Hard for ICOs to Avoid US Courts: Personal Jurisdiction Found in Two Recent Securities Cases Over Foreign ICO Defendants

Over the past year, the plaintiffs’ bar and Securities and the Exchange Commission (SEC) have brought class and enforcement action proceedings, respectively, against those involved with the issuance and marketing of initial coin offerings (ICOs), including those located outside the United States. The proceedings involving foreign defendants present the interesting and threshold issue in these litigations of whether personal jurisdiction in U.S. courts exists over these defendants. Until recently it was unclear how courts would apply traditional jurisdictional analysis to these token-offering participants.

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Blockchain Developments: NY AG Issues Report, Major Japanese Exchange Hacked, Global Attitudes Diverge and Use Cases for Social Good Emerge

In this issue:

New York Attorney General Issues Virtual Markets Integrity Initiative Report

Major Hack of Japanese Exchange, Multiple U.S. Enforcement Actions

Blockchain Capital Markets Solutions Advance, Global Regulations Diverge

Blockchain Use Cases for the Environment, Digital Identity and State Initiatives

New York Attorney General Issues Virtual Markets Integrity Initiative Report

By: Diana J. Stern

On Sept. 18, 2018, the New York Attorney General’s Office released its Virtual Markets Integrity Initiative Report. The report addressed 10 major virtual currency trading platforms. Key takeaways include the following:

  • Many of the trading platforms that participated in the report lack safeguards to effectively prevent conflicts between customer and insider interests. Items of particular concern include employee trading practices and the manner in which platform operators trade on their own venues.
  • Only a minority of platforms have formal market manipulation policies and restrict, let alone monitor, automated algorithmic trading. There is no mechanism for analyzing suspicious trading strategies across platforms.
  • Consumer funds are at risk because of data security vulnerabilities and an absence of industry standards for insurance and auditing virtual assets.
  • The report concludes with a list of questions customers should ask before participating on virtual currency trading platforms.

Three platforms declined to participate in the report, claiming that they did not operate in New York. However, the Attorney General found otherwise and referred those entities to the New York State Department of Financial Services.

For more information on the report, please see the following:

Major Hack of Japanese Exchange, Multiple U.S. Enforcement Actions

By: Diana J. Stern and Robert A. Musiala Jr.

On Sept. 20, 2018, various news outlets reported that Zaif, a licensed Japanese cryptocurrency exchange, had been hacked, with cyber-thieves stealing approximately $60 million of bitcoin, bitcoin cash and MonaCoin. This news came amid reports that in the first six months of 2018, hackers stole a total of approximately $540 million worth of cryptocurrency from Japanese exchanges and individual wallets. Additionally, according to a recently issued report by the Cyber Threat Alliance, thus far in 2018 there has been an “enormous increase” in illicit cryptocurrency mining activity, with “a 459 percent increase in illicit cryptocurrency mining malware detections since 2017.” And earlier this week, it was reported that a hacker stole approximately $24,250 by manipulating smart contracts run by a betting company that operated on the EOS blockchain.

In enforcement actions, the U.S. District Court for the Eastern District of California ruled in favor of the government to seize the late operator of AlphaBay’s assets, which included a Lamborghini, bitcoin and several beachfront vacation resorts. Also, the founder of cryptocurrency mining companies GAW Miners and ZenMiner was sentenced to 21 months in prison after pleading guilty to charges of wire fraud brought by the U.S. Attorney for the District of Connecticut. And the Texas Securities Commission entered emergency cease and desist orders against three cryptocurrency schemes. One of the targets was a cryptocurrency investment promotor based in Russia that was targeting Texas residents by masquerading as an established U.S. platform. Another offered investors both shares of the company and units of its token in order to fund what the company claimed to be an unhackable cryptocurrency wallet for anonymous, untraceable transactions. Per the order, such investments are securities regulated by Texas law. The company is based in Belize.

In other recent news, the FinCEN Improvement Act (H.R. 6411) recently passed in the House. The bill proposes new language to FinCEN’s authorizing statute that requires the regulator to work with international financial intelligence bodies and tribal law enforcement groups on cryptocurrency matters. While some see the bill as superfluous, reasoning that there was no question as to FinCEN’s authority, it nevertheless underscores FinCEN’s role in regulating virtual currencies and the importance of enforcement coordination worldwide.

To read more about the topics covered in this week’s post, please see the following:

Blockchain Capital Markets Solutions Advance, Global Regulations Diverge

By: Simone O. Otenaike

Global banks and traders recently announced plans to launch the first blockchain-based platform to finance commodity trading. According to reports, a Switzerland-based venture will run the platform and develop it in partnership with a leading blockchain technology company. The platform is set to go live later this year for the energy industry and then expand into agriculture and metals by early next year. Also this week, one of Wall Street’s largest banks announced that it is moving forward with plans to offer a trading desk that will support various derivatives tied to digital assets, while another major Wall Street bank said it is exploring bitcoin derivatives products.

On Sept. 19, 2018, a top 10 national bank joined a blockchain network that offers real-time cross-border payments. The network includes some of the world’s leading financial institutions and now has more than 100 clients across the globe, and is currently operating in 40 countries. And the South Dakota Division of Banking has approved the world’s largest processor of on-chain bitcoin transactions, as a public South Dakota Trust Company − thus allowing the company to offer digital asset custodial services to institutional investors in the United States. The California-based company processes 15 percent of all global bitcoin transactions and processes $15 billion per month across all digital assets. As a qualified custodian, the company can deliver the highest levels of security and regulatory compliance for institutional investors.

On the regulatory front, the chief accountant for the U.S. Securities and Exchange Commission made a statement earlier this week that the emergence of blockchain technology does not erase the fundamental responsibility of firms to maintain appropriate books and records. Overseas, the U.K.’s Treasury Committee published a substantive report promoting thoughtful regulation of the blockchain industry to improve consumer outcomes, promote sustainable growth and position the U.K. to become the global center for digital asset activity. On the other hand, a recent EU report found no rush to regulate the market, citing concerns related to stifling innovation, with one policymaker commenting that the EU may decide to test different national solutions before implementing a more harmonized approach for the collective EU nations. Coincidentally, earlier this week, France announced that it will now issue licenses to companies that want to raise funds through ICOs in an attempt to attract more digital asset investors into the country.

To read more about the topics covered in this week’s post, see the following:

Blockchain Use Cases for the Environment, Digital Identity and State Initiatives

By: John C. McIlwee

In collaboration with a “Big Four” accounting firm and Stanford Woods Institute for the Environment, the World Economic Forum (WEF) recently issued a press release reporting on 65 blockchain use cases for solving the world’s “most pressing” environmental challenges. The nonprofit organization, built on shaping policy for the public good, stated its belief that blockchain will advance environmental protection efforts by offering new financing models for environmental outcomes, realizing nonfinancial assets (such as natural capital), and enabling clean, decentralized and efficient systems. The WEF identified eight categories of blockchain use cases that it deems “game changers” for environmental protection, among them a “see-through” supply chain that promotes transparency and traceability.

Several new pilots also took flight this week focusing on digital identity. Blokusign has developed an app for Gmail that allows users to easily maintain, manage and authenticate documents digitally signed by them without any reliance on third parties. Gemalto, a digital security leader, has partnered with R3, using its Corda platform, to create a blockchain-powered mobile app to protect digital identifiers. Users download the app, control personal data shared therein and then manage information shared with service providers via a consent function.

Poland’s largest bank has also adopted a blockchain-backed system for managing bank records for nearly 5 million of its account holders. In this new initiative, bank documents will utilize a 64-character hash code to permit users to easily verify the documents’ authenticity and to create a decentralized log of activity − even after accounts are closed. And in Austin, Texas, the city and local medical service providers have teamed up to create a blockchain-powered ID system to track services provided to those without conventional forms of identification, such as homeless persons. The pilot links digital copies of records to cellphone numbers and email addresses, which permits a traceable record for those served in the community that could not be established through the paper ID that many lack.

In other developments, South Korea recently announced a blockchain initiative for its customs authority, built on Nexledger. A memorandum of understanding that details the new customs platform includes the signatures of 48 domestic entities and public agencies that look to blockchain technology to curtail forgery and increase export efficiency. Meanwhile, across the Pacific, Oregon Blockchain Venture Studio has launched a campaign to make Oregon the center of the blockchain universe. The incubator-like program, with the backing of at least two U.S.-based multinational corporations and support from the state of Oregon, hopes to accomplish this goal by offering investment capital to promising blockchain startups if they agree to set up shop in the Beaver State.

