SEC Scrutinizes Use of Fintech by Broker-Dealers and Investment Advisers

The Securities and Exchange Commission (“SEC”) recently issued a request for information and public comment on the use of new and emerging technologies by investment advisers and broker-dealers that suggests potential regulatory action to come.[1] According to its release, the SEC is seeking to understand how registrants — whether online brokerages, robo-advisers, internet investment advisers, or more traditionally-operated firms — use various digital engagement practices, interactive websites and mobile applications, or artificial intelligence to serve retail investors.

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Cryptocurrency and NFT Market Growth Continues, Regulators Across Globe Target Crypto Industry as Threats Continue, Global Blockchain Survey Published

In this issue:

Crypto Market Develops in DeFi, Payments, Compliance and Consumer Adoption

Market Navigation, Fashion Metaverse, Online Tutorials: NFT Adoption Continues

Crypto Compliance Addressed by CFTC, Thai SEC, South Korea and UK FCA

SEC, DOJ and Ontario Securities Commission Bring Crypto Enforcement Actions

Reports Released on Crypto Scams and Malware, Poly Hacker Returns Funds

2021 Global Blockchain Survey Focuses on Views of Financial Services Leaders

Crypto Market Develops in DeFi, Payments, Compliance and Consumer Adoption

By Veronica Reynolds and Robert A. Musiala Jr.

A large institutional financial and media conglomerate recently announced a partnership with a major financial services and investment management company that specializes in digital assets, with the two companies offering the public the opportunity to invest in a decentralized finance (DeFi) index. Uniswap, Aave, Maker and Compound are a few of the DeFi protocols included in the index. The financial services and investment management company also announced its new DeFi Index Fund – its own separate “passively managed fund tracking the performance of DeFi.”

This week, Chainalysis introduced the Chainalysis Global DeFi Adoption Index, “a new geographic index ranking countries by DeFi adoption” that focuses on “grassroots adoption by individuals, rather than those sending the largest raw values of funds.” The index ranks 154 countries according to three criteria: (1) on-chain cryptocurrency value received by DeFi platforms, weighted by purchasing power parity per capita; (2) total retail value received by DeFi platforms; and (3) individual deposits to DeFi platforms. The top five ranked countries, in order, are the United States, Vietnam, Thailand, China and the United Kingdom.

According to recent reports, a major U.S. technology firm has been awarded a patent for software designed to “help users develop blockchain applications by making it easier and more efficient to create crypto tokens for different distributed ledgers.” And in a development from the Bitcoin ATM industry, this week, a group of Bitcoin ATM operators announced the formation of the Cryptocurrency Compliance Cooperative, with a mission to “legitimize the cash-to-cryptocurrency industry by bolstering compliance standards.”

In a final item of note, growing consumer interest in cryptocurrency was highlighted in three recent surveys. Findings from the surveys include the following:

  • In one survey, respondents on average planned to invest $1,645 in cryptocurrency in the coming year and to hold on to their crypto for an average of five years.
  • In another survey, 60 percent of respondents viewed cryptocurrency as a long-term investment, and 11 percent of U.S. respondents purchased cryptocurrency with their COVID-19 stimulus checks.
  • A third survey found that Africa’s peer-to-peer bitcoin trading volume is close to $17 million and is now the largest in the world, exceeding that of North America.

For more information, please refer to the following links:

Market Navigation, Fashion Metaverse, Online Tutorials: NFT Adoption Continues

By Lauren Bass

Last week, an international digital payments corporation partnered with the first federally chartered digital asset bank to purchase the non-fungible token (NFT) CryptoPunk 7610. According to reports, the $150,000 transaction, which marked the corporation’s first foray into digital collectibles, was designed to help the company navigate this emerging marketplace and understand “what it takes to acquire, custody and interact with an NFT.”

Earlier this week, a U.S. beer company reportedly purchased NFT artwork featuring its own branded content. According to reports, the company then used the digital image as its profile picture on social media. The recent NFT sale follows the beer magnate’s earlier purchase of the Beer.eth domain name through OpenSea’s Ethereum Name Service.

In other NFT news, a major luxury fashion publication will reportedly launch an interactive fashion metaverse via a scannable QR code embedded in the magazine’s September print cover. According to reports, this digital world will feature two magazine covers, each to be released as a limited-edition NFT, as well as unique interactive online experiences. The publication will also reportedly release 15 NFTs featuring digital-only fashion wear, beauty and design products. The NFTs will be available for purchase on Brytehall, a newly launched NFT platform on the Binance Smart Chain.

To encourage the creation of NFTs on the Ethereum blockchain, Ethereum.org has published a tutorial that describes the step-by-step process necessary to generate and release an NFT. The three-part series teaches readers how to (i) write and deploy an ERC-721 smart contract, (ii) mint an NFT, and (iii) view the finished NFT on the Ethereum network.

For more information, please refer to the following links:

Crypto Compliance Addressed by CFTC, Thai SEC, South Korea and UK FCA

By Teresa Goody Guillén

Commissioner Dawn Stump of the U.S. Commodity Futures Trading Commission (CFTC) issued a statement this week addressing the CFTC’s regulatory and enforcement authority over digital assets. Among other things, the commissioner stated that the CFTC does not regulate commodities, but rather, it regulates derivatives. The statement outlined 10 points clarifying how and what the CFTC regulates and distinguished its regulatory versus enforcement authority.

This week, the Securities and Exchange Commission of Thailand (Thai SEC) proposed additional regulations related to the custody of investors’ cryptocurrency holdings held by digital asset business operators, citing investor protection concerns. The regulations address custody of fiat money, fiat money and digital assets, and seeking benefits from clients’ assets. Among other things, the Thai SEC is specifically proposing to prohibit crypto companies from using investor assets for the “benefit of another client or other persons,” and it proposes a new framework for the withdrawal and transfer of fiat money from digital asset accounts, requiring compliance with the principles of “decentralized approval authority, multi-sign approval authority, and check and balance.” The Thai SEC is accepting public comments on the newly proposed regulations until Sept. 22.

All South Korean crypto exchanges have reportedly failed their regulatory “consulting” audits. In June, the regulatory Financial Services Commission (FSC) collaborated with government ministries and state-owned IT firms to conduct a “complete investigation of corporate accounts” and crypto exchanges’ “coin management and investor protection” protocols. The FSC reportedly found that out of 33 exchanges, 25 had gained information security management system accreditation, anti-money laundering protocols were still “lacking” at most exchanges, and none of the trading platforms had obtained the required real name-authenticated banking contracts they will need to continue doing business after Sept. 24. Finally, in news from the U.K., a June notice from the Blockchain Blog Image Request Financial Conduct Authority to the cryptocurrency exchange Binance was made public this week. Among other things, the notice found that the exchange was “not capable of being effectively supervised.”

For more information, please refer to the following links:

SEC, DOJ and Ontario Securities Commission Bring Crypto Enforcement Actions

By Keith R. Murphy

The U.S. Securities and Exchange Commission (SEC) obtained judgments against three individual defendants in connection with their roles with BitConnect and its “lending program,” according to a recent press release. The charges among the various defendants included offering and selling securities without registering the securities offering with the SEC, aiding and abetting that unregistered securities offering, and unjust enrichment. The press release notes that thus far the defendants collectively have been ordered to pay $3.5 million and 190 bitcoin in disgorgement and prejudgment interest, with one defendant still awaiting court determination of the amount he will owe.

In related news, the Ontario Securities Commission recently issued a notice to a Seychelles-based fintech company operating the OKEx cryptocurrency exchange, asserting that the products it offers are considered securities and derivatives and thus are subject to Ontario securities law. The notice alleges the company failed to comply with Ontario’s registration and prospectus requirements, and it recommends various penalties, including prohibiting certain activities of the exchange and financial penalties.

The inventor of cryptocurrency AriseCoin has been sentenced to five years in prison for defrauding investors out of more than $4 million, according to a United States Department of Justice press release this week. In connection with his guilty plea, the defendant reportedly admitted lying to prospective investors, including representing that his similarly named AriseBank could offer Federal Deposit Insurance Corp.-insured accounts and traditional banking services such as Visa-branded credit cards and use the money from investors to fund his personal life.

A recently unsealed federal indictment alleges that a dark web drug dealer going by the name of Xanaxman has been laundering nearly $140 million of bitcoin while serving time in a Maryland prison. The defendant is already serving a nearly five-year prison term for dark web sales activities and was previously ordered to forfeit thousands of bitcoin. In connection with the recent charges, the United States Drug Enforcement Administration reportedly has seized 2,934 bitcoin since February.

For more information, please refer to the following links:

Reports Released on Crypto Scams and Malware, Poly Hacker Returns Funds

By Joanna F. Wasick

According to recent findings by the Australian Competition and Consumer Commission, Australians have lost over $70 million to scams in the first six months of this year. More than half of these losses were reportedly due to cryptocurrency scams, many involving a simple setup, where the scammer lies to investors about having an innovative, profitable trading system, when in fact no such system exists and investments are just stolen. Scam-related bitcoin losses were reportedly up 44 percent from last year.

An analysis out earlier this month found that a new type of malware involving a social engineering-based “malvertising” campaign is targeting users in Japan. The application masquerades as either an animated porn game, a reward points application or a video streaming application, and then delivers a malicious application that deploys a Cinobi banking trojan to steal cryptocurrency account credentials. The operation is attributed to Water Kappa, a threat actor that previously targeted Japanese banking users. In related news, last week, Trend Micro, an enterprise data security and cybersecurity company, discovered eight deceptive mobile apps masquerading as cryptocurrency cloud mining applications. The apps trick victims into watching ads, paying for subscription services and paying for increased mining capabilities without getting anything in return.

The hacker who took more than $600 million from the Poly Network platform on Aug. 10, has released the private key for the remaining $141 million after returning the rest of the funds earlier this month. The Poly Network later tweeted its thanks for the return and posted a link to a transaction on the Ethereum blockchain, confirming that the key worked.

For more information, please refer to the following links:

2021 Global Blockchain Survey Focuses on Views of Financial Services Leaders

By Robert A. Musiala Jr.

This week, a Big Four accounting and consulting firm published its 2021 Global Blockchain Survey. The survey focused on the global financial services industry (FSI) and finds that “global FSI leaders see digital assets … as a strategic priority.” According to the survey, “80% of overall respondents say that digital assets will be ‘very/somewhat important’ to their respective industries in the next 24 months.” The survey polled a sample of 1,280 senior executives in 10 locations: Brazil, Mainland China, Germany, Hong Kong SAR, Japan, Singapore, South Africa, the United Arab Emirates, the United Kingdom and the United States. Some key findings from the survey include the following from FSI respondents:

  • 83 percent agree there is a compelling business case for blockchain, digital assets and/or cryptocurrencies within their organization or project.
  • 83 percent report that their business partners, suppliers, customers and/or competitors are discussing working on blockchain, digital assets and/or cryptocurrencies in the context of solutions or strategies.
  • 80 percent agree their industry will see new revenue streams from blockchain, digital asset and/or cryptocurrency solutions.
  • 77 percent agree that their organization will lose an opportunity for competitive advantage if they fail to adopt blockchain and digital assets.
  • 76 percent strongly or somewhat believe digital assets will be a strong alternative to or replacement for fiat currencies in the next 10 years.
  • The top expected roles of digital assets in FSI organizations were custody of digital assets, new payment channels, tokenization of assets and access to decentralized finance platforms.
  • The top reported barriers to digital asset acceptance were financial infrastructure, cybersecurity and regulatory barriers.
  • The top reported impacts of digital assets were more efficient processes, greater compliance and transparency, and achieving competitive advantages.

For more information, please refer to the following link:

Crypto Adoption and AML Reports Published, NFT Market Growth Continues, Blockchain Cobalt Pilot Progresses, Crypto Exchange and DeFi Market Hacked

In this issue:

Crypto Adoption Index Published, Regulators Address Crypto Across Globe

Design, Data and Digital Platforms: NFT Market Domination Continues

Blockchain Cobalt Tracing Pilot Launches, Ethereum-Based Networks to Merge

Bitcoin “Tumbler” Operator Pleads Guilty, Crypto AML Report Published

Cryptocurrency Exchange and DeFi Market Hacked, Crypto Malware Reported

Crypto Adoption Index Published, Regulators Address Crypto Across Globe

By Joanna F. Wasick

The 2021 Chainalysis Global Crypto Adoption Index was published on Wednesday, providing an in-depth review of cryptocurrency adoption around the globe. Chainalysis ranked 154 countries according to three metrics: (1) on-chain cryptocurrency value received, (2) on-chain retail value transferred and (3) peer-to-peer exchange trade volume. The application of each metric was balanced with the country’s purchasing power parity per capita, so that the significance of cryptocurrency use was assessed in the context of a people’s individual wealth and the value of money generally in that country. Vietnam received the highest overall index ranking, followed by India and Pakistan. The United States was ranked eighth, down two places from last year. The index further indicates that global cryptocurrency adoption has grown over 2,300 percent since Q3 2019 and over 881 percent in the past year.

After significant contention over the language in the infrastructure bill’s provision on cryptocurrency tax reporting, a recent article reports that the U.S. Treasury intends to issue guidance clarifying that only cryptocurrency companies considered to be “brokers” under the tax code will be subject to reporting obligations, and not, for example, developers, stakers and miners. The prospective guidance appears to be an effort by Treasury to get the existing bill passed by the House and through to the president, without further congressional efforts to narrow the bill’s actual language, which could cause delay.

Earlier this week, Spain’s National Securities Market Commission issued 12 warnings to companies, including cryptocurrency exchanges Huobi and Bybit, for providing investment services without properly registering with authorities. Three other crypto exchanges were also targeted, as was one token issuer. Similarly, the Dutch central bank stated on Wednesday that cryptocurrency exchange Binance had not properly registered to do business and was operating illegally in the country. Also on Wednesday, the Australian Securities & Investments Commission issued a statement telling Australians to be wary of investing in crypto-asset-related financial products and services where the provider does not have proper licensing.

For more information, please refer to the following links:

Design, Data and Digital Platforms: NFT Market Domination Continues

By Lauren Bass

Earlier this week, a major Italian fashion house announced the debut of its non-fungible token (NFT) collection. According to reports, the collection, which marks the brand’s first foray into the NFT market, will feature one-of-a-kind items intended to “bridge the physical with the metaphysical.” These specially designed digital looks will be available for auction via UNXD, an Ethereum-based luxury marketplace powered by the Polygon Network.

After featuring the work of a graphic artist on the cover of its August 2021 issue dedicated to cryptocurrency, a multinational business magazine has reportedly decided to mint the viral design as a limited edition NFT series. According to reports, each NFT will sell for a fixed price of 1 ETH and be offered to the public exclusively through the OpenSea marketplace.

In other NFT news, a Chinese e-commerce platform has announced the launch of a new integrated marketplace that will allow writers, musicians, artists and game developers a means by which to sell rights to their intellectual property via the blockchain. According to reports, the NFTs will be issued through the New Copyright Blockchain, which is operated by the Sichuan Blockchain Association Copyright Committee. The digital tokens will be accessible to the public through a dedicated auction site on the e-commerce platform.

According to cryptocurrency analysts, recent summer NFT sales have “exploded” to levels beyond that of the earlier NFT boom in March. One of the largest NFT marketplaces has reportedly topped $1 billion in sales this month, representing almost 60,000 unique sales per day. According to reports, the market increase may have been fueled by recent purchases of CryptoPunks, Art Blocks, Social Media profile picture collections and other cryptoart. The report also suggests there may be a correlation between NFT sales and the price of ETH.

For more information, please refer to the following links:

Blockchain Cobalt Tracing Pilot Launches, Ethereum-Based Networks to Merge

By Keith R. Murphy

According to recent reports, a well-known electric vehicle (EV) manufacturer has reported progress in piloting a new blockchain cobalt traceability solution that is backed by several major metals and mining companies. The cobalt traceability pilot is reportedly being tested in real-world conditions, