qualify for economic returns, including dividends, relating to the underlying securities. A press release notes that the first stock available for use with the tokens is a well-known electric car company pioneer, and Binance also reportedly intends to tokenize Coinbase stock. Prices for the new Binance products will reportedly be settled in Binance USD (BUSD).

For more information, please refer to the following links:

MLB Gets In on NFT Hype, Chinese Alliance Seeks to Bring NFTs to Streamers

By: Veronica Reynolds

This week, a large U.S. trading card company, in partnership with a major U.S. professional sports organization, announced plans to release flagship baseball cards in the form of non-fungible tokens (NFTs), to be released on the Wax blockchain. The NFTs are set to launch on April 20, 2021, allowing consumers to “[b]uy, sell, and trade exclusive, officially licensed NFTs featuring modern-day stars in new and classic … card designs.” According to reports, the trading card company launched a low-profile test run of NFTs last year.

Last week, a large Chinese mobile streaming platform launched a strategic alliance through its wholly owned subsidiary and a global digital marketing promotions, rebates and loyalty solutions provider. The alliance seeks to leverage the in-app digital currency solutions offered by the Chinese subsidiary and the loyalty rewards system offered by the digital marketing promotions provider, allowing streamers the opportunity to earn points by generating engagement. Points generated through such use could be redeemed for digital rewards, including bitcoin and retailer gift cards, and in-app digital currency. In addition, the alliance seeks to provide a pathway for streamers to launch their own NFTs and allow users to use in-app points to bid on NFT “mementos” from their favorite streamers.

For more information, please refer to the following links:

Token Safe Harbor Proposal Updated, IRS Memo Addresses Bitcoin Hard Fork

By: Teresa Goody Guillén

This week, U.S. Securities and Exchange Commission (SEC) Commissioner Peirce (not the SEC) released an updated token safe harbor proposal, which amends her original proposal from February 2020. The safe harbor would seek to provide network developers with a three-year grace period to facilitate participation in and development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. The updated safe harbor proposal makes three significant changes from the prior version: (1) to enhance token purchaser protections, the proposal adds semi-annual updates to the plan of development disclosure and a block explorer; (2) at the end of the grace period, the proposal adds an exit report requirement, which would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934; (3) the exit report requirement provides guidance (not a bright-line test) on what outside counsel’s analysis should address when explaining why the network is decentralized.

In other regulatory news, the Office of the Chief Counsel of the Internal Revenue Service (IRS) recently released a memorandum responding to a request for tax advice from someone who received bitcoin cash as a result of the Bitcoin hard fork in August 2017. While this memorandum cannot be cited as precedent, it stated that cryptocurrency received from a so-called hard fork that altered Bitcoin’s underlying ledger to result in a split that generated bitcoin cash is considered taxable gross income. The analysis includes two hypotheticals that rely on whether the taxpayer had dominion and control over bitcoin cash to determine whether it is considered taxable income under Section 61 of the Internal Revenue Code.

A recent blog post brought to light the issue of whether virtual currency is subject to unclaimed property law given that state unclaimed property laws apply to a wide variety of assets or property types, and the IRS has defined virtual currency as property (IRS Ruling Notice 2014-21). The blog post provides an overview of state views and notes that the 2016 Revised Uniform Unclaimed Property Act developed and updated by the Uniform Law Commission (ULC), included virtual currency in its definition of property that is subject to unclaimed property laws.

For more information, please refer to the following links:

ECB Publishes Survey on Digital Euro, Study Addresses Bitcoin Electricity Usage

By: Jordan R. Silversmith

Earlier this week, the European Central Bank published a comprehensive analysis of its public survey on a digital euro, confirming that, by and large, what the public and professionals most desire from a digital currency is privacy. While 43 percent of respondents said privacy is the most important feature of a digital euro, fewer than one in 10 responses of members of the public showed support for full anonymity. Security was the second-most-important issue flagged by respondents. Absent from the responses was any discussion of Bitcoin’s continually rising power consumption: according to a report by a major U.S. bank, Bitcoin is consuming 66 times more electricity than it did in 2015. However, the Bitcoin Network’s electricity usage lags far behind its price, which has risen by around 170 times over that same period.

