Blockchain Payments Reports Published, Coffee and Shipping Industries Adopt Blockchain, SEC and CFTC Charge Blockchain App, Bitcoin Used in Social Media Hack

In this issue:

Monetary Authority of Singapore and World Bank Publish Blockchain Payments Reports

U.S. Coffee Brand and Foreign Shipping Ports Initiate Blockchain Solutions

SEC/CFTC Charge Blockchain App, DOJ Charges Allege Crypto Fraud Related to PPP

Hackers Use Bitcoin in Social Media Fraud, Research Highlights Crypto Threats

Monetary Authority of Singapore and World Bank Publish Blockchain Payments Reports

By Veronica Reynolds

The fifth and final phase of Project Ubin, a blockchain project spearheaded by the Monetary Authority of Singapore, concluded this week. It was marked by the publication of a report that summarizes the blockchain-based multicurrency payments network developed during the final phase of the project. The report emphasizes that the prototype was built to be “production ready,” with the goal of modeling better connectivity and integration among cross-border payments participants. The report examines the integration of the prototype with more than 40 companies, finding that a real-world implementation of the prototype could facilitate faster and cheaper cross-border payments than are currently possible with existing technologies. The report concludes by offering design ideas and concepts for payment processes that could be applied to current payment architectures.

Another report released this week by the World Bank takes a close look at smart contracts. The report begins by explaining smart contracts, proceeds with an overview of policy considerations related to the deployment of the technology, and concludes with an analysis of the technology’s potential in the retail and finance industries. The report notes that while in 2019 a survey of more than 1,000 senior executives from 12 countries found that 80% of those surveyed believed blockchain has compelling applications in industry, the percentage of survey participants engaged in implementing blockchain-based projects decreased from 34% in 2018 to 23% in 2019.

For more information, please refer to the following links:

U.S. Coffee Brand and Foreign Shipping Ports Initiate Blockchain Solutions

By Robert A. Musiala Jr.

This week, a major U.S. food manufacturer announced that one of its popular coffee brands has joined the Food Trust, a blockchain-based platform for tracking the food product supply chain. The Food Trust is hosted by a major U.S. technology firm and runs on the Hyperledger Fabric blockchain protocol. According to a press release, the initiative will enable consumers to use an app that allows coffee drinkers to scan a QR code on their bag of coffee and “trace their coffee back to its country of origin and learn about efforts to help farmers in coffee-growing regions.” The technology will reportedly use blockchain “to record data about supply chain events in the coffee’s journey; including which beans were used, when they were roasted, ports they were shipped to and beyond.”

In a recent development involving the same U.S. technology firm and the world’s largest container shipping company, a shipping container terminal in Sri Lanka has joined TradeLens, a blockchain platform designed to improve data management in the shipping industry. Like the Food Trust, TradeLens also operates on the Hyperledger Fabric blockchain protocol.

In another shipping industry development, the Port of Rotterdam Authority has announced that it “has unveiled a new pilot blockchain-based project to make container handling safer and more efficient by removing the need to use a pin code.” According to a press release, during the pilot, “the pick-up rights for the import of containers will be converted from a PIN code into a digital token with the aid of a blockchain-based application, a process the Port of Rotterdam Authority compares to passing the baton in a relay race.”

For more information, please refer to the following links:

SEC/CFTC Charge Blockchain App, DOJ Charges Allege Crypto Fraud Related to PPP

By Teresa Goody Guillén

According to a press release and order published this week, the Securities and Exchange Commission (SEC) charged Plutus Financial, Inc. d/b/a Abra of California (Abra) and a related firm, Plutus Technologies Philippines Corp. (Plutus), for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange. Without admitting or denying the allegations, Abra and Plutus agreed to a cease-and-desist order and to pay a combined penalty of $150,000. The SEC’s order finds, among other things, that Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities through blockchain-based financial transactions with Abra or Plutus. According to the order, those contracts were security-based swaps subject to U.S. securities laws, and Abra and Plutus violated federal securities laws by engaging in unregistered offers and sales of these security-based swaps.

In a parallel action, the Commodity Futures Trading Commission (CFTC) announced a settlement with Abra and Plutus arising from similar conduct in which the respondents agreed to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA). Among other things, the CFTC order found that the respondents entered into thousands of digital asset and foreign currency-based contracts that constituted swaps, in violation of Section 2(e) of the CEA, which requires swaps to be entered into on “a board of trade designated contract market.” The CFTC order also found that the respondents illegally operated as an unregistered futures commission merchant.

Also this week, the U.S. Attorney’s Office for the Southern District of Texas charged a 29-year-old Texas man for wire fraud, bank fraud, making false statements and unlawful money transactions for allegedly fraudulently obtaining $1.1 million through the Paycheck Protection Program (PPP) and using the PPP money to fund a cryptocurrency account. The Small Business Administration (SBA) launched the PPP program in April to offer relief to small businesses impacted by COVID-19.

For more information, please refer to the following links:

Hackers Use Bitcoin in Social Media Fraud, Research Highlights Crypto Threats

By Jordan R. Silversmith

On the evening of July 16, a massive and apparently coordinated attack on prominent social media accounts paralyzed a popular social network for several hours. Hackers logged into the accounts of high-profile users and industry-leading cryptocurrency exchanges. The hackers then tweeted out requests for bitcoin from the account followers. As the hack continued, the social media platform eventually prevented all verified users from tweeting until resolution of the hack. The hackers reportedly defrauded users of more than $100,000 in bitcoin.

In other news, researchers recently discovered websites distributing a malicious crypto-trading application targeted at a popular brand of personal computer devices. The Trojan-style malware steals information such as browser cookies and cryptocurrency wallets and uploads it to a secure website where hackers can access the information. Nigerian scammers used a similar means to steal funds from unsuspecting users, a recent FBI criminal complaint alleges. Using a business email compromise scheme, the hackers gained access to legitimate business email accounts and defrauded employees into transferring company funds to the criminals’ bank account. The complaint alleges that the schemers defrauded American companies of tens of millions of dollars and then converted $6.5 million into bitcoin via a major U.S. bitcoin exchange.