To read more about this week’s articles on enterprise blockchain use cases, see the following:

Stablecoins Launch in US Amid Multiple Securities Enforcement Actions and Bid to Repurpose DoD Data Center for Cryptocurrency Mining

In this issue:

Stablecoins Launch in US as New Data Cites Drop in ICO Funding

SEC and FINRA Issue First-of-Their-Kind Enforcement Actions

Blockchain Enterprise Developments: Mining, Digital Identities and Food Supply Chain

Cryptocurrencies Continue to Enter Traditional Areas of Financial Crimes 

Stablecoins Launch in US as New Data Cites Drop in ICO Funding

By: Robert A. Musiala Jr. and Brian P. Bartish

On Monday, Sept. 10, 2018, the New York Department of Financial Services (DFS) announced that it has authorized both Paxos Trust Company LLC and Gemini Trust Company LLC to offer price-stable cryptocurrencies pegged to the U.S. dollar, commonly known as “stablecoins.” According to a DFS press release, the approvals of these new financial products came after rigorous review and will be subject to ongoing examinations to ensure compliance with BSA/AML and OFAC regulations; adherence to cybersecurity standards; prevention of market manipulation; maintenance of proper information reporting and consumer protection; and assurances that the stablecoins are fully exchangeable for the U.S. dollar. Paxos Standard is built on the Ethereum blockchain and is backed by U.S. dollar deposits held in segregated accounts at multiple FDIC-insured U.S. banks, with the account balances verified by independent audit firms. All Paxos Standard tokens in circulation will be backed by U.S. dollars, and upon redemption for dollars, the Paxos Standard tokens will be immediately destroyed. The Gemini Dollar also runs on the Ethereum blockchain, with each Ethereum-based token backed by a U.S. dollar. The dollars backing the Gemini Coin will be held at a major U.S. bank in an FDIC-insured account, with monthly audits to be performed on the account by a public accounting firm.

Also on Sept. 10, various news outlets reported that a major U.S. bank is planning to begin acting as an agent issuing so-called digital asset receipts (DARs) that would effectively allow parties to trade in bitcoin without having to take actual ownership of bitcoin. According to reports, the DARs would function similar to American depository receipts (ADRs), which enable parties to trade baskets of foreign stocks that do not trade on U.S. exchanges. In the same way that an ADR is held by a bank that issues a depository receipt, with a DAR the bitcoin will be held by a custodian, with a receipt issued by the bank. In a separate report this week, another major U.S. investment bank announced that it is working on a bitcoin derivative product that would be settled in U.S. dollars. And on Sept. 12, startup Seed CX announced a $15 million Series B funding round that it will use to expand its offerings of institutional trading and settlement for cryptocurrency spot markets and CFTC-regulated cryptocurrency futures. These developments come amid the announcement of the Blockchain Association, the first ever D.C. lobbying group dedicated to the blockchain industry.

As institutional products evolve, according to new data published by Autonomous Research, nearly half of all ICOs since 2017 have failed to raise any funds. According to the new research, the month of August 2018 saw the lowest rates of return on startup ICOs since May 2017, with such efforts raising only $326 million compared with the $3 billion-per-month average observed during the first three months of the year. The report also found that roughly 40 percent of the ICOs examined raised more than $1 million each, and found that the number of hedge funds specifically focused on cryptocurrency has increased significantly. The move away from ICOs to so-called securitized token offerings appears to be further illustrated by recent news that the Malta Stock Exchange’s fintech and digital asset subsidiary, MSX PLC, recently signed a Memorandum of Understanding with cryptocurrency exchange Binance to jointly launch a new security token digital exchange that seeks to take advantage of the island-nation’s pro-crypto regulatory stance.

According to joint research from the World Economic Forum and Bain & Company, small and medium-sized enterprises (SMEs), particularly in the developing world, could stand to become some of the biggest beneficiaries of blockchain financing, as global businesses could reduce the supply-demand gap in trade financing and generate roughly $1.1 trillion in new trade volume through effective blockchain deployments. In China, the “Guangdong, Hong Kong and Macao Dawan District Trade Finance Blockchain Platform” has begun pilot operations with the backing of the People’s Bank of China that aim to facilitate cross-border trading across provinces and reduce trade financing costs from 7-8 percent to less than 6 percent for SMEs.

To read more about the above developments, please see the following:

SEC and FINRA Issue First-of-Their-Kind Enforcement Actions

By: Jaime B. Petenko

This week, the U.S. Securities and Exchange Commission (SEC) issued two first-of-their-kind enforcement actions in the blockchain industry. In one action, TokenLot LLC and its owners agreed to pay more than $500,000 in penalties to settle charges that they acted as unregistered broker-dealers in the sale and trading of securities. TokenLot LLC, a self-described “ICO Superstore” where investors could purchase digital tokens and engage in secondary trading, handled more than 200 different digital tokens for more than 6,000 retail investors from July 2017 until February 2018. In the second action, Crypto Asset Management LP, a hedge fund, agreed to pay a $200,000 penalty to settle charges that it operated as an unregistered investment company. The fund raised more than $3.6 million over a four-month period in 2017, while falsely marketing that it had filed a registration statement with the SEC and that it was the “first regulated crypto asset fund in the United States.” In both actions the offending parties, once contacted by the SEC, ceased their activities and began refunding money to investors (in the case of TokenLot LLC) or offering buybacks to investors (in the case of Crypto Asset Management LP).

In another reported first this week, the federal judge in U.S. v. Zaslavskiy issued a ruling allowing the government to proceed with a criminal case in the U.S. District Court in Brooklyn, alleging that an initial coin offering is a security for purposes of federal criminal law. In the case, the defendant is charged with conspiracy and two counts of securities fraud for allegedly defrauding investors in two initial coin offerings for digital currencies backed by investments in real estate and diamonds that did not exist.

After trading began in the United States approximately one month ago, the SEC suspended trading through Sept. 20, 2018, of Swedish bitcoin exchange-traded notes and ether exchange-traded notes due to a “lack of current, consistent and accurate information” leading to confusion among market participants. The SEC noted that differing descriptions of the financial instruments in the broker-application materials, in public sources and in the offering materials led to confusion over the nature of the financial instruments. Because of the confusion, the SEC believes that the public interest and the protection of investors required the trading to be suspended.

Also this week, FINRA reported that it filed its first disciplinary complaint involving cryptocurrencies. FINRA charged Timothy Tilton Ayre with securities fraud and the unlawful distribution of an unregistered cryptocurrency security called HempCoin. From January 2013 through October 2016, FINRA alleges, Ayre attempted to lure public investment in his worthless public company, Rocky Mountain Ayre, Inc. (RMTN), by making material misstatements in RMTN’s public filings about its finance and business and by creating, offering and selling unregistered securities, HempCoin. RMTN publicized HempCoin as “the first minable coin backed by marketable securities.” Investors mined more than 81 million HempCoin through late 2017, and bought and sold the currency on two cryptocurrency exchanges.

To read more about these enforcement actions, please see the following:

Blockchain Enterprise Developments: Mining, Digital Identities and Food Supply Chain

By: Njeri S. Chasseau

A Nevada-based Chinese investment company has its sights set on redesigning a 55,000-square-foot U.S. Department of Defense data center into a new cryptocurrency mining center that will, once completed, contain approximately 1,300 mining machines for a variety of cryptocurrencies including Bitcoin and Zcash. The data center is ideal given the security and power requirements of crypto-mining enterprises, and can be upgraded to increase the number of mining machines required for the company’s operations.

Across the Pacific, Australia’s New South Wales government recently announced a partnership with an Australian IT firm to conduct a pilot project that will store and authenticate driver’s license data for approximately 140,000 license holders in the state. A formal launch of the program is set for 2019, and the New South Wales government hopes to eliminate the need for its residents to carry physical licenses; the program is in line with Australia’s Digital Economy Initiative promoting the widespread adoption and use of blockchain in the country. Similarly, an Icelandic automatic identity verification company last week announced the launch of a new blockchain-based identity management solution aimed at combatting the problems presented by internet “trolls” – internet users commonly associated with bullying and harassing behavior online. The new technology seeks to ensure that once trolls are banned from a particular platform, they will not be able to re-register a new account or re-enter the platform.

This week also saw new developments in blockchain solutions for the food supply chain, with a new food supply chain startup, Ripe Technology, raising nearly $2.4 million in seed funding. The startup aims to bring innovation to the food supply chain by using blockchain to increase traceability and transparency between farmers, distributors, grocers and other major stakeholders in the food industry.

For more about blockchain and current enterprise-related uses, please see the following:

Cryptocurrencies Continue to Enter Traditional Areas of Financial Crimes

By: Robert A. Musiala Jr. and Melonia A. Bennett

New developments show criminals continue to abuse cryptocurrencies in the traditional areas of theft, fraud and extortion. On Sept. 5, a press release announced the guilty plea of Louis Meza for orchestrating the kidnapping and theft of more than $1.8 million in Ether. The press release quoted Manhattan District Attorney Cyrus R. Vance as saying “Louis Meza orchestrated a 21st-century stick-up … Then 21st-century investigators brought him swiftly to justice ….” In an ongoing lawsuit in Vancouver, a judge has ordered the return of a former executive’s company laptop, in an attempt to discover up to $7 million in cryptocurrency allegedly stolen by the executive from his former company. In India, a former politician was recently arrested for suspected involvement in a scheme to frame another man for the purpose of extorting $1.3 million in bitcoins. And in Japan, the trustee of the defunct bitcoin exchange Mt. Gox recently announced that corporate creditors can now enter claims as part of the civil rehabilitation to claw back their bitcoin through a newly approved process.

To read more about the above developments, please see the following:

Blockchain Developments: Payments, Capital Markets, Enterprise and Patents

In this issue:

Payments and Capital Markets Blockchain Developments Continue to Progress

• Industry and Government Continue to Champion Blockchain Pilots

Newly Released List Ranks Companies with the Most Blockchain Patent Filings

Payments and Capital Markets Blockchain Developments Continue to Progress

By: Jonathan D. Blattmachr

This week saw several blockchain-related developments in the payments and capital market spaces. In payments, a major global technology company’s newly announced remittance system claims to enable faster and less costly cross-border payments. According to the company’s website, a counterparty using the system converts its fiat currency into a digital asset that contains settlement instructions; simultaneously, the system converts the digital asset into the second counterparty’s chosen fiat currency, and all relevant transaction details are recorded onto a blockchain to complete clearing.

Startup TransferGo has announced a similar system using Ripple that allows for real-time fund transfers from Europe to India, a corridor through which billions of dollars in currency currently flow. Transfers now, including through Swift, take up to three days to complete. For those willing to wait so long, TransferGo says it will allow free transfers through a separate system. In a related announcement, startup Abra says it will now allow EU residents to transfer Euros or other fiat currencies directly to the company, which will then deposit bitcoin to users’ digital wallets. This will enable Abra users to sidestep traditional methods to fund their digital wallets. And startup CoinGate is claiming it will make bitcoin transactions faster and cheaper for some 4,000 merchants by utilizing the emerging Bitcoin Lightning Network. These developments in the payments space dovetail with recent estimates that the crypto ATM market will grow to $144.5 million by 2023, up from $16.3 million this year, reflecting a compound annual growth rate of 54.7 percent. It is expected that much of this growth will stem from two-way machines that allow users to exchange fiat currency for crypto, and vice versa, with U.S. companies leading the charge.

In capital markets, a major U.S.-based web services provider announced it will add to its platform cryptocurrency trading in bitcoin, ether, litecoin and dogecoin. Additionally, the Chicago Board Options Exchange (CBOE) announced it will begin trading ether futures by year end, with the futures’ value based on the underlying price indicated on Winkelvoss’s crypto exchange, Gemini. According to reports, bitcoin futures’ traded volume was up 93 percent between the first and second quarters this year.

To read more about the topics covered in this week’s post, see the following:

Industry and Government Continue to Champion Blockchain Pilots

By: Brian P. Bartish

California is poised to become the latest state to implement a law clarifying the legal status of blockchain smart contracts with the passage of Assembly Bill 2658, which, if signed by Governor Jerry Brown, would provide a statutory definition for blockchain technology, expand the definitions of electronic record and electronic signature to include records and signatures secured through blockchain, add “smart contract” to the legal definition of a contract, and stipulate that information secured through blockchain is rightfully owned by the creator for purposes of interstate or foreign commerce. In Japan, the city of Tsukuba is adopting a new blockchain-based online voting system designed to prevent tampering with votes, maintain voter confidentiality and achieve better voting efficiency. And South Korea recently announced an additional six blockchain pilot projects − including use cases for livestock supply chain management and customs clearance − that will double the total number already sponsored by the government and will correspond with an additional $9 million budget increase for the year 2019.

Major industry players are also increasing investments in blockchain technology, including a major U.S. technology company and web search engine, which announced that it has added Ethereum to its BigQuery service, giving users new analytical and visualization capabilities on large-scale blockchain data sets. Another major global technology firm recently announced a new addition to its stable of self-sovereign identity products through a collaboration with Hu-manity.co to produce an enterprise version of the latter’s #My31 app – designed to engender individuals with stronger data ownership rights – with the goal of resolving the economic and informational disparities that exist between data subjects and buyers. Two more major global technology firms recently announced a joint venture for a blockchain-based supply chain proof of concept solution based on track-and-trace technology. And a “Big Four” accounting and consulting firm recently published a white paper detailing a proposed risk and controls framework to ensure blockchain deployments meet an organization’s operational, enterprise risk management and internal audit requirements.

For additional information about the topics covered in this week’s post, please see the following:

Newly Released List Ranks Companies with the Most Blockchain Patent Filings

By: Robert A. Musiala Jr.

On Aug. 31, IPR Daily published a list ranking the companies from across the globe that have filed the most blockchain-related patents. At the top of the list is one of China’s largest technology firms, with 90 filings. Several U.S. companies from various industries are on the list, including blockchain startups, banks and credit card companies, traditional technology and consulting firms, and consumer products firms. Just this week, two more blockchain patent applications were published from well-known U.S. companies. One application is by a major retail firm, and seeks to patent a blockchain system for managing product deliveries by autonomous drones, robots and similar devices. The other application is by Winklevoss IP, LLC, and seeks to patent a system for securely storing blockchain-based assets.

To read more about the topics covered in this week’s post, see the following:

Blockchain Capital Markets Offerings and Executive Attitudes Evolve, Threats Continue

In this issue:

New Blockchain Trading Platforms and Capital Markets Offerings Announced

Blockchain Executive Surveys Released, More Pilots and Investments Announced

Update: Cryptocurrency Cybercrimes and ICO Enforcement Actions

John McAfee’s ‘Unhackable’ Cryptocurrency Wallet Hacked

New Blockchain Trading Platforms and Capital Markets Offerings Announced

By: Jaime B. Petenko

Recently, it was reported that a popular Colorado resort planned to sell “Aspen Coins” in a Reg D 506(c) offering on a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system (ATS). On Aug. 24, 2018, this offering launched through an international crowdfunding firm, with the hotel offering to sell $18 million in Aspen Coins. Aspen Coins represent, indirectly, one share of common stock in the resort.

Now other similar announcements have been made. Last week, U.S.-based registered broker-dealer Rialto Trading announced a partnership with Bittrex, a U.S.-based digital asset trading platform, to develop a new security token trading platform. Rialto Trading also intends to expand its services to include issuance advisory services, placement, trading and custody for security tokens. On Aug. 28, 2018, OpenFinance launched a regulated ATS for security tokens, reportedly enabling accredited investors to trade tokens issued under Reg D, S, A+ and CF exemptions. Retail investors reportedly also are permitted to trade certain digital securities, subject to a 12-month holding period. In other platform news, a public trust company regulated by the South Dakota Division of Banking has announced that it secured insurance for blockchain-based assets held on its qualified custody platform through the world’s leading insurance market.

In a press release this week, the World Bank announced the results of its offering of a blockchain-operated new debt instrument or bond-i. The bond-i is reportedly the world’s first bond to be created, allocated, transferred and managed over blockchain. The World Bank raised A$110 million in the offering and will pay 2.20% interest on the bonds.

Last week, the Monetary Authority of Singapore and Singapore Exchange announced a collaboration to develop Delivery versus Payment (DvP) capabilities for the settlement of tokenized digital currencies and securities across various blockchain platforms. DvP is a settlement procedure whereby cash payment and delivery of securities occur simultaneously. In another recent report, a British multinational bank and the financial arm of a German multinational manufacturing company partnered to conduct an “industry-first client pilot” for blockchain-based guarantees in trade finance, with an aim to fully digitize bank guarantee issuance from end to end using smart contracts.

For more about blockchain developments in capital markets, please read the following:

Blockchain Executive Surveys Released, More Pilots and Investments Announced

By Robert A. Musiala Jr.