For more information, please refer to the following links:

Judgment Entered in Crypto Fraud Case, Hacked Bitcoin Seen on the Move

By: Joanna F. Wasick

Late last week, a Nevada federal court entered a default judgment against David Saffron, an Australian citizen residing in the U.S., and Circle Society, his Nevada corporation, for running a cryptocurrency Ponzi scheme. The case was brought by the Commodity Futures Trading Commission, which alleged that Saffron fraudulently solicited and accepted over $15 million of bitcoin and U.S. dollars from at least 179 individuals by falsely promising to invest the funds and generate guaranteed returns of up to 300 percent. Rather than using the funds as promised, the defendants allegedly misappropriated the funds, including by holding them in Saffron’s personal wallet and using some to pay out redeeming investors.

A former CIA director published an analysis last week of bitcoin’s use in illegal activities. The paper concludes that generalizations on the use of bitcoin in illicit finance are “significantly overstated” and cites a recent study by blockchain analytics firm Chainalysis stating that illicit activity among all cryptocurrencies was less than 1 percent of total cryptocurrency activity between 2017 and 2020. According to the paper, most of this activity consisted of “simple” scams and purchases on the dark web. For bitcoin specifically, the paper notes that illicit activity makes up less than 0.5 percent of total transaction volume. The paper also notes that blockchain ledger technology is underutilized by law enforcement and can become a highly effective crime-fighting and intelligence-gathering tool.

According to reports this week, long-dormant bitcoin stolen in the 2016 hack of cryptocurrency exchange Bitfinex were seen on the move. There were 63 transactions in all, totaling over $620 million, with the largest transaction worth over $78 million. Some of the transfers were between wallets associated with the hack, although many were to newly created wallets. Efforts to identify the hacker are ongoing.

For more information, please refer to the following links:

CBDC Initiatives Announced Across Globe, US Crypto Firms Pursue Licenses and Form Lobbying Groups, DOJ Targets Unlicensed Crypto MSB

In this issue:

Central Bank Digital Currencies Explored in Thailand, Japan and Sweden

US Crypto Firm Seeks Clearing Agency License, New Lobbying Group Formed

DOJ Targets Unlicensed Bitcoin Money Transmitter, ICO Extortion Scheme

Central Bank Digital Currencies Explored in Thailand, Japan and Sweden

By: Veronica Reynolds

According to a recent press release, the Bank of Thailand (BOT) is seeking public comment on the issuance and development of a Retail Central Bank Digital Currency (CBDC), an easily portable “digital form of money issued by the central bank comparable to physical banknotes,” which can be used in online and offline financial transactions. The main objective of the BOT’s exploration of Retail CBDC is to provide citizens with broader access to secure financial services. The BOT seeks to pilot Retail CBDC in spring 2022.

Similarly, the Bank of Japan recently announced plans to experiment with CBDC this year “to test the technical feasibility of the core functions and features required for CBDC.” Phase 1, Proof of Concept, began this week, with the goal being to “develop a test environment for the CBDC system and conduct experiments on the basic functions that are core to CBDC as a payment instrument such as issuance, distribution, and redemption.” Phase 1 is anticipated to last one year, with the goal being to test the functionality of CBDC and document key takeaways.

Sweden, too, announced CBDC-related news this week, with the country’s central bank, Sveriges Riksbank, publishing a recent study outlining the results of its digital currency pilot on a network based on R3’s Corda blockchain. The report cites, among other things, scalability as a major bottleneck in the development and adoption of the technology. Other issues also emerged from the report, including the need to protect information implicated in e-krona transactions in order to safeguard personal data and comply with bank secrecy laws. The head of Riksbank’s e-krona pilot division, Mithra Sundberg, said that Sweden’s CBDC may require “a new legal framework” before it can be launched.

For more information, please refer to the following links:

US Crypto Firm Seeks Clearing Agency License, New Lobbying Group Formed

By: Teresa Goody Guillén

A New York-based cryptocurrency firm recently announced that it will apply for a clearing agency license from the U.S. Securities and Exchange Commission (SEC) and hopes to secure registration in 2021. A clearing agency is an intermediary that facilitates the settlement of a trade between a buyer and a seller. Current settlement systems take two days to settle a trade. The crypto firm’s announcement follows its same-day trade settlement pilot test. This is reportedly the first live application of blockchain technology for equities markets in the United States. Reports state that, in February, the Depository Trust and Clearing Corporation said reducing the settlement time to one day would reduce market risk and lower margin requirements, especially during particularly volatile market conditions.