Blockchain analytics firm Crystal recently published a report analyzing the use of bitcoin by darknet entities. According to a press release, “the report analyzes darknet interactions with exchanges and other entities throughout the first quarter of 2020 and compares it to historical darknet activity from the past three years.” Among other things, the report found that while “the amount of bitcoin (measured in BTC) transferred between darknet entities and other entity types declined in Q1 2020 compared to the same period one year ago … the value of the amount of bitcoin transferred (measured in USD) grew by 65%.”

For more information, please refer to the following links:

New York Appellate Court Confirms Attorney General’s Broad Investigative Powers into the Cryptocurrency Industry

On July 9, the Appellate Division of the Supreme Court of New York, First Department (First Department) issued a significant decision in James v. iFinex that confirmed the broad authority of the New York State Attorney General (NYAG) to investigate potential fraud. The decision is significant because it is the first appellate decision to apply the Martin Act’s expansive powers to an NYAG investigation of foreign entities in the cryptocurrency industry. Given this decision, the NYAG now may be emboldened to use these powers to more actively police the emerging industry by seeking asset freezes and other preliminary injunctive relief against potential bad actors outside of the Empire State. Continue Reading

Blockchain Solutions Announced, U.S. Fund Announces Digital Securities, FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Privacy, Enforcement Actions Continue

In this issue:

Blockchain Solutions Announced in Auto, Shipping, Medical and Aid Sectors

Fund Issuing Digital Securities Obtains SEC Registration, Bitcoin ETP Lists on Xetra

FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Transaction Privacy

Crypto Enforcement Actions Continue by SEC, CFTC, State and Foreign Agencies

Blockchain Solutions Announced in Auto, Shipping, Medical and Aid Sectors

By: Jordan R. Silversmith

A prominent German automotive manufacturer announced this week that it has begun testing the use of blockchain technology for the company to monetize its supply-side data streams. The collaboration between the carmaker and a Singapore-based blockchain company will seek to promote decentralized sharing of internal sales and financial data between the manufacturer’s various production hubs and other partners in the supply chain.

A major Asian freight carrier also recently announced that it will take a trial run on Alibaba’s new Ant Blockchain technology. The Shanghai-based shipping company announced it would use Ant Blockchain, a product of Alibaba subsidiary Ant Financial, to cut costs and streamline operations.

At the end of June, the South Korean government announced a shift to blockchain to store clinical diabetes information. Blockchain startup Sendsquare was selected by government ministers to develop a proof-of-concept project to help the country, which has around 3.6 million people afflicted with diabetes, develop a blockchain registry to help analyze and store anonymized clinical data.

The European Union is also developing blockchain technologies to ameliorate societal problems: The European Innovation Council awarded over €5 million to six blockchain companies last week. The companies will work to develop various blockchain tools to address sustainability and industrial challenges, including using blockchain to promote trust and transparency on the Internet, strengthen intergovernmental sustainability goals and deliver cash aid to victims of natural catastrophes.

For more information, please refer to the following links:

Fund Issuing Digital Securities Obtains SEC Registration, Bitcoin ETP Lists on Xetra

By: Teresa Goody Guillén

This week, California investment firm Arca introduced its Arca U.S. Treasury Fund, which it says is the first U.S. Securities and Exchange Commission (SEC)-registered closed-end fund to offer digital securities. The fund is reportedly the first to be approved by the SEC under the Investment Company Act of 1940. Arca announced that the Arca U.S. Treasury Fund invests 80 percent of its portfolio assets in interest-bearing, short-duration U.S. Treasury securities and each ArCoin is a share in the Arca U.S. Treasury Fund. According to a press release, the securities will be digital only and thus can be transferred in peer-to-peer transactions using blockchain technology.

A Swiss-based product provider, 21Shares (formerly known as Amun), announced that its bitcoin exchange-traded product (ETP) was officially accepted to list on Xetra, Deutsche Boerse’s electronic trading venue.  21Shares reportedly launched its first bitcoin ETP at the end of 2018 on the SIX Swiss Exchange. The company is also reported to have launched products that track other cryptocurrencies, multiple digital assets and a “short bitcoin” ETP that inversely tracks bitcoin’s price.

For more information, please refer to the following links:

FATF Issues Crypto Reports, U.S. Court Addresses Bitcoin Transaction Privacy

By: Joanna F. Wasick

This week, two cryptocurrency-focused reports were issued by the Financial Action Task Force (FATF), an independent intergovernmental body that develops and sets policies to counteract money laundering, terrorist financing and similar crimes. One report was a 12-month review of the revised FATF standards on virtual assets and virtual asset service providers (VASPs), which laid out guidelines for regulation, supervision and monitoring. The review finds there is no current need to amend any of these standards. The other FATF report concerns stablecoins (digital assets backed by fiat currency) and finds they share many of the same potential financial crime risks as other virtual assets, due in part to their potential for anonymity and global reach. The report proposes a number of actions to decrease these risks, including implementing the same FATF standards on stablecoins as on virtual assets and VASPs.

The U.S. Court of Appeals for the Fifth Circuit recently issued a decision finding that an individual’s bitcoin transactions are not protected by the Fourth Amendment. The case, United States v. Gratkowski, involves a defendant who was the subject of a federal investigation regarding a child pornography website. The government had identified bitcoin addresses on the bitcoin blockchain linked to transactions with the illicit site. The government then subpoenaed a major U.S. cryptocurrency exchange for its records to identify the owners associated with those addresses, one of which was Gratkowski, who later argued that the government’s recovery of the bitcoin transaction information was unconstitutional because he had a reasonable expectation of privacy in those blockchain and cryptocurrency exchange records. The court disagreed and noted the inherent problem of making privacy arguments about a public blockchain, which openly reflects every bitcoin address and its respective transfers. The court also likened the exchange’s transaction records and related information to regular bank records, which the Supreme Court has already found to be outside the Fourth Amendment’s scope.

The District of Columbia Bar recently issued an ethics opinion that lawyers in Washington, D.C., can accept cryptocurrency as payment, provided that the fee agreement is fair and reasonable and the lawyer can safeguard the virtual assets. In recognition of cryptocurrency’s volatility, the opinion advises that the fairness of the fee arrangements should be assessed at the time they are made. The opinion also recognizes the IRS’s position that cryptocurrency be treated as property and notes that cryptocurrency fee payment is akin to payment in property, not in fiat currency. And earlier this week, new research was published finding that 89 percent of cryptocurrency holders worry about dying with their assets. Despite this worry, however, the same research finds that only 23 percent of holders have wills or other plans for their estates.

For more information, please refer to the following links:

Crypto Enforcement Actions Continue by SEC, CFTC, State and Foreign Agencies

By: Veronica Reynolds

Last month, the Securities and Exchange Commission (SEC) announced a court-approved settlement with Telegram Group Inc. and its wholly owned subsidiary, TON Issuer Inc., which requires the companies disgorge $1.2 billion to investors and pay an $18.5 million fine in connection with Telegram’s 2018 sale of digital currencies in an alleged violation of securities law. The settlement also requires Telegram to notify the SEC of any future digital offerings. Read more about the history of the Telegram case here. This week, another securities enforcement action emerged in Texas, with the state securities commissioner issuing an emergency order halting the proliferation of an allegedly fraudulent multilevel marketing scheme perpetuated by Mirror Trading International PTY LTD and four of its stateside multilevel marketing agents. The order alleges that the organization and its agents peddled fraudulent investment “opportunities” in a cryptocurrency trading pool.

Criminal enforcements proliferated in non-securities-related sectors as well in recent weeks. The United States Commodities Futures Trading Commission announced plans to file for default judgment against Benjamin Reynolds, the director of the now-defunct cryptocurrency scheme Control-Finance Limited, for failure to respond or otherwise defend allegations that he engaged in the execution of an elaborate $147 million Ponzi scheme. And stablecoin issuer the CENTRE Consortium blacklisted an Ethereum address subject to a law enforcement request. CENTRE did not confirm the reason for freezing the Ethereum address, but reports speculate that the address may be linked to criminal activity. In a related development, new research has found that Tether, the issuer of the USDT cryptocurrency, has reportedly blacklisted 24 Ethereum addresses this year that hold USDT, including an address that holds $4.56 million in cryptocurrencies.

Chinese authorities recently have cracked down on alleged money laundering schemes occurring through over-the-counter (OTC) platforms. In 2017, China banned cryptocurrency exchanges from facilitating trades between cryptocurrencies and the Chinese yuan. As a result, OTC platforms emerged as the primary destination for peer-to-peer cryptocurrency trading in the country. Anonymous reports claim that China is engaged in a “systematic effort” to curb money laundering purportedly facilitated by Chinese OTC platforms.

For more information, please refer to the following links:

Canada’s Largest Cryptocurrency Exchange Found to Have Operated Like a Ponzi Scheme

On June 11, 2020 the Ontario Securities Commission (OSC), one of Canada’s provincial securities regulators, issued a report finding that QuadrigaCX (Quadriga), which went into bankruptcy a few months after founder and CEO Gerald Cotten was reported to have died in India, “was an old-fashioned fraud wrapped in modern technology.”[1] The report, dated April 2020, details that at the time Quadriga filed for bankruptcy protection, the cryptocurrency exchange owed 76,000 clients a combined $215 million in assets.[2] Although these clients spanned the globe, approximately 40% hailed from Ontario.[3]

OSC staff undertook a review of Quadriga’s operations to determine how the platform was run and what caused its collapse. Over a 10-month period, staff reviewed and analyzed trading and blockchain data, interviewed witnesses, and collaborated with various regulatory bodies in Canada and elsewhere to determine, among other things, where the money went.[4] They found that a $169 million asset shortfall resulted from Cotten’s fraudulent conduct. Continue Reading

Blockchain Food Tracing Initiatives Add Members, Report Addresses Central Bank Digital Currencies, NY DFS Publishes Crypto Guidance, Enforcement Actions Continue

In this issue:

Seafood Association, Restaurant Chain Announce Blockchain Supply Chain Partnerships

Sweden Report Addresses Central Bank Digital Currencies, Fintech Firms Explore Crypto

NY DFS and UK FCA Publish Crypto Guidance, Firms Announce Compliance Initiatives

U.S. and Foreign Agencies Take Enforcement Actions, Crypto Threat Reports Published

Seafood Association, Restaurant Chain Announce Blockchain Supply Chain Partnerships

By: Jordan R. Silversmith

This week, a major global technology firm and the Norwegian Seafood Association announced a new collaboration using the Food Trust blockchain technology platform. Norwegian seafood exporters will now be able to use blockchain technology to keep a verified ledger sharing supply chain data throughout the country’s seafood industry. Several Norwegian companies have already announced new relationships with blockchain technology suppliers.

A major Mexican family restaurant chain also announced a new partnership with a blockchain enterprise company. The restaurant chain will work with the blockchain platform SIMBA Chain to develop a blockchain-based traceability solution for the company’s coffee supply chain. The partnership will provide for the creation of a distributed application prototype to register and trace coffee beans as the beans travel through the restaurants’ supply chain.

For more information, please refer to the following links:

Sweden Report Addresses Central Bank Digital Currencies, Fintech Firms Explore Crypto

By: Veronica Reynolds

Sweden’s Central Bank recently released its Economic Review 2020, which provides an overview of the bank’s analysis of the relevance of digital currencies and factors to consider when assessing the viability of a proposed Swedish Central Bank-released digital currency, e-krona. The report notes that cash continues to be marginalized, which raises concerns about reduced competition within the payments markets and of the role of the Central Bank, which issues cash, being potentially marginalized as well. The report offers four separate models for a Central Bank-supported digital currency, with an analysis of the advantages and disadvantages of each in relation to overall policy goals. According to the report, these policy goals include providing a stable store of value and unit of account, providing citizens access to the global monetary system, and supporting the financial stability of the payments market.

Reports circulated this week that two massive fintech companies plan to allow direct sales of cryptocurrencies directly from within their respective digital platforms. Sources say that the companies may offer built-in wallet functionality and work directly with cryptocurrency exchanges to source liquidity.

A recent report released by cryptocurrency analytics firm Chainalysis observes that 60% of all bitcoin currently mined is held long term by investors. The individuals and businesses that comprise the 60%, according to the report, have never sold more than 25% of their bitcoin holdings, with the remainder held for many years. The report also indicates that only 19% of all bitcoin currently mined is being actively traded in the market, but that this trading activity buoys the market and determines the price of bitcoin.

For more information, please refer to the following links:

NY DFS and UK FCA Publish Crypto Guidance, Firms Announce Compliance Initiatives

By: Robert A. Musiala Jr.

This week, the New York Department of Financial Services (NY DFS) announced a series of major initiatives that are intended to “make it easier for virtual currency companies to successfully operate in New York.” These include the following:

  • Final guidance related to the ability of entities currently authorized under the NY DFS BitLicense regime to “self-certify the use of new coins” that establishes an approach “by which DFS will provide a list of approved coins that all licensees can easily adopt.”
  • A notice of NY DFS license application practices “aimed at creating a more transparent and timely process for the evaluation of virtual currency license applications.”
  • A virtual currency FAQs document that will be updated on an ongoing basis to reflect questions and feedback received by NY DFS from the blockchain and crypto industry.
  • A new proposed conditional licensing framework intended to make it easier for startups to enter the New York market.
  • A memorandum of understanding with the State University of New York expressing intent to launch a virtual currency program, “SUNY BLOCK.”

In the U.K., the Financial Conduct Authority (FCA) published a notice this week to remind cryptocurrency businesses operating in the U.K. that under new rules, these businesses must register with the FCA by Jan. 10, 2021, or they “will have to cease carrying on business.” According to the notice, to ensure that registration applications are processed on time, completed applications should be submitted to the FCA by June 30.

This week, more firms announced initiatives aimed at driving compliance in the cryptocurrency industry. A Big Four accounting and consulting firm has launched “Chain Fusion, a patent pending suite of advanced analytics capabilities, built on leading cryptoasset data & technology products to streamline the ability for financial services companies and fintechs to offer cryptoasset services on an institutional scale.” Separately, according to reports, a major global bank based in the Netherlands has developed the “Travel Rule Protocol” with support from several other crypto industry firms. The solution aims “to assist with the Financial Action Task Force’s Travel Rule requirement for crypto exchanges and firms dealing in digital assets.” Finally, blockchain analytics firm Chainalysis published a blog intended to provide a guide to complying with anti-money laundering requirements in the cryptocurrency industry.

For more information, please refer to the following links:

U.S. and Foreign Agencies Take Enforcement Actions, Crypto Threat Reports Published

By: Joanna F. Wasick

Last Friday, the U.S. Securities and Exchange Commission (SEC) announced it filed an emergency action and froze the assets of two Pennsylvania brothers and three related entities in order to stop their fraudulent endeavor and theft of investor funds. According to the SEC, from at least July 2019 through May 2020, the brothers offered securities in a private fund that purported to invest in digital assets but were misrepresenting fund performance, fabricating financial statements and forging audit documents.

In New Zealand, police recently froze $140 million as part of a global investigation into Alexander Vinnick, who previously operated BTC-e, a cryptocurrency exchange that reportedly traded more than $4 billion dollars’ worth of bitcoin. In 2017, Vinnick was arrested in Greece by local police on a U.S. extradition warrant that accused him of facilitating money laundering, identity theft, drug trafficking and computer hacking. Since then, his alleged criminal proceeds were traced to New Zealand accounts targeted in the recent asset freeze—the largest recorded restraint of funds in New Zealand police history.

This month, Scamwatch, an arm of the Australian Competition and Consumer Commission, issued a report finding that Australians lost more than $14 million dollars in cryptocurrency scams in 2019. Most of these frauds were basic Ponzi schemes, with no real cryptocurrency involved. Younger Australians aged 25 to 34 were most heavily affected. While the monetary loss from this type of fraud is significant, according to the report, greater losses were recorded in business email compromise scams ($132 million), traditional investment scams ($126 million) and “dating and romance scams” ($83 million).

This week, an Israeli cybersecurity firm released a report concluding that, over the past two years, one criminal group was responsible for stealing $200 million in numerous hacks of five different exchanges. These hacks followed a particular pattern: The hacker group gains access to the exchange executives’ private email accounts, then uses spear-phishing (in which the hacker impersonates a high-ranking employee from either the target company or a company with which it regularly deals) to obtain information that grants access to user wallets. Despite the efficacy of the group, the security firm finds that the hacking group is small, i.e., less than five individuals, and likely lacks military training or support.

For more information, please refer to the following links:

U.S. Air Force Explores Blockchain, Global Blockchain Survey Published, Crypto Debit Card Launches, Compliance Initiatives Announced, Quadriga CX Report Published

Abstract Digital network communication digital conceptIn this issue:

U.S. and Australia Explore Blockchain Solutions, Global Blockchain Survey Published

U.S. Cryptocurrency Debit Card Launches, Gaming Firm Announces Token Initiative

SEC and Industry Promote Regulatory Compliance Solutions for Blockchain Market

OSC Issues Report Finding QuadrigaCX Operated Like a Ponzi Scheme

U.S. and Australia Explore Blockchain Solutions, Global Blockchain Survey Published

By: Robert A. Musiala Jr.

This week, Simba Chain announced that it has been awarded “a two-year, $1.5 million contract by the U.S. Air Force to fund a Phase II Small Business Innovation Research (SBIR) project.” According to a press release, Simba Chain will work with “one of the world’s largest aerospace corporations” on areas that include “introducing blockchain into the Air Force’s cybersecurity, logistics, and programming training curriculum and research.”

The Australian government, in partnership with several private sector firms, recently published a report on its “RENeW Nexus” project, which “was conceived to understand the potential of localised energy markets and how technology can facilitate better outcomes for the energy system.” The report includes a section on “Blockchain specific benefits” for the electricity markets that discusses the potential for faster settlement of energy transactions through “the use of blockchains, smart contracts and smart metering.”

According to reports, the U.S. member of the most widely used supply chain standards body in the world recently completed “[t]he first phase of a multi-phase proof-of-concept focused on supply chain visibility and included solutions that leveraged blockchain, cloud and other traceability technology.” And finally, this week a Big Four accounting and consulting firm published its third annual Global Blockchain Survey. Some highlights from the survey include the following:

  • Blockchain’s standing as a top-five strategic priority continued in 2020 with a clear majority of respondents.
  • Respondents are open to using an array of digital assets in their business models, with “enterprise controlled” digital assets, “general asset backed” digital assets and decentralized cryptocurrencies having the most interest.
  • Financial transactions and data privacy top the list of areas that respondents see benefiting most from a global digital identity.
  • Blockchain consortia face a full array of challenges to attract new members, with rules and participant roles and responsibilities heralding the list.

For more information, please refer to the following links:

U.S. Cryptocurrency Debit Card Launches, Gaming Firm Announces Token Initiative

By: Jordan R. Silversmith

Earlier this week, BitPay announced the release of its prepaid debit card. According to a press release, the product is the first-ever prepaid debit card in the U.S. to use cryptocurrency funds. The press release notes that the card “can be loaded with dollars that are converted from cryptocurrency” and automatically reloads when funds run out. Meanwhile, an iconic gaming company announced a partnership with Unikrn, an esports betting company, to better integrate the company’s Ethereum-based ERC20 token with Unikrn’s cryptocurrency ecosystems. According to a press release, through the partnership, Unikrn will gain access to the gaming company’s signature video game catalog while providing crypto technology and new wagering opportunities and experiences through Unikrn’s platform.

A recent report highlighted data from Crystal Blockchain finding that Seychelles, a small island nation at the edge of the Somali Sea, led the world in cross-border bitcoin transactions in 2019. The Crystal Blockchain analysis examined flows of bitcoin between exchanges around the world and found that Seychelles, with fewer than 100,000 people, beat out the second-place United States in both funds sent and received. The Crystal dataset includes an interactive map showing the flow of bitcoin transactions around the world.

For more information, please refer to the following links:

SEC and Industry Promote Regulatory Compliance Solutions for Blockchain Market

By: Robert A. Musiala Jr.

Late last week, the U.S. Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (FinHub) announced the launch of a series of “virtual peer-to-peer meet-ups (P2Ps)” to facilitate “meeting with FinTech industry participants to help inform regulatory approaches and engage on particular projects and issues.” The first theme of the series is regulatory technology (RegTech), with virtual meetings taking place the week of July 6.

Several blockchain firms announced regulatory compliance initiatives this week. The Algorand Foundation announced a partnership with blockchain analytics firm Chainalysis that will seek to implement transaction monitoring and compliance processes for the ALGO token. Fireblocks, which provides wallet infrastructure and settlement solutions, also announced a partnership with Chainalysis that will reportedly allow the Fireblocks platform “to monitor cryptocurrency transactions in real-time, setting a new security and compliance standard for its customers.”

Additionally, this week the Stellar Development Foundation announced proposed updates to the Stellar blockchain protocol that are intended to make it “easier to tokenize regulated assets like securities.” According to a blog post, the protocol updates would allow issuers of regulated tokenized assets on the Stellar blockchain to require certain authorizations before the tokens can be transferred by third parties.

For more information, please refer to the following links:

OSC Issues Report Finding QuadrigaCX Operated Like a Ponzi Scheme

By: Teresa Goody Guillén

The Ontario Securities Commission (OSC) has issued a report of its staff’s findings from their review of Quadriga and its operations. The review was undertaken to determine how the platform was run, the cause of its collapse and where the money went. The key finding is that Quadriga operated like a Ponzi scheme. The report indicates that the now-defunct cryptocurrency exchange, which went into bankruptcy a few months after founder and CEO Gerald Cotten was reported to have died in India, “was an old-fashioned fraud wrapped in modern technology” and the collective loss of investor funds was at least $169 million. The OSC report indicates that the facts it uncovered about Quadriga apply only to Quadriga and should not be construed as indicative of similar misconduct on other crypto asset trading platforms. The report includes the below key regulatory takeaways for investors and crypto asset trading platforms.

Key takeaways for investors:

  • In Canada, many crypto asset trading platforms are not registered.
  • Using a crypto asset trading platform carries risks.
  • Platform clients should conduct due diligence and be alert for signs of fraud.

Key takeaways for crypto asset trading platforms:

  • Crypto asset trading platforms may have to register with the OSC and should take appropriate steps to comply with Ontario securities law.
  • Platforms should ensure that they have systems and controls in place to manage risks.
  • Platforms should disclose key information to clients.

For more information, please refer to the following links:

Blockchain Identity Solutions Advance, Federal Reserve and Financial Regulators Address Blockchain, Crypto Institutional Survey Published, US and Foreign Enforcement Actions

In this issue:

Fish Producer Joins Food Trust, Blockchain Identity Solutions Advance in UK and US

Federal Reserve, CFI, OCC and NY DFS Address Blockchain and Cryptocurrencies

Institutional Cryptocurrency Survey Published, Bitcoin ETP Seeks to Launch in Germany

Accounting Firms and Government Agencies Seek to Acquire Blockchain Analytics Tools

U.S. and International Enforcement Actions Seize Assets in Alleged Crypto Frauds

Fish Producer Joins Food Trust, Blockchain Identity Solutions Advance in UK and US

By: Jordan R. Silversmith

Last week, a major Norwegian fish producer announced it will join the Food Trust – a permissioned, permanent and shared ledger of food system data stored on the blockchain – to improve traceability of its products and promote consumer trust across its supply chain. Corporate buyers, including select grocery stores in the United States and Canada, will be able to scan a QR code to obtain a history of the company’s arctic salmon and the feed it was raised on.

Three companies in the United Kingdom working in the U.K. Financial Conduct Authority’s (FCA) regulatory sandbox recently announced their successful completion of a blockchain digital identity pilot. The program was conducted to study the ways financial institutions can use self-sovereign identity in customer onboarding and to reduce compliance costs. The companies plan to further develop the pilot to use self-sovereign identity for other services, such as renting a car or automated check-in at a hotel.

A leading American software company, in one of many efforts by members of the Decentralized Identity Foundation to create tools for COVID-19 response programs, released a beta version of its Bitcoin-based identity tool on Bitcoin mainnet earlier this week. The identity tool is intended to allow user-controlled logins that fit the needs of independent companies or services rather than having large system-providers own a user’s login credentials. Moving the open-source tool to Bitcoin mainnet will allow the public to use and test the beta version of the tool.

For more information, please refer to the following links:

Federal Reserve, CFI, OCC and NY DFS Address Blockchain and Cryptocurrencies

By: Joanna F. Wasick

Both the Federal Reserve and its research initiative, the Consumer Finance Institute (CFI), recently issued statements related to blockchain and cryptocurrency in banking. Late last month, the Federal Reserve announced, in response to a question posed by Sen. Thomas Cotton, R-Ark., that it was considering whether AMERIBOR, a permissioned version of the Ethereum blockchain that captures interbank lending rates, was a suitable replacement for the London Interbank Offered Rate (LIBOR), a widely used benchmark for short-term interest lending rates that has been the subject of past manipulation scandals. This month, the CFI published a working paper on the creation and use of a central bank digital currency (CBDC), noting, among other things, that a CBDC could not only eliminate cash, but also give consumers the possibility of holding a bank account with the central bank directly.

Late last week, the Office of the Comptroller of the Currency (OCC), the U.S. bank regulator, issued a notice of proposed rulemaking (NPR) for public comment to update its rules for national bank and federal savings association activities. The OCC also released an advance notice of public rulemaking (ANPR), seeking comment on how cryptocurrencies and blockchain technology are, and can be, used in banking. Both the NPR and ANPR were issued in conjunction with potential changes to 12 CFR 7, which serves to update or eliminate outdated regulatory requirements. Notably, the notices come on the heels of a new OCC acting comptroller, Brian Brooks, who, prior to serving as OCC chief operating officer, was the general counsel of Coinbase, a major cryptocurrency exchange.

The New York State Department of Financial Services (DFS) and French regulator Autorité de Contrôle Prudentiel et de Résolution (ACPR) have entered into a memorandum of understanding (MOU) to strengthen their positions as fintech hubs. Under the MOU, DFS and ACPR will refer fintech innovators to each other, which can improve speed to market; exchange information about regulatory and policy issues; ensure that innovators in each other’s jurisdiction receive equivalent levels of support; and share regulatory and supervisory expertise and best practices. In a press release issued June 3, the DFS superintendent said the MOU “will foster collaboration to support cross-border fintech developments, providing entrepreneurs speed to market opportunities in New York and France.”

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Institutional Cryptocurrency Survey Published, Bitcoin ETP Seeks to Launch in Germany

By: Veronica Reynolds

According to a recent survey from a major U.S. financial services firm, around a third of large institutional investors have holdings in digital assets such as bitcoin. And in the U.S., about 27% of institutions, such as pension funds, family offices and hedge funds, own digital assets, up from the 22% reported by the same survey last year. Of those surveyed, more than 25% hold bitcoin and 11% hold ether. The increased interest by institutional investors has prompted many companies, such as Genesis and BitGo, to launch new services geared toward these investors.

This week’s announcement of a potential new exchange-traded product (ETP), Bitcoin Exchange Traded Crypto (BTCE), also indicates increased activity in the digital asset space by mainstream investors. ETC Group plans to list BTCE on a German digital stock exchange pending approval from the country’s financial regulators. BTCE will be backed by bitcoin and will track its price. And the first blockchain-based international trade finance transaction between two countries occurred this week. According to reports, the transaction was facilitated using R3’s Corda platform between two banks, one in Turkey and the other in Germany. The technology was used to secure payments of an underlying data transfer supporting a trade of laminated glass interlayers between the two countries.

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Accounting Firms and Government Agencies Seek to Acquire Blockchain Analytics Tools

By: Robert A. Musiala Jr.

According to a recent press release, a subsidiary of a major global accounting firm has formed a partnership with CipherTrace, a blockchain analytics firm, that will allow the accounting firm to “incorporate … cryptocurrency attribution data into advanced auditing and forensics tools.” The press release notes that the partnership will allow the accounting firm “to better address growing cyber threats and compliance risks posed by illicit cryptocurrency and cross-border transactions.” In a related development, according to recent reports, major U.S. exchange Coinbase is seeking to license its blockchain analytics software to the U.S. Drug Enforcement Administration and the Internal Revenue Service.

On June 24, the Financial Action Task Force (FATF), a global anti-money laundering standards organization, will hold a meeting to discuss the progress made by Virtual Asset Service Providers (VASPs) in complying with the so-called Travel Rule, which requires VASPs to maintain information on the originators and beneficiaries of cryptocurrency transactions. According to a source cited in a recent report, “only 10% of countries in the FATF are prepared for the June 24 meeting.”

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U.S. and International Enforcement Actions Seize Assets in Alleged Crypto Frauds

By: Teresa Goody Guillén

The Securities and Exchange Commission announced that it has obtained an asset freeze and other emergency relief in an enforcement action against residents of Utah and Colombia for allegedly defrauding investors of more than $12 million in two cryptocurrency-related schemes. The complaint alleges a first scheme involved operation of a multilevel-marketing business, selling interests in a purported cryptocurrency mining operation and misappropriation of investor funds. The complaint alleges a second scheme involving fraudulent sales of “cryptocurrency trading packages” and misappropriation of investor funds in a “Ponzi-like” scheme.

The Department of Justice has charged a 20-year-old California resident with conspiracy to commit wire fraud for his alleged role in a SIM swap scam. The defendant is alleged to have used the SIM swap scam to steal a significant portion of one victim’s cryptocurrency and to have targeted, along with co-conspirators, at least 20 people.

European police have halted a multimillion-dollar illegal online streaming business operating from Spain. It is reported that the online streaming ring earned an estimated $17 million while operating over five years. European police reportedly made 15 house searches across Europe and arrested 11 people, took down 50 servers in nine countries, and seized $5.4 million in cryptocurrencies, property, jewelry, luxury cars and cash. An additional $1.25 million was frozen in several bank accounts.

Chinese police reportedly froze approximately 4,000 bank accounts owned by over-the-counter (OTC) cryptocurrency traders due to alleged money laundering using cryptocurrency. And in Russia, a power grid firm claims that illegal miners stole $6.6 million worth of electricity, and the firm found 35 cases of illegal power consumption in 20 of the 85 regions of Russia. The theft reportedly occurs when the illegal miners pull an electrical cord to the nearest power line and build their own power transforming stations (possibly underground) or tamper with the power meters to reduce the appearance of their energy consumption.