This week, two “Big Four” accounting and consulting firms each published the results of blockchain market surveys collectively taken by thousands of executives from around the globe. Highlights from these two surveys include the following:

  • 84% are actively involved with blockchain;
  • 45% believe trust in blockchain technology could delay adoption;
  • 30% see China as a rising blockchain leader;
  • 28% say interoperability of systems is a key for success;
  • 84% believe blockchain is scalable and will achieve mainstream adoption;
  • 74% see a compelling business case for blockchain;
  • 69% anticipate replacing current recordkeeping systems with blockchain;
  • 68% perceive a competitive disadvantage if they do not adopt blockchain.

Meanwhile, more blockchain-based investments and pilots have been announced. The U.K. government recently launched a program to support blockchain startups seeking to launch in the country and is investigating leveraging blockchain to secure digital evidence used in court proceedings. In Japan, the government recently announced that it is developing a blockchain-based solution to streamline logistics data sharing between trade entities like shipping companies, ports, banks and insurance companies.

In the U.S., a major news cooperative announced that it is partnering with blockchain startup Civil to build a blockchain-based digital content licensing and distribution platform that aims to track news to ensure the content is being licensed correctly. And a major global beer producer and distributor recently announced a partnership with startup Klip to leverage the Ethereum blockchain in a solution that intends to increase transparency in ad buying.

To read more about the topics covered in this week’s post, see the following:

Update: Cryptocurrency Cybercrimes and ICO Enforcement Actions

By: Simone O. Otenaike

The North American Securities Administrators Association (NASAA) continues its ongoing initiative to protect investors from financial harm involving fraudulent initial coin offerings (ICOs) and cryptocurrency-related investment products. NASAA recently announced that more than 200 ICOs and cryptocurrency-related investment products are currently under active investigation. Also this week, the Colorado Securities Commissioner issued orders to investigate three cryptocurrency companies promoting unregistered ICOs in Colorado. The “ICO Task Force,” convened by the Commissioner in May, is responsible for the investigations into the three companies.

In international developments, finance ministers from the European Union plan to discuss regulation of cryptocurrency markets and digital assets during a Sept. 7 meeting in Vienna. The meeting will address the lack of transparency in the cryptocurrency markets and the potential to misuse digital assets for money laundering, tax evasion and terrorist financing. In China, five regulatory agencies – the People’s Bank of China, the Banking Regulatory Commission, the Ministry of Public Security, the Central Cyberspace Affairs Commission and the State Administration for Market Regulation – jointly issued a warning against trading activities involving cryptocurrencies. While these regulators are mostly focused on overseas projects that solicit investments from Chinese residents through mobile and internet platforms, the regulators also warn against new domestic fundraising methods like initial exchange offerings, initial fork offerings and initial miner offerings.

In the area of cybercrimes, a recent report from an IT security firm indicates that the first half of 2018 saw an increase in malicious crypto-mining attacks. The report notes that malicious crypto-mining attacks over the first six months of 2018 are up 956 percent from the attacks across a similar period in 2017.

To read more about the topics covered in this week’s post, see the following:

John McAfee’s ‘Unhackable’ Cryptocurrency Wallet Hacked

By: Brian P. Bartish

Cryptocurrency wallet manufacturer BitFi has become the latest challenger to fail in its bid to disprove the well-established cybersecurity axiom that nothing is unhackable. A team of researchers recently published evidence that they successfully sent signed transactions with the wallet by modifying the device, connecting to the wallet’s server and transmitting sensitive data with it, conditions that would entitle the team to a $10,000 bug bounty issued by BitFi. BitFi has yet to acknowledge whether it will pay the bounty.

While this may be the first effort to successfully meet the terms of one of BitFi’s bounties, it follows a number of successful efforts to compromise the device, including one instance where a 15-year-old hacker modified the firmware to play the video game Doom, after BitFi executive chairman and one-time anti-virus pioneer John McAfee personally backed a bounty challenge of $100,000 on July 24. McAfee and BitFi balked at these earlier hacks and refused to pay the bounty, claiming that they did not match the terms of the bounty to the letter, and even sent threatening tweets aimed at the hackers – responses that earned BitFi an award for worst vendor response at DEF CON earlier this month.

Despite BitFi’s dubious claims of “fortress-like security” – McAfee later conceded that calling the wallet unhackable may have been “unwise” – the bounty program seems to have been a success at least from a marketing perspective. BitFi touts its ability to support an unlimited number of cryptocurrencies and allow users to generate a secret phrase to control the device, as opposed to a 24-word mnemonic seed. Further, BitFi touts itself as completely open source, so the user stays in control of the funds even if the manufacturer of the wallet ceases to exist.

For further reading, please see the following:

U.S. Customs Pilots Blockchain, SEC Rejects Bitcoin ETFs, Government Investments and Enforcement Actions Continue

In this issue:

U.S. Customs Pilots Blockchain for Supply Chain as Private Sector Pilots Continue

The SEC Rejects Bitcoin ETFs; New Exchanges and Services Announced Abroad

Governments Worldwide Continue to Invest in Blockchain Projects

Enforcement Actions Continue in U.S. and Abroad as Industry Begins to Self-Regulate

U.S. Customs Pilots Blockchain for Supply Chain as Private Sector Pilots Continue

By: John C. McIlwee

On Tuesday, the U.S. Customs and Border Protection (CBP) agency announced that it would begin testing a blockchain solution to verify certificates of origin for goods coming into the country under the Central America-Dominican Republic and United States Free Trade Agreement and the North American Free Trade Agreement. The agency not only seeks to become an advocate for market adoption, but it also hopes to utilize blockchain technology to collect better data on the source of goods and import/export compliance. While acknowledging the challenge of standing up a blockchain with 47 partner countries, a CBP spokesperson indicated the agency is pressing forward with integrating blockchain into trade compliance. According to American Shipper, the official said, “Really what the government’s trying to do is twofold: One is to help blockchain along in a healthy manner for increasing market adoption, and the other thing is we’re trying to prepare ourselves in a proactive way to be ready for when private industry begins to really take off with this technology.”

Last Thursday, a major U.S.-based shipping company filed a patent application for its new blockchain-enabled package-tracking concept. Meanwhile, a major global enterprise software provider recently announced a supply chain pilot with 16 farm-to-consumer produce suppliers using its cloud-based blockchain as a service (BaaS) platform. According to a Computerworld article, the pilot will seek to implement IoT sensors developed by one of its customers to gather relevant data regarding the parcels themselves, including temperature, humidity, vibration and light exposure.

The second-largest e-commerce company in China, JD.com, is also throwing its hat in the BaaS ring, with the launch of JD Blockchain Open Platform. As its first customer, China Pacific Insurance intends to use JD’s blockchain infrastructure to trace state-mandated corporate invoices, known as “fapiao.” In paper form, tracking fapiao took time when done correctly, and even more time when errors were made − which was often. China Pacific Insurance hopes that JD’s platform will eliminate the paper chase, save money and open a new line of revenue with existing customers.

To read more about this week’s articles on blockchain enterprise solutions, see the following:

The SEC Rejects Bitcoin ETFs; New Exchanges and Services Announced Abroad

By: Jaime B. Petenko

On Aug. 22, 2018, the U.S. Securities and Exchange Commission (SEC) issued three orders rejecting nine bitcoin exchange-traded fund (ETF) proposals and disapproving related rule changes. Each of the proposed ETFs was tied to the bitcoin futures market as provided by the CBOE and CME exchanges, not the spot market, which was proposed for the recently rejected Winklevoss ETF. Despite this difference, the SEC rejected the proposals, noting that the bitcoin futures market was not mature enough and that the proposals failed to protect against fraud and manipulation. Although the rule change was disapproved, the SEC emphasized in all three proposals that “the disapproval does not rest on an evaluation of whether bitcoin, or blockchain more generally, has utility or value as an innovation or investment.” According to The New York Times, the day after the rejection orders were published, the SEC announced that it would review the decisions. In a post on Twitter, SEC Commissioner Hester Pierce made the following comment about the forthcoming review: “In English: the Commission (Chairman and Commissioners) delegates some tasks to its staff. When the staff acts in such cases, it acts on behalf of the Commission. The Commission may review the staff’s action, as will now happen here.”

This week, a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system entered into an agreement with CUSIP Global Services to become the first registered broker-dealer to offer nine-digit alphanumeric codes, or CUSIPs, to so-called securitized tokenized offerings (STOs). STOs traded on the platform reportedly will be offered the same CUSIPs that are issued to stocks and bonds, allowing the tokenized securities to be integrated into the existing transactional system.

In foreign markets, several new exchanges and services were announced this week. Singaporean cryptocurrency exchange, Huobi, launched the Huobi Automated Listing platform, a service designed to streamline and increase transparency by requiring cryptocurrency projects to submit documentation and be verified before being listed on the exchange.

Binance LCX, a joint venture between Binance and the Liechtenstein Cryptoassets Exchange, announced the launch of a fiat-to-crypto exchange in Liechtenstein that will offer trading between Swiss francs and euros against major digital currency pairs. And ZB.com, one of the largest cryptocurrency exchanges in the world by traded value, announced that it will set up operations in Malta with the launch of a new exchange.

To read more about blockchain developments in capital markets, see the following:

Governments Worldwide Continue to Invest in Blockchain Projects

By: Joanna F. Wasick

The Bank of Thailand (BoT) announced on Tuesday it was creating a central bank digital currency (CBDC) on Corda, a distributed ledger technology platform developed by the R3 consortium. The project, “Project Inthanon,” is a collaborative effort by BoT and eight major private banking institutions, and seeks to create a prototype that enables domestic funds transfers within the country’s interbanking system using CBDC tokens. The first phase of the project is set for completion by the beginning of 2019, after which the BoT will seek to expand the project to include third-party funds transfers and cross-border funds transfers.

Canada is proceeding on the trajectory it set in June 2017, when the Canadian government-funded research program Industrial Research Assistance Program (IRAP) hosted a blockchain kickoff session and revealed plans to implement the technology in administering funding for innovative projects to Canada’s small and medium-sized businesses. Earlier this year, IRAP, through its National Research Council of Canada (NRC), launched Canada’s first trial of a public blockchain technology to facilitate the transparent administration of government contracts. On Monday, NRC announced that it has built an Ethereum blockchain explorer hosted on the InterPlanetary File System (IPFS) through services provided by Bitaccess, a blockchain startup. The explorer allows users to search the Ethereum blockchain for published grants and contribution data.

In the United States, researchers at the University of California-San Diego won more than $800,000 from the National Science Foundation (NSF) to develop the Open Science Chain, a distributed ledger that will serve as a living digital catalog to help researchers access and verify data from various scientific experiments. The web-based platform allows for an auditable means for researchers to provide metadata and verification information about their data sets, and update such data sets as they change and evolve.

At the local level, a prominent Ohio businessman is striving to make Cleveland the Silicon Valley of the blockchain era. Bernie Moreno, owner of numerous luxury car dealerships, is garnering support for “Blockland Cleveland,” a $150 million blockchain technology initiative that has attracted the interest of other Ohio business and civic leaders. The plan intends to feature a physical campus that, over the next four years, would grow into a 300,000-square-foot Cleveland-based incubator with 2,000 startup desks for developers, 15 spaces for young businesses, an auditorium suitable for 300 people, fiber connections to support the building and a K-8 school.

For more information, read the following:

Enforcement Actions Continue in U.S. and Abroad as Industry Begins to Self-Regulate

By: Simone O. Otenaike

A Seattle-based e-sport betting startup is facing a class action lawsuit for alleged violations of U.S. securities laws. The company’s ICO occurred in late 2017 and raised an amount worth $31 million at the time. Since then, the price of the company’s blockchain-based tokens has declined from about $2 to $0.05. The lead plaintiff alleges that the company intentionally mischaracterized the securities as tokens to avoid the reach of U.S. securities laws. In related news, last week a federal court entered a default judgement against a blockchain startup after finding that the plaintiffs were defrauded out of approximately $1 million in cryptocurrencies. The judge plans to hold a hearing this week to confirm the calculation of damages.

On Thursday, a Chinese regulator announced plans to step up efforts to block internet access to cryptocurrency trading platforms. The agency has identified and seeks to shut down more than 100 trading platforms with overseas IP addresses that are still available domestically. Chinese police are also increasing efforts to prosecute individuals for cryptocurrency cybercrimes. Last week, the police tracked down three suspects responsible for stealing about $87 million in crypto assets. In related international news, one of the promoters behind a cryptocurrency platform was arrested earlier this week in India. When the cryptocurrency platform suddenly shut down earlier this year, many investors lost their money because they were no longer able to trade their tokens or coins. The platform promoters are facing charges for extorting cryptocurrency and defrauding investors.

An international fiat and cryptocurrency exchange platform that recently initiated new Know Your Customer (KYC) checks in an effort to improve anti-money laundering practices has locked many of its users’ accounts without notice. According to reports, the platform is currently dealing with backlash from many customers who use it as a main payment option while traveling abroad, and who lack access to key identification documents required by the new KYC procedures.

Earlier this week, several global cryptocurrency exchanges announced plans to join a self-regulatory organization that will police virtual commodity marketplaces. The self-regulatory organization, The Virtual Commodity Association Working Group, plans to establish industry standards and work with regulators to prevent fraud and manipulation in the virtual commodity markets. The goal of the working group is to protect consumers while increasing the adoption of cryptocurrency trading platforms by improving transparency, accountability and security across the various platforms.

To read more about the topics covered in this week’s post, see the following:

New Investments and Capital Markets Products, New Crimes and Enforcement Actions

In this issue:

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

Cryptocurrency Cybercrimes and Enforcement Actions Continue

Blockchain Investment Continues as Businesses Expand Operations 

Capital Markets Firsts for Blockchain Include Bonds, Security Tokens, Exchange Traded Notes

By: Jaime B. Petenko

According to an Aug. 10, 2018, press release, the World Bank and an Australian multinational bank are partnering to issue what is reported to be the first bond globally created, allocated, transferred and managed over blockchain. The “Blockchain Offered New Debt Instrument,” or “bond-i,” will be issued over a private blockchain built on top of the Ethereum network that has been reviewed by a major global technology company for its architecture, security and resilience. The blockchain platform will be co-hosted by the World Bank in Washington, D.C., and the Australian multinational bank in Sydney, Australia.

In another first, a token trading platform operating as an SEC- and FINRA-registered broker-dealer and alternative trading system recently launched a Reg D 506(c) offering of security tokens issued by a popular Colorado resort. Accredited investors can purchase “Aspen coins,” which represent, indirectly, one share of common stock in the Colorado resort, including voting rights and rights to distributions. The Aspen coins are backed by the resort’s assets. Purchases of Aspen coins can be made with U.S. dollars, bitcoin or Ethereum. In Canada, a Canadian multinational bank and the Ontario Teachers’ Pension Plan announced the successful issuance of a fixed income transaction on blockchain. The Canadian bank sold CA$250 million of one-year floating rate deposit notes to the pension fund and mirrored the transaction on a blockchain platform.

According to reports, this week an exchange-traded note that has been trading on the Nasdaq Stockholm Exchange since 2015 is now being quoted in U.S. dollars. Trading the note will be similar to buying American depositary receipts, where investors will see a foreign-listed asset in U.S. dollars. Trades will be executed in U.S. dollars but will be settled, cleared and held in custody in Sweden.

Two foreign stock exchanges also made announcements about trading digital assets this week. The Stuttgart Stock Exchange (Gruppe Börse Stuttgart), the second-largest stock exchange in Germany, announced it is creating an end-to-end infrastructure for digital assets, to include cryptocurrency trading, initial coin offerings and a cryptocurrency custody service. And the Jamaica Stock Exchange (JSE) signed a memorandum of understanding with a Toronto-based fintech company to create a digital assets trading platform that meets regulatory compliance standards. The JSE plans to include regulatory tools on the platform, including a tool to track market manipulation. Also this week, the prominent industry organization Coin Center released a report setting forth a proposed framework for securities regulation of cryptographic assets, cryptocurrencies and tokens.

To read more about blockchain developments in capital markets, see the following:

Cryptocurrency Cybercrimes and Enforcement Actions Continue

By: Brian P. Bartish

New statistics from Kaspersky Labs show that phishing schemes exploiting ICOs to target potential investors have generated more than $2.3 million in the second quarter of 2018 alone. According to a recent survey of UK organizations, one in three respondents had been impacted by cryptojacking malware in the past month. In a recently filed lawsuit, fraudsters allegedly impersonated a victim in communications to a multinational telecommunications company to access the victim’s crypto wallets and steal $24 million in cryptocurrencies. According to another recent report, a wealthy investor was flown to Macau by a Thai group in a scheme that resulted in the theft of more than 5,500 bitcoins.

On Aug. 11, alleged stablecoin provider Tether issued new Tether tokens worth $50 million after losing roughly $300 million in market capitalization over the past 30 days. Tether has been the source of criticism for its failure to submit to a public audit to prove its claims of Tether being backed by the dollar on a one-to-one basis.

In a speech last week, FinCEN director Kenneth A. Blanco delivered a clear, stern message to crypto exchanges on their AML and CFT obligations, stating that compliance programs must be implemented long before they receive notice of an examination. Mr. Blanco stated that FinCEN’s goal is to ensure that all virtual currency money transmitters undergo such compliance examinations regularly. And in an Aug. 14 press release, the SEC announced that it had obtained permanent officer-and-director and penny stock bars against the founder of a company who perpetrated a fraudulent ICO.

For further reading:

Blockchain Investment Continues as Businesses Expand Operations

By: Simone O. Otenaike

Earlier this week, a U.S. Securities and Exchange Commission filing revealed that a leading blockchain investment company has raised more than $71 million from approximately 90 investors for its third crypto fund. The same blockchain investment company raised $13 million for its crypto fund in 2016 and $25 million for its initial coin offering fund in 2017. In related news, two portfolio companies from a major online retailer’s crypto fund made key announcements. The first portfolio company, which raised $134 million in a security token offering, revealed that a Hong Kong-based equity firm agreed to invest an additional $400 million in the company in exchange for equity. The other portfolio company, a Barbados-based blockchain startup, announced plans to partner with a Caribbean-based bank to issue a central bank-backed digital currency and test know-your-customer/anti-money laundering technology.

In Singapore, a venture capital firm announced plans to launch a $10 million crypto fund. According to The New York Times, this fund will invest in early-stage companies globally such as cryptocurrency exchanges and security providers. Meanwhile, a New York-based blockchain company recently completed a $32 million Series B funding round and announced plans to expand its user base and further develop its auditable distributed ledger-based network, data synchronization technology and Ethereum-compatible smart contracting language.

This week Coinbase announced its acquisition of a decentralized identity solution startup company. The company will join Coinbase’s identity team and intends to use blockchain technology to develop new and innovative ways of verifying and validating identity. Also this week, a leading mobile payment platform announced the expansion of its service to allow customers to buy and sell bitcoins in all 50 U.S. states.

To read more about the topics covered in this week’s post, see the following:

Buying Coffee with Bitcoin, Tracking Ships with Blockchain, Fighting Financial Crimes and Litigating ICOs

In this issue:

New Solutions Seek to Bring Cryptocurrencies Closer to Mainstream

Blockchain Developments for Shipping, Food, Pharmaceuticals and Diamonds

Cryprocurrency Scams and Enforcement Actions Perpetuate Uncertainty

Analysis: Tezos Securities Class Action Survives Motion to Dismiss

New Solutions Seek to Bring Cryptocurrencies Closer to Mainstream

By: Jaime B. Petenko

This past week, a leading operator of global exchanges, clearing houses, data and listing services announced that it has partnered with a multinational technology company, one of the world’s largest and most well-known coffeehouse chains, and a major global management consulting firm to launch a new cryptocurrency platform. The new platform will develop open technology to enable consumers and institutions to more easily buy, sell, store and spend cryptocurrencies. The ecosystem created by the new platform is expected to include federally regulated markets as well as merchant and consumer applications. Subject to U.S. Commodity Futures Trading Commission review and approval, the new platform plans to launch in November with a one-day bitcoin futures contract that will be physically delivered, meaning owners will receive bitcoin, not cash, upon expiration of the contract. The coffeehouse chain, as the flagship retailer, will leverage the platform to give consumers the ability to convert cryptocurrencies into U.S. dollars to pay for coffee and other items at its retail locations.

In related news, a global investment banking, securities and investment management firm recently announced that it is considering offering custody services for crypto funds to provide protection to clients from risk of loss in the case of a cyberattack. Also, cryptocurrency exchange platform Coinbase recently launched a plug-in for a major e-commerce platform that will allow more web merchants to accept cryptocurrency as a form of payment.

In international news, while Thai banks continue to be prohibited from engaging in cryptocurrency activities, on Aug. 1 the Bank of Thailand published a regulatory announcement allowing bank subsidiaries to issue digital tokens, provide crypto brokerage services, run crypto-related businesses and invest in cryptocurrencies, subject to certain rules.

To read more about the topics covered in this week’s post, see the following:

Blockchain Developments for Shipping, Food, Pharmaceuticals and Diamonds

By: Jonathan D. Blattmachr and Diana J. Stern

This week, a major global technology firm and the world’s largest shipping company announced TradeLens, a blockchain-enabled shipping solution and “joint collaboration” between the two companies. Built on Hyperledger, the system has reportedly captured more than 150 million shipping events worldwide. The companies assert TradeLens will allow shippers to cut middlemen from the supply chain, saving customers up to 40 percent on shipping costs. With 92 firms already signed up (representing some 20 percent of the global supply chain’s market share), TradeLens expects to have a commercially available platform by year end.

In developments related to food supply chain solutions, Wyoming ranchers are working on a blockchain solution to track their beef’s provenance, with the hope that consumers will pay a premium for beef with verified origins. Additionally, Nestlé recently announced that it is testing whether fruits and vegetables used in baby food products can be traced using blockchain technology to improve recalls.

In Austria, a startup named Grapevine World recently announced a blockchain pilot for tracking healthcare data for a Forbes 100 pharmaceutical corporation’s clinical trials. The pilot will be hosted on a major cloud network, leverage existing health care interoperability standards and use Hyperledger Fabric. In China, ZhongAn Technology, an insurance company subsidiary, announced a new blockchain network to provide assurances on the origin and quality of diamonds using existing industry certification standards. The network reportedly has already uploaded data on 760,000 diamonds.

To read more on supply chain, see the following,

Cryptocurrency Scams and Enforcement Actions Perpetuate Uncertainty

By: Brian P. Bartish

Cryptojacking schemes continue to proliferate, with security researchers recently uncovering a massive wave of such attacks specifically targeting unpatched MikroTik routers to spread Monero-mining malware to every web page that a user may visit using the vulnerable router. The campaigns compromised more than 210,000 routers in total, with 183,700 in Brazil alone. Tokyo-based security firm Trend Micro discovered an on-demand malware business on the dark web at a price of $25,000, which allows users to exploit bitcoin ATM vulnerabilities to pilfer the bitcoin equivalents of up to 6,750 in U.S. dollars, euros or pounds.

The Wall Street Journal recently published the results of a study that determined that so-called “pump and dump” groups have generated more than $825 million in trading activity over the past six months by artificially increasing the price of certain cryptocurrencies to sell them at a profit. And researchers studying Twitter bots have uncovered a significant number of bots being used to entice users to give away small amounts of cryptocurrencies based on false promises of a larger payout in the same currency. The research team identified one botnet consisting of more than 15,000 bots that operated on a structure where some bots spoof legitimate cryptocurrency accounts and other bots “like” the fraudulently generated tweets.

A recent Bloomberg article stated that the SEC has begun scrutinizing brokerages that deal in cryptocurrencies, seeking information about fees generated from trading, financing and initial coin offerings. According to another report, FinCEN intends to go after foreign crypto exchanges doing business in the U.S. that do not comply with anti-money laundering rules. An additional report released this week discussed strategies for how cryptocurrency exchanges can avoid regulatory scrutiny by implementing the right policies and procedures, designated compliance roles, board oversight, and other measures. On Aug. 1, a bitcoin trader was forced to forfeit 81 bitcoins and was sentenced to 41 months in prison for money laundering.

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Analysis: Tezos Securities Class Action Survives Motion to Dismiss

By: Marc D. Powers

Earlier this week, the federal court in the Tezos consolidated securities class action proceeding addressed several thorny jurisdictional issues prevalent in many initial coin offerings (ICOs) made in 2017 and earlier. Over the past year, the SEC and plaintiffs in class actions have been bringing claims against parties allegedly involved in ICOs, mostly where there are allegations of fraud involved, with the primary claims based upon the sale of unregistered securities. In many of these cases, the ICOs were done in foreign jurisdictions or by foreign defendants or entities. So the interesting question that arises is this: Under what circumstances may these plaintiffs appropriately haul foreign defendants into U.S. courts to defend themselves? Several courts nationwide are now grappling with that issue, and the first decision substantively addressing those points has come down with a fair analysis heavily dependent upon the facts and allegations in the pleading.

In the putative class action involving the July 2017 Tezos ICO, which the defendants had characterized as a fundraiser for the Swiss-based Tezos Foundation, about $232 million was raised by the Foundation, with a portion going to a California husband and wife team, the Breitmans, and their company, Dynamic Ledger Solutions (DLS). The couple’s home was the corporate headquarters of DLS. Other defendants included the well-known venture capitalist Timothy Draper and his firms, which made a minority investment in DLS in May 2017, and Bitcoin Suisse, a foreign firm specializing in the crypto-financial sector, which provided intermediary services for the ICO such as conversion of U.S. dollars to Bitcoin and Ethereum, the transfer of the crypto to Tezos, and the creation of digital wallets.

The defendants moved to dismiss the consolidated complaint, which alleged violations of Sections 12 and 15 of the Securities Exchange Act of 1934, on several grounds, including lack of personal jurisdiction, forum non conveniens, that they were not a “statutory” seller or that there was the improper extraterritoriality application of the courts being used for the Exchange Act claims. Only the Draper defendants and Bitcoin Suisse were successful on their motions to dismiss.

Judge Richard Seeborg had little problem finding that the Breitmans (U.S. citizens living in Northern California) as well as DLS and the Foundation (both effectively controlled by the Breitmans) purposely directed their activities for the offering and met jurisdictional due process requirements. Equally easy was dismissing the Draper defendants, as neither Draper nor his entities solicited the purchase of the tokens, as required to be a “statutory” seller. There were no allegations of face-to-face buyer-seller contact for liability to attach.

Separately, the Foundation, organized in Switzerland, as the only “seller” of the token, argued that it was an extraterritoriality application of the U.S. Supreme Court’s Morrison decision, because the sale occurred in Alderney, a remote British outpost, and thus was not a “domestic transaction” for which U.S. courts should take jurisdiction. The Foundation further argued there was a forum selection clause, which made the U.S. courts forum non conveniens. However, the Court held that despite significant law enforcing such provisions, given it was based upon a “browsewrap” agreement, it would not be enforced, subject to later proof of the plaintiff’s actual knowledge of the provision.

It seems that certain allegations would influence any court deciding these kinds of issues. Here, the plaintiffs alleged that the Foundation engaged in little or no marketing of the ICO anywhere other than in the United States, the Breitmans were U.S.-based, and a significant portion of the 30,000 contributors to the ICO were U.S. citizens. It will be interesting to follow the case law development as more foreign defendants are sued in U.S. courts for foreign ICOs and challenge the fling on both personal and subject matter jurisdictional grounds.

In re Tezos Securities Litigation, 17-cv-06779 (N.D. Cal.) (J. Seeborg).

Blockchain Developments: Food Supply Chain, Bitcoin ETPs, ICOs and Tech Adoption

In this issue:

Multiple Pilots Drive Momentum for Leveraging Blockchain in the Food Supply Chain

SEC Rejects Winklevoss Bitcoin Trust, Commissioner Dissents

New Reports Detail ICO Scrutiny and Seek to Provide Clarity

Blockchain Adoption Continues in Both Institutional and Startup Environments

Multiple Pilots Drive Momentum for Leveraging Blockchain in the Food Supply Chain

By: Jaime B. Petenko

A major global technology company recently shared additional details about the Food Trust, a consortium consisting of 10 of the world’s largest companies that are building a blockchain to improve visibility and accountability in the food supply chain. According to recent reports, the Food Trust has recorded over half a million transactions and includes full end-to-end traceability for approximately 200 stock keeping-units (SKUs). The Food Trust reportedly implements GS1 standards to ensure uniformity among all participants. Also according to recent reports, during the third quarter of 2018, the Food Trust plans to announce general availability of the technology and onboard additional companies.

The same major global technology company has partnered with Brooklyn Roasting Co., a roastery in Brooklyn, New York, to use blockchain to track and confirm the authenticity of 150 bags of Ethiopian Yirgacheffe coffee beans as they move from a co-op in Ethiopia to a Djibouti export warehouse to a port in New Jersey to the Brooklyn roastery. During a recent event, Brooklyn Roastery and its technology partner opened the blockchain ledger to the general public. By scanning the QR code on mugs connected to the blockchain, customers could view their coffee’s journey through the supply chain and view documents verifying the coffee’s authenticity, including fair trade certificates, packing invoices and delivery receipts.

This week, an Australian multinational bank announced the completion of a successful global trade using its new blockchain platform. The bank partnered with five domestic and international supply chain leaders to track the shipment of 17 tons of almonds from a packer in Victoria, Australia, to end delivery in Hamburg, Germany. The platform – underpinned by blockchain, the “internet of things” and smart contracts – digitizes the operations, documentation and finance areas of global trade. It provides partners with greater transparency and efficiency, allowing them to view and track the location of a shipment along the supply chain, as well as the temperature and humidity of the container, and to upload and access documents such as bills of lading, certificates of origin and customs documentation.

The Sustainable Sugar Project, led by the Queensland Cane Growers Organization, recently received an AU$2.25 million (US$1.7 million) grant from the Australian government for its Smart Cane Best Management Practice initiative. The initiative will use blockchain to track the provenance of sugarcane and allow for proof of provenance and sustainability of the farm producing the sugarcane. Blockchain will also enable farmers who are using sustainable practices to attract a premium for their product.

To read more about the use of blockchain in the food supply chain, please see the following:

SEC Rejects Winklevoss Bitcoin Trust, Commissioner Dissents

By: Robert A. Musiala Jr. and Jonathan A. Forman

On July 26, 2018, the U.S. Securities and Exchange Commission (SEC) issued an order disapproving a proposed rule change sought by Bats BZX Exchange Inc. (BZX) that would have allowed BZX to list and trade shares of the Winklevoss Bitcoin Trust (WBT). Had the rule change been approved, the WBT would have held bitcoins as its sole asset, shares of WBT would have been issued and redeemed in exchange for bitcoin, and WBT shares would have been available only to certain “authorized participants.” The WBT would have sought to have its shares track the price of bitcoin by calculating the net value of its bitcoin holdings every 15 seconds based on the price of bitcoin on the Gemini Exchange, a cryptocurrency exchange that is also owned by the Winklevoss twins.

Cameron and Tyler Winklevoss first sought SEC approval for the WBT more than five years ago, in July 2013. The brothers have amended the WBT registration statement nine times, with the recent disapproval order being the latest in a long string of rejections by the SEC. The SEC explained its rationale for this most recent disapproval order in a 92-page document. In brief, the SEC concluded that BZX was unable to show that it could design rules to prevent fraud and manipulation and to protect investors related to the WBT shares.

The SEC rejected the argument that the bitcoin market was inherently resistant to manipulation. In doing so, the SEC cited, among other things, the “51% vulnerability”; the concentration of bitcoin ownership; the prevalence of cyberattacks on bitcoin exchanges; and recent studies finding evidence of bitcoin price manipulation involving Tether, a cryptocurrency claimed to be backed 1:1 by U.S. dollars that is used as a store of value for cryptocurrency market participants. According to the SEC, because the bitcoin market is not resistant to manipulation, BZX would have had to have entered into appropriate surveillance-sharing agreements with “significant” regulated bitcoin markets in order to sufficiently deter fraud and price manipulation and protect investors. The SEC found that adequate surveillance-sharing agreements were not in place.

Notably, SEC Commissioner Hester M. Peirce issued a written dissent from the SEC’s disapproval order. Commissioner Peirce wrote that the SEC erroneously focused on the characteristics of the spot market for bitcoin. According to her dissent, the appropriate focus should have been on the ability of the exchange to prevent manipulative and fraudulent trading pursuant to Section 6(b)(5) of the Securities Exchange Act of 1934. Commissioner Peirce noted that the standards, requirements and controls under which BZX proposed the trading of WBT shares offered sufficient protection. By looking beyond them and weighing the merits of bitcoin itself, Commissioner Peirce wrote that the SEC overstepped what should have been a limited inquiry. Commissioner Peirce also criticized the order because, in her view, it inhibits institutionalization and dampens innovation in the industry, which would mitigate the risks on which the disapproval order was based. According to a July 24, 2018, notice published in the Federal Register, the SEC intends to issue an order approving or disapproving a similarly situated exchange-traded product by Sept. 21, 2018.