A group of major companies has formed the Crypto Council for Innovation to lobby policymakers. The council’s stated mission is to demonstrate the “transformational promise of crypto and communicate its benefits to policymakers, regulators, and people around the globe.” The council reportedly plans to appoint a board that would include each of the four initial members and add an executive team.

The U.K.’s Financial Conduct Authority (FCA) announced that it will increase its anti-money laundering supervision by expanding the types of companies that have to submit a special financial crime log to the FCA (known as REP-CRIM reports) to include cryptocurrency firms. The FCA stated that this will increase the number of reporting companies from 2,500 to 7,000 and brings the cryptocurrency sector further into line with banks and other finance firms. Companies that have been added to the list of reporting companies are required to start submitting financial crime reports in their first annual report after January 2022.

For more information, please refer to the following links:

DOJ Targets Unlicensed Bitcoin Money Transmitter, ICO Extortion Scheme

By: Joanna F. Wasick

On Monday, the U.S. Department of Justice (DOJ) announced that a New Jersey resident pled guilty to one count of running an unlicensed money transmitting business. According to the government, the individual had operated a website through which he converted clients’ fiat currency into bitcoin, transferred the bitcoin to client wallets and charged a fee for his services. The announcement contained no allegations of fraud or other wrongdoing, other than not registering his business as required by federal law.

In another announcement issued on Monday, the DOJ reported that Michael Hlady pled guilty in a Brooklyn federal court to conspiring to extort a startup company for millions of dollars’ worth of ether (ETH). According to court documents, while the company was planning its initial coin offering (ICO) in 2017, Hlady and a co-conspirator repeatedly threatened that they would destroy the company and its community unless the company sent them additional funds and company tokens. The company transferred 10,000 ETH in response to the threats.

According to reports published this week, South Korean prosecutors have sold bitcoin for the first time in the country’s history, transferring the proceeds into the national treasury. The 191 bitcoin had been confiscated in April 2017 from the operator of an illegal pornography site. While other countries, such as the United States, have been auctioning confiscated bitcoin for years, South Korean prosecutors have held on to the cryptocurrency due to legal ambiguity regarding its treatment. However, this recent sale follows the passage of the country’s new cryptocurrency legislation, which went into effect at the end of March.

For more information, please refer to the following links:

Financial Firms Launch New Crypto Products, NFTs Trending, Crypto Exchange Acquires Broker-Dealer, SEC, DOJ, IRS and CFTC Actions Target Crypto Actors

In this issue:

US Institutional Financial Firms, and Fintech Startups, Launch Crypto Products

Creative NFT Launches and Bitcoin Giveaways Continue To Trend

US Crypto Exchange Acquires Broker Dealer, SEC Action Targets Token Sales

US Enforcement Actions Target Cryptocurrency Darknet Activities and Fraud

DOJ and IRS Actions Target Crypto Tax Evaders, UK Addresses Staking Taxation

US Institutional Financial Firms, and Fintech Startups, Launch Crypto Products

By: Jordan R. Silversmith

A major U.S. financial services corporation announced this week that it would begin to settle transactions over the Ethereum Network in USD Coin (USDC), a stable coin backed by the U.S. dollar, becoming the first major payments network to do so. The corporation is piloting the capability with an online cryptocurrency platform and plans to offer the USDC settlement capability to additional partners later in 2021. According to a press release, the corporation believes that the ability to settle in USDC will help crypto native companies evaluate new business models without needing traditional fiat in their treasury and settlement workflows. Meanwhile, on Tuesday, another major U.S. financial services corporation launched its own crypto checkout service, which will allow U.S. consumers to use their cryptocurrency holdings to pay at millions of online merchants globally.

A U.S. cryptocurrency marketplace founded in 2018 recently announced the launch of its digital wallet to manage various cryptocurrencies and digital assets across one platform. The app will reportedly allow consumers to use their cryptocurrencies according to their preferences by converting participating rewards points to cash, or by using bitcoins as payment, for example. According to a press release, the company hopes that consumers will be able to use the new wallet to track and utilize the value of all kinds of digital assets, from bitcoins to gift cards to loyalty points.