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Solutions Announced in Pharma, Energy and Food Industries, Digital Dollar Project Launches, France Approves Second ICO, Major Crypto AML Report Published

In this issue:

Blockchain Solutions Launch in Pharma, Energy and Food Industries

Digital Dollar Project Launches, Cryptocurrency Focused Bank Receives Investment

French Regulator Approves ICO, New Token Standards Body Launches

DOJ and SEC Continue Prosecuting Crypto Crimes, CipherTrace Issues AML Report

Blockchain Solutions Launch in Pharma, Energy and Food Industries

By: Robert A. Musiala Jr.

According to reports, the Chinese branch of one of the largest pharmaceutical companies in the world recently announced that it will work with VeChain to develop a blockchain-based solution for tracking the supply chain of clinical drugs. The solution will reportedly record batch numbers related to specific drugs on a permissioned blockchain. A recent article in Harvard Business Review noted how blockchain may help companies achieve compliance with provisions in the U.S. Drug Supply Chain Security Act and the EU’s Falsified Medicines Directive that address the combating of counterfeiting and tampering in the pharmaceutical supply chain.

Last week, a major global telecommunications firm announced a partnership with Energy Web, a nonprofit focused on building blockchain solutions for the energy sector. According to a press release, the partnership will seek to leverage blockchain and IoT to integrate assets like wind turbines, batteries, heat pumps and solar panels with energy grids. Separately, according to reports, a nonprofit focused on offshore energy recently completed a pilot that leveraged blockchain to collect data and generate invoices during the process of transporting wastewater byproducts collected in the extraction of oil and natural gas. A spokesperson for the nonprofit said the pilot showed that opportunities exist “for blockchain to reduce costs, increase efficiency, provide transparency and eliminate disputes in the oil and gas industry.”

In food supply chain developments, the Chinese subsidiary of a major U.S. grocery and retail company recently announced that it will partner with VeChain to implement a blockchain system for tracing food products. The Chinese office of a Big Four accounting and consulting firm will reportedly assist in the project. Also in China, the province of Yunnan has reportedly launched a blockchain solution for tracing tea products.

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Digital Dollar Project Launches, Cryptocurrency Focused Bank Receives Investment

By: Jordan R. Silversmith

A nonprofit foundation and a Fortune 500 company recently published a whitepaper and announced a partnership to further exploration into a central bank digital currency (CBDC), or a “digital dollar.” The purposes of the Digital Dollar Project are, among others, to promote research and public discussion on the potential benefits of a tokenized dollar and to propose possible models to support the public sector as it considers the development, testing and adoption of a CBDC. Last February, the Federal Reserve announced that it is exploring the possibility of issuing a CBDC.

A proposed Wyoming-based bank that will specifically service the cryptocurrency industry recently announced that it had raised enough funds to begin the process of applying for a charter. While the bank will need to raise additional capital if granted a charter, the bank’s CEO said the bank plans to open for business in early 2021.

Last week a major U.S. bank agreed to pay $2.5 million to settle a class action suit over its 2018 decision to start treating purchases of cryptocurrency with credit cards as cash advances, resulting in higher fees. In the motion, filed last Tuesday in Manhattan federal court, the plaintiffs said the settlement would permit class members to get back approximately 95% of the fees they claim were unlawfully charged, while the bank, as part of the settlement, will not admit to wrongdoing.

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French Regulator Approves ICO, New Token Standards Body Launches

By: Teresa Goody Guillen

The French financial regulator, Autorite des Marches Financiers (AMF), has granted its second approval of a capital raise through a public token offering. The AMF granted the expected €10 million ($11.2 million) raise under its “ICO visa,” which is part of a comprehensive legal framework for cryptocurrencies launched in 2019. The visa requires applicants to show the AMF they have provided all relevant information to purchasers about the sale and the risks involved. According to reports, the visa was granted to GreenToken, an Ethereum ERC-20 standard token that will be used to acquire and value goods and services on the GreenToken network, a professional community focused on renewable energy. The token will reportedly become tradable on the French cryptocurrency exchange SAVITAR, as well as directly on the GreenToken network, beginning Dec. 1.

The InterWork Alliance (IWA) has formally launched its operations as a self-described “platform-neutral, non-profit organization dedicated to creating the business-level standards and tools needed to build distributed applications and increase innovation across token-enabled ecosystems.” IWA is reported to have more than 30 organizations participating and aims to enable organizations to adopt a variety of tokenized assets by agreeing to distributed business models in a platform-agnostic manner. The IWA will focus on three frameworks: (1) the Token Taxonomy Framework, which defines a token and how its value can be exchanged (and was initiated by the Enterprise Ethereum Alliance); (2) the InterWork Framework, which is for the legal clauses that match up with token standards; and (3) the Analytics Framework, which is to enable market data and analytics in a privacy-preserving manner.

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DOJ and SEC Continue Prosecuting Crypto Crimes, CipherTrace Issues AML Report

By: Marc D. Powers

A New York City man has been charged with conspiracies to engage in computer hacking for credit card information and money laundering through the use of bitcoin. As alleged in the indictment, the defendant improperly accessed vulnerable computer networks containing credit and debit card account information, sold the information in a criminal marketplace, and used bitcoin and other cash transactions to launder the proceeds from his crimes. He faces up to five years in jail if convicted.

In its continuing enforcement efforts against unregistered token offerings, the SEC recently obtained an asset freeze from a Texas federal court on all the proceeds received from a $9 million token offering that the agency claims was procured by fraud and in violation of federal securities laws. Among other things, the complaint alleges the defendants falsely claimed that the Meta 1 Coin was backed by a $1 billion art collection and/or $2 billion in gold. The complaint also alleges that a portion of the monies raised in the ICO were spent to purchase a Ferrari.

CipherTrace has issued its Spring 2020 Cryptocurrency Crime and Anti-Money Laundering Report. The report examines the first five months of the year and finds, among other things, that crypto thefts, hacks and frauds totaled $1.36 billion, with over $1.3 billion coming from fraud and misappropriation. The report also notes that 74% of bitcoin moved in cross-border exchange-to-exchange transactions, highlighting the need for exchanges to adopt tighter controls to ensure anti-money laundering and counter-terrorist financing compliance. According to the report, 88% of funds sent by U.S. bitcoin ATMs to exchanges in 2019 were sent to exchanges located offshore. The report also finds that while the total value collected by criminals from crypto crimes is among the highest recorded, the global average of criminal funds sent directly to cryptocurrency exchanges dropped 47% in 2019. This suggests that many criminals are finding it harder to offload their illicit funds into cryptocurrency exchanges, indicating effective implementation of AML measures around the world.

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Tezos and ATB Cryptocurrency Class Action Cases Provide Guidance on Different Factors Driving Settlements Against ICO Issuers for Securities Laws Registration Violations

On April 30, 2020, a federal court in San Francisco preliminarily approved a $25 million class action settlement against the Swiss-based Tezos Foundation, its Californian founders, and other domestic and foreign firms directly involved in the 2017 initial coin offering (ICO) of its token, XTZ. The Tezos offering was conducted on a worldwide basis to both sophisticated, accredited investors and the general public, raising more than $233 million. As of June 2, 2020, the XTZ token was ranked number 10 on CoinMarketCap at a price of $3.08 per token. The $25 million settlement amounts to about 10 percent of the total amount raised in the Tezos offering.

On April 10, 2020, another securities class action against Delaware-based ATBCOIN LLC (ATB) and its foreign founders, involving the 2017 ICO of the ATB token, preliminarily settled for $250,000, which represents about 1 percent of the $25 million in funds allegedly raised. Weeks later, on May 12, the attorney for the ATB defendants wrote to the federal judge in Connecticut presiding over the case, explaining that, upon further reflection, the defendants could not pay even that paltry settlement sum. The ATB token was ranked number 1,653 on CoinMarketCap at a price of $.001188 per token as of June 2, 2020. Continue Reading

Cryptocurrency Trading Firms Expand Services Through Acquisitions, Regulatory Approvals and Investments, SEC Charges ICO Issuer, Crypto Malware Attack Detected

In this issue:

U.S. Crypto Trading Firms Make Acquisitions Targeted at “Prime Brokerage” Services

FINRA Approves Blockchain ATS, Institutional Crypto Trading Firm Expands Reach

SEC Announces Charges and Consent Order Against Issuer of $25.5 Million ICO

Major Crypto Mining Malware Attack Detected

U.S. Crypto Trading Firms Make Acquisitions Targeted at “Prime Brokerage” Services

By: Robert A. Musiala Jr.

This week major U.S. cryptocurrency exchange Coinbase announced plans to acquire Tagomi, a U.S.-based prime brokerage platform focused on the cryptocurrency industry. In a press release, Coinbase referred to Tagomi as “the leading crypto prime brokerage platform” and said the acquisition “will bolster our offerings for advanced traders and the most sophisticated crypto investors.” According to the press release, the acquisition will allow Coinbase “to offer custody, professional trading features, and prime brokerage services on one platform, giving sophisticated investors the seamless, powerful trading experience they have come to expect in equities and FX markets.”

In a similar move, U.S.-based Genesis Global Trading, a cryptocurrency trading firm, recently acquired UK-based Vo1t, a cryptocurrency custody provider. A recent report notes that the acquisition is intended to allow Genesis Global Trading to “begin developing a full suite of prime brokerage services under one roof including lending, trading and custody.” According to Investopedia, “[p]rime brokerage refers to a bundle of services that investment banks and other major financial institutions offer to hedge funds and similar clients.”

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FINRA Approves Blockchain ATS, Institutional Crypto Trading Firm Expands Reach

By: Jordan R. Silversmith

Last week an investment management company announced that the Financial Industry Regulatory Authority (FINRA) had approved its request to engage in private placements and to operate an alternative trading system (ATS) to trade digital securities. The company, whose ATS technology has been in development since 2016, will use blockchain technology to offer new capital formation opportunities for issuers, investors and traders.

A large Swiss securities and financial infrastructure company announced on Wednesday that it is leading a $14 million Series A investment into a California-based enterprise infrastructure provider that builds institutional investing tools and technology for cryptocurrency industry clients, including several major cryptocurrency exchanges. According to reports, the provider plans to use the investment funds to build out its portfolio of institutional bitcoin investing tools. The Swiss securities company also reportedly plans to use the provider’s technology to connect its private banking customers to a panoply of digital asset investment opportunities.

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SEC Announces Charges and Consent Order Against Issuer of $25.5 Million ICO

By: Robert A. Musiala Jr.

This week the U.S. Securities and Exchange Commission (SEC) announced charges against BitClave PTE Ltd., a company based in San Jose, California, “for conducting an unregistered initial coin offering (ICO) of digital asset securities.” According to an SEC press release and the SEC’s consent order, “from June to November 2017, BitClave raised over $25 million by selling its Consumer Activity Tokens (CAT) to approximately 9,500 investors, including investors in the U.S.” and “planned to use the ICO proceeds to develop, administer, and market a blockchain-based search platform for targeted consumer advertising.”

Under the consent order, BitClave has agreed to pay disgorgement of $25,500,000, prejudgment interest of $3,444,197 and a penalty of $400,000. The consent order also establishes a Fair Fund to return monies to injured investors, paid by BitClave. According to the press release, “BitClave also agreed to transfer all remaining CAT in its control to the fund administrator for permanent disabling, publish notice of the order, and request removal of CAT from all digital asset trading platforms.” The press release also notes that CAT has already been removed from many third-party trading platforms, and “BitClave is currently winding down its operations and does not plan to continue developing or supporting the platform.”

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Major Crypto Mining Malware Attack Detected

By: Joanna F. Wasick

Earlier this month, a computer and cloud security firm reported that since December 2019, a hacker group known as Blue Mockingbird infected more than 1,000 business computer systems with mining malware. According to that report, the malware attacks servers running ASP.NET applications and exploits a vulnerability to obtain administrator-level access in order to modify the server settings. Once that high-level access to the system is obtained, an application is installed and run to mine Monero, a popular cryptocurrency. The report did not reveal the names of the attacked companies.

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