For more information on the SEC’s recent order, see the following:

New Reports Detail ICO Scrutiny and Seek to Provide Clarity

By: Njeri S. Chasseau

Earlier this week, Stanford Law School released a report finding that U.S. class action lawsuits related to initial coin offerings (ICOs) are set to double in the next few years. According to the report, there have been 12 class action lawsuits related to ICOs since 2016, alleging abuse due to a lack of accountability and failure to adhere to securities laws. ICOs also appear to be under increasing scrutiny abroad. Switzerland’s Financial Market Supervisory Authority recently launched proceedings against blockchain startup Envion AG, alleging that the company breached financial market laws during a January 2018 ICO that raised almost $100 million through the acceptance of nearly 100 million Swiss francs. The Swiss regulators are investigating whether Envion may be in violation of Swiss banking laws. The risk of fraud in the ICO industry was further highlighted by recent reports of an online ICO white paper writing service that apparently seeks to commoditize white paper writing for startups looking to launch ICOs.

Two recently released publications seek to provide guidance on the legal status of ICOs. The Chamber of Digital Commerce, along with the Token Alliance, released a report titled “UNDERSTANDING DIGITAL TOKENS: Market Overviews and Proposed Guidelines for Policymakers and Practitioners.” Additionally, the Stanford Journal of Blockchain Law & Policy published an article that discusses the top 25 ICO jurisdictions and evaluates the related regulatory activity taking place in those jurisdictions.

For more information on blockchain and ICO lawsuits and regulation, see the following:

Blockchain Adoption Continues in Both Institutional and Startup Environments

By: Robert A. Musiala Jr.

Institutional financial services firms continue to integrate blockchain into their business models. Earlier this week, Forbes reported that a 129-year-old global asset management firm based in Chicago recently began offering fund administration services to three “mainstream hedge funds” that are “diversifying their portfolios with cryptocurrency investments.” The same firm has also begun implementing a blockchain solution based on Hyperledger Fabric to settle private equities transactions, and recently filed two blockchain patents. According to Cointelegraph, the same firm is exploring launching a cryptocurrency custody service.

In related news, a recent transaction took place in which, for the first time, two institutional traders swapped a position in the CME bitcoin futures market for an equivalent amount of the “physical asset” of bitcoin. This type of transaction is common in commodities trading, but now appears to be possible with bitcoin as the underlying commodity. And in international news, the Bank of Canada recently published a working paper analyzing the potential benefits of a “central bank digital currency” (CBDC). According to the paper, “[t]he welfare gains of introducing a CBDC are estimated at up to 0.64% for Canada.”

Fintech startups also continue to see increased adoption of blockchain. The cryptocurrency exchange Coinbase recently announced that it is now offering deposits and withdrawals denominated in the British pound. Square, the mobile payments firm, recently announced that its revenue from bitcoin sales reached $37 million in the second quarter of 2018. According to a recent article in Fortune, Bitmain – the world’s largest cryptocurrency mining company – earned approximately $1 billion in net profits in the first quarter of 2018. And in Switzerland, the online bank Swissquote reportedly experienced a 44 percent increase in profits in the first half of 2018, as a result of its new service offering bitcoin trading accounts for its clients.

For more information on recent trends in blockchain adoption, see the following:

Investments, Pilots and Patents: Recent Blockchain Developments

In this issue:

Investment Continues Across Private and Public Sectors

Initiatives Announced in Healthcare, Emissions, Airlines and Public Sectors

Continue to Seek IP Rights Amid Evolving Patent Landscape

Blockchain Investment Continues Across Private and Public Sectors

By: Melonia A. Bennett

The International Data Corporation (IDC) has published its update to the Worldwide Semiannual Blockchain Spending Guide, which estimates that worldwide spending on blockchain solutions in 2018 will be $1.5 billion, twice as much as in 2017. The Guide also estimates that worldwide spending on blockchain solutions will reach $11.7 billion in 2022. The Guide predicts that the largest growth in the U.S. will be in the distribution and services sector, and in Europe, Middle East, Africa and China, in the financial services sector.

The United Nations has noticed the explosive growth of blockchain investment—growing at an “unprecedented scale” and “warp speed,” according to Secretary-General António Guterres. The UN announced the creation of a “High-Level Panel on Digital Cooperation,” to put blockchain technology on its agenda. The panel will include industry, academic and political members, and will focus on confronting the impact of digital technologies on the global economy and society.

In the private sector, a New York-based global consulting and financial solutions firm, and a FINRA-registered broker-dealer, recently announced a new strategic collaboration to facilitate investment in SEC-compliant token offerings. In a July 24 announcement, Coinbase stated that it is partnering with London-based WeGift to launch crypto gift cards, which will allow customers to purchase retail goods and services using cryptocurrencies. Also on July 24, Galaxy Digital, the crypto-focused merchant bank founded by Mike Novogratz, announced that it led a $52.5 million fundraising round for crypto-lending start-up BlockFi, whose current model allows investors to take out a loan as high as $10 million using either bitcoin or ether as collateral.

In the public sector, on July 20, the Chinese district government of the Nanjing Jiangbei New Area announced its plans for a 10 billion-yuan (around $1.4 billion) blockchain project, funded through a public-private partnership. Thirty percent of the funds will come from the local government and 70 percent from the private sector, including a Chinese academic-backed fund and publicly listed venture capital firm based in the city of Nanjing.

For more information on recent blockchain investments, see the following:

New Initiatives Announced in Healthcare, Emissions, Airlines and Public Sectors

By: Simone O. Otenaike

This week, the Linux Foundation announced a new blockchain framework for the healthcare sector that hosts a number of benefits. The framework allows participants to draft smart contracts in any language (e.g., Python and Javascript) and then use those smart contracts to vote on the blockchain network’s configuration settings. The framework also supports Ethereum and allows participants to upgrade the blockchain consensus protocol and incorporate new scalable algorithms.

In the emissions industry, a multinational technology company announced an initiative to enhance the market for carbon credits through blockchain technology. The billion-dollar market for carbon credits suffers from inefficiencies and expensive accounting procedures, resulting in carbon credits that are often underutilized by corporations. The new initiative would turn these carbon credits into crypto tokens backed by various carbon assets verified by third parties according to international standards. The underlying token protocol seeks to instantly calculate the number of carbon credits needed to offset a corporation’s carbon footprint and facilitate the purchase and sale of carbon credits, ultimately leading to a more efficient marketplace.

Internationally, a major airline announced plans to roll out an airline loyalty digital wallet that would use blockchain technology to convert frequent flyer miles into digitized units that could be used to purchase goods from select retailers via the airline’s mobile app. The airline is currently partnering with 18 merchants, including restaurants, beauty parlors, gas stations and select retailers.

In the public sector, Delaware plans to launch a proof of concept for a blockchain-based business filing system. The system will allow corporations to track stocks and collateral assets in real time through smart contract technology and ultimately provide lenders and borrowers with more efficient and accurate records to meet state and federal regulations. In Tennessee, a global shipping corporation announced its plans to team up with a nonprofit pharmacy and launch a blockchain application that aims to reduce pharmaceutical waste. The application will rely on a secure and immediate, time-stamped distribution of information to facilitate the retrieval of unused medications and eliminate potential chain-of-custody issues. The goal of the nonprofit pharmacy is to distribute the unused medication to cancer patients who are otherwise unable to access it.

A new blockchain solution for supply chain also debuted this week with a global technology company’s launch of its proprietary blockchain-as-a-service application. The service reportedly has a few early adopters that were able to launch successful proofs of concept to address product tracking and traceability issues. A 30-day free trial of the service is available now, and customers can also sign up for a monthly, yearly or multiyear deal.

To read more about the topics covered in this week’s post, see the following:

Firms Continue to Seek IP Rights Amid Evolving Patent Landscape

By: Robert A. Musiala Jr.

Late last week, the U.S. Patent Office published the latest in what has been a steady stream of blockchain-based patent applications filed by institutional banks. Two patent applications by one of the largest U.K.-based banks were published: one dealing with a blockchain-based system for hosting cryptocurrency transactions, and another that seeks to streamline “know your customer” processes. Both patent applications appear aimed at leveraging blockchain to enhance security and compliance in banking systems.

A recent Cointelegraph article provided some statistics on the companies and countries with the most blockchain-related patent filings. Notably, the applications from China significantly outnumber those from other countries. The article also notes that so-called patent trolls appear to be taking an interest in blockchain patent applications.

As the patent landscape continues to evolve, blockchain is also being discussed as a solution for IP protection. A recent Forbes article highlighted a start-up that is seeking to leverage blockchain to assist in managing the protection of various types of intellectual property, including code, text, photos, music, 3D work, designs, trade secrets and confidential information. Vaultitude seeks to place nondisclosure agreements on a blockchain and to create a blockchain-based marketplace for selling and licensing IP. Among other uses, Vaultitude believes its solution could be used by patent offices in their prior art searches.

For more information on recent blockchain patent developments, see the following:

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