According to a recent blog post, Ripple Labs has agreed to acquire 40 percent of a leading Asia-based cross-border payments firm. The new partnership will reportedly allow for the expansion of RippleNet’s On-Demand Liquidity service, which uses the XRP cryptocurrency, to instantly send money and reduce working capital needs.

For more information, please refer to the following links:

Creative NFT Launches and Bitcoin Giveaways Continue To Trend

By: Veronica Reynolds

A major U.S. news magazine recently sold three of its covers – two iconic and one original – as non-fungible tokens (NFTs) on NFT platform SuperRare. The magazine is one of many brands leaning into the NFT-hype, with the covers going for a total of $435,000. “This is not just about the collectibles and big drops,” according to the magazine’s president. “The more interesting part is what does this mean about the future of subscriptions, the future of community, the future of membership.” In another recent NFT campaign, a large U.S. brand of potato chips recently offered a new virtual chip “flavor” – limited-edition animated images of a gold-plated tube of chips, available as NFTs on Rarible. SuperRare and Rarible are NFT marketplaces where consumers can buy, sell, auction and bid on NFTs.

Bitcoin continues to be an attractive marketing hook, with a corporate restaurant chain offering $100,000 in free bitcoin giveaways this week. The restaurant chain launched the campaign as a game, requiring participants to guess the correct six-digit code, which, if guessed correctly, would give them a chance to win free bitcoins. The campaign was announced in partnership with Stefan Thomas, a programmer who gained notoriety when he became unable to access a digital wallet containing over 7,000 bitcoins due to his failure to remember a password that would allow him access to an encrypted device. Sports fans, too, gained exposure to bitcoin this week, with a major-league baseball team selling tickets in exchange for bitcoins for the first time ever.

A recent article published in Forbes and a recent report from a Big Four accounting and consulting firm address the potential impact of blockchain and cryptocurrencies on the digital advertising industry. Among other things, the publications discuss blockchain-and cryptocurrency-based applications and their potential to reduce costs, enable new reward campaigns, reduce fraud and secure data in the ad industry.

For more information, please refer to the following links:

US Crypto Exchange Acquires Broker Dealer, SEC Action Targets Token Sales

By: Joanna F. Wasick

Earlier this week, a major U.S. cryptocurrency exchange announced that the Financial Industry Regulatory Authority (FINRA) approved its acquisition of a U.S. broker-dealer. The acquisition will reportedly make the exchange one of the first cryptocurrency firms to own a broker-dealer approved to offer equities on an omnibus basis to U.S. retail investors. According to a press release, the exchange plans to launch fractional equities in the U.S. later this year and will provide seamless trading between cryptocurrencies, U.S. stocks, precious metals, carbon credits, FX products and other assets, all with one interface.

This week the U.S. Securities and Exchange Commission (SEC) filed a complaint charging LBRY Inc., a blockchain-based publishing platform and video-sharing company, with “conducting an unregistered offering of digital asset securities” related to the company’s “LBRY Credits,” which were sold between 2016 and 2020 to institutional investors and other platform users. LBRY issued a detailed statement responding to the SEC’s complaint. According to LBRY, the SEC refused offers to settle, despite the fact that LBRY did not conduct an initial coin offering and despite the absence of any alleged fraud. LBRY asserts that the SEC’s stance “would make almost all blockchain tokens securities,” thereby creating “a bureaucratic nightmare for United States residents and businesses operating in the U.S.”

According to reports, while answering questions at last week’s virtual Security Token Summit 2021, SEC Commissioner Hester Peirce warned that fractionalized non-fungible tokens (NFTs) could be considered securities, and therefore selling or otherwise issuing them could be subject to U.S. securities laws. Commissioner Peirce reportedly criticized the Howey Test, which is the standard means for determining what constitutes a security, stating the test “hasn’t worked that well” for cryptocurrencies and other digital assets. The commissioner also reportedly said that she hopes to develop a “safe harbor plan,” which would reduce regulatory scrutiny of emerging blockchain networks.

For more information, please refer to the following links:

US Enforcement Actions Target Cryptocurrency Darknet Activities and Fraud

By: Keith R. Murphy

According to a recent press release from the U.S. Department of Justice (DOJ), the chief executive officer of a communications network and service provider and a former distributor of the company’s devices have been indicted on charges that they intentionally participated in a criminal enterprise that facilitated the international distribution of illegal drugs through the use of the company’s encrypted communications devices. The DOJ indictment charges that company employees utilized cryptocurrencies including bitcoin to facilitate illegal transactions on the company’s website, to retain the anonymity of the customers and to launder their customers’ ill-gotten gains.

According to another DOJ press release, an Israeli national pleaded guilty this week to operating a website that enabled users to access darknet marketplaces in order to purchase illegal drugs and firearms as well as malware and hacking tools. The defendant and co-defendant who operated the website allegedly received kickbacks in the form of cryptocurrency, including more than 8,000 bitcoins, for providing the links. The defendant allegedly attempted to conceal the kickbacks by transferring funds from the company’s bitcoin wallet to other bitcoin accounts and bank accounts in the name of shell companies he controlled.

A default judgment was entered last week against an individual in connection with his involvement in a 2017 fraud scheme where he and his company solicited bitcoins valued at more than $22 million from customers under the false premise of providing them with guaranteed returns, according to a press release from the Commodity Futures Trading Commission (CFTC). The press release notes that the default judgment requires the defendant to pay more than $500 million in restitution and civil monetary penalties and enjoins him from trading in any CFTC-regulated markets.

For more information, please refer to the following links:

DOJ and IRS Actions Target Crypto Tax Evaders, UK Addresses Staking Taxation

By: Keith R. Murphy and Robert A. Musiala Jr.

According to a recent press release from the U.S. Department of Justice (DOJ), a Massachusetts federal court has entered an order authorizing the Internal Revenue Service (IRS) to serve a “John Doe” summons on a major U.S. cryptocurrency exchange and its affiliates. According to the press release, the IRS is “seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.” In a separate development, the DOJ Division of Tax has reportedly filed a “John Doe” subpoena in the Northern District of California seeking to obtain information from another major U.S. cryptocurrency exchange regarding U.S. taxpayers who held cryptocurrency assets with the exchange.

An IRS press release last week highlighted an event called “The Challenge” that recently took place among members of the Joint Chiefs of Global Tax Enforcement (J5). According to the press release, the focus of this year’s event was fintech companies, and the participating countries brought datasets for teams of technology experts and investigators to work through in order to generate leads and to locate tax offenders who are using cryptocurrency. The chief of the IRS Criminal Division is quoted in the release as stating that the Challenges jump-start investigations and end up in real enforcement actions.

According to reports, the U.K. tax authority, Her Majesty’s Revenue and Customs (HMRC), recently updated its Cryptoassets Manual with new guidance on the taxation of income from participation in staking on proof-of-stake blockchain networks. The updated guidance is available on the HMRC website.

For more information, please refer to the following links:

Crypto Firm Initiatives in CBDCs and Custody, GSA Auctions Bitcoin, Marketing Campaigns Integrate Crypto, ETFs Seek Approval, Enforcement Actions Continue

In this issue:

Crypto Firms Expand CBDC and Custody Initiatives, GSA Auctions Bitcoin

Token-Focused Marketing Campaigns Signal Rising Interest in Cryptocurrencies

ETFs Seek SEC Approval as Brazil Approves First ETF, FATF Updates Guidance

CFTC, Canadian Tax Agency and DOJ Continue Crypto Enforcement Activities

Crypto Firms Expand CBDC and Custody Initiatives, GSA Auctions Bitcoin

By: Jordan R. Silversmith

Ripple Labs recently released a white paper describing its XRP cryptocurrency as a way to link different central bank digital currencies (CBDCs). The white paper argues that XRP could be a “neutral bridge” between different cryptocurrencies and enable interoperable CBDCs and cross-border payments.

A major global technology firm recently issued a press release announcing a partnership with METACO, “a provider of security-critical infrastructure that helps large banks manage digital assets,” to integrate the technology firm’s “confidential computing capabilities” and cloud computing platform. The initiative is reportedly aimed at further enabling “large financial institutions to securely integrate cryptocurrencies, tokens, and distributed ledger use-cases into their core infrastructure.”

Officials at the General Services Administration (GSA) recently placed a 0.7501 share of bitcoin for auction at a two-day bidding event, and bidders for the bitcoin ran prices up well above market rate. At the close of the auction, the highest bidder won the bitcoin share at a price of $53,104, about 21 percent higher than market value. According to a GSA press release, the agency intends to hold another bitcoin auction from March 29 to 31, when it will sell a total of 6.79 bitcoin, with 10 lots up for bid.

A recent survey polled U.S. adults seeking their opinions on cryptocurrency. Among other results, 39 percent of respondents said they “don’t know anything about cryptocurrency,” while 38 percent believe “cryptocurrency is the future of money.”

For more information, please refer to the following links:

Token-Focused Marketing Campaigns Signal Rising Interest in Cryptocurrencies

By: Veronica Reynolds

Decrypt, a cryptocurrency-focused publication, launched its “Reader Token” (DCPT) to the public last week, allowing readers to accrue tokens in return for content consumption. The program provides a fresh take on the traditional advertising model, with Decrypt releasing a limited supply of Decrypt Tokens in periods called “seasons,” in partnership with sponsors, to be redeemed by consumers for digital rewards. The program’s first sponsor is Protocol Lab’s Filecoin, with 21 million tokens available during its first season.

In bitcoin news, a well-known alcoholic beverage company recently offered social media users who participate in its online marketing campaign the opportunity to receive bitcoin in exchange for a tweet. Consumers who participate will be entered in a sweepstakes for a chance to win one bitcoin.

For more information, please refer to the following links:

ETFs Seek SEC Approval as Brazil Approves First ETF, FATF Updates Guidance

By: Teresa Goody Guillén

An affiliate of a large American multinational financial services corporation sought approval from the U.S. Securities and Exchange Commission (SEC) this week to offer a bitcoin exchange-traded fund (ETF) in the U.S. market. The fund, Wise Origin Bitcoin Trust, would reportedly track the performance of the financial services corporation’s bitcoin index. A New York-based investment firm also recently filed for a bitcoin ETF with the SEC. The filing reportedly states that the ETF will seek to list its shares on the New York Stock Exchange Arca. Meanwhile, the Brazilian Securities and Exchange Commission announced that it has approved a plan for Latin America’s first bitcoin ETF. According to the announcement, Brazil’s B3 is the second exchange in the world to have a fully bitcoin-based ETF, after Canada’s Toronto Stock Exchange.

The Financial Action Task Force (FATF) is updating its Guidance on the risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The revised Guidance focuses on six main areas in order to (1) clarify the definitions of VA and VASP to make clear that these definitions are expansive, (2) provide guidance on how the FATF Standards apply to so-called stablecoins, (3) provide additional guidance on the risks and potential risk mitigants for peer-to-peer transactions, (4) provide updated guidance on the licensing and registration of VASPs, (5) provide additional guidance for the public and private sectors on the implementation of the Travel Rule, and (6) include Principles of Information-Sharing and Co-operation Amongst VASP Supervisors. FATF is consulting private-sector stakeholders before finalizing the revisions to the Guidance and welcomes feedback, to be submitted by April 20, 2021.

For more information, please refer to the following links:

CFTC, Canadian Tax Agency and DOJ Continue Crypto Enforcement Activities

By: Joanna F. Wasick

Late last week, the Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against a major California-based cryptocurrency exchange. Charges included reckless, false, misleading or inaccurate reporting and “wash trading” (using transactions to give the appearance that purchases and sales were made, without incurring market risk or changing the trader’s market position), which created the misleading appearance of liquidity and trading interest in a particular cryptocurrency. The order requires the exchange to pay a civil monetary penalty of $6.5 million and cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations. The CFTC stated that its order exemplifies the CFTC’s commitment to safeguarding the integrity and transparency of digital asset pricing.

Also last week, a Canadian federal court authorized the Canadian Minister of National Revenue to seek certain documents and information from Coinsquare, a Canadian cryptocurrency exchange. Requested information includes a list of all customer accounts, identifying information of account holders, transfer data and other trading activity. The action is similar to that of the United States Internal Revenue Service (IRS) against a U.S. exchange, which began five years ago to aid the IRS in recovering taxes from account holders.

The United States Department of Justice (DOJ) recently released a statement that a Russian national, Egor Kriuchkov, pleaded guilty of conspiring to travel to the U.S. to recruit an employee of a Nevada company into a criminal hacking scheme that involved installing malware on the company’s computer network. Kriuchkov allegedly met with the employee and offered him a payout in bitcoin in return for abetting the hack. However, the employee reported the meeting to his employer company, the FBI was promptly contacted and the hack was thwarted. The DOJ stated, “This case highlights the importance of companies coming forward to law enforcement, and the positive results when they do so.”

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US Firms Launch Bitcoin Products, Seek Approvals; Federal and State Agencies Take Enforcement Actions Against Cryptocurrency Industry Firms

In this issue:

US Firms Launch Bitcoin Products, Seek Approvals, Advocate for Crypto Rules

Multiple Federal and State Agencies Take Actions Against Crypto Industry Firms

US Firms Launch Bitcoin Products, Seek Approvals, Advocate for Crypto Rules

By: Joanna F. Wasick

According to reports, in an internal memorandum issued earlier this week, a major U.S. investment bank informed its financial advisers that it is launching access to three funds that enable bitcoin ownership. Clients with at least $2 million in assets held by the firm will be able to access the three funds.

The 45-day window has begun for a decision by the U.S. Securities and Exchange Commission (SEC) on the VanEck exchange-traded fund (ETF) filing. During this time, the SEC must approve, decline or extend the review period. As reported previously, the Chicago Board Options Exchange filed to list the ETF in January. The SEC officially published the company’s submission on March 15. The public also has a three-week period to submit comments on the SEC website.

On Monday, Coin Center, an independent nonprofit research and advocacy center focused on cryptocurrency-related public policy issues, published its third comment letter regarding a proposed rule from the Financial Crimes Enforcement Network (FinCEN) that would impose new requirements on certain cryptocurrency transactions involving cryptocurrencies. The letter focused on the proposed rule’s customer counterparty identification requirements and the creation of currency transaction report obligations for cryptocurrency transactions over $2,000. Coin Center criticized the rule as hampering innovation and infringing privacy rights. As reported previously, FinCEN published a notice in January extending the comment period for the proposed rule to March 29, 2021.

Ant Group, the financial technology affiliate of e-commerce giant Alibaba, retained its position as the largest holder of blockchain patents in 2020, according to a report recently published by International Asset Management, which cited data from Clarivate’s Derwent World Patents Index. Ant Group now has 2,298 blockchain patents, having added 586 in 2020. A major U.S. technology firm came in fourth, with 647 blockchain patent filings.

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Multiple Federal and State Agencies Take Actions Against Crypto Industry Firms

By: Keith R. Murphy

The Securities and Exchange Commission recently obtained a temporary restraining order and asset freeze against an individual alleged to have falsely represented himself as an investment advisor who misappropriated funds from over 450 investors through a Ponzi-like scheme, according to a recent SEC litigation release. The defendant purportedly told investors that their money would be pooled into a fund investing in digital assets, but instead utilized the assets for personal expenses. The SEC is also seeking disgorgement from several entities and an individual related to the defendant.

A recent publication by the Federal Bureau of Investigation highlights the alleged sustained hacking activity of North Korean government-linked cyber criminals and related theft of cryptocurrencies, noting that federal charges against three North Korean hackers were unsealed in February. The story notes that the likely targets of the malicious cryptocurrency applications were employees of virtual currency exchanges.

According to a recent report, the Commodity Futures Trading Commission (CFTC) is investigating a large cryptocurrency exchange that is not registered with the CFTC, to determine whether it allowed U.S. residents to buy and sell derivatives that are policed by the regulator. The report notes that the CFTC views virtual currencies such as Bitcoin and Ether as commodities, and asserts jurisdiction over their futures and other derivatives. The report further notes that the company has not been accused of misconduct.

The Texas State Securities Board has issued emergency cease and desist orders against three unregistered cryptocurrency and alternative asset platforms, according to a news release this week. One of the companies targeted is alleged to advertise cryptocurrency investments in plans with exorbitant guaranteed returns, while the other two companies are promoting plans with similar guaranteed returns tied to investments including precious metals, oil and gas, and forex. All the offerings are deemed to be fraudulent, according to the news release.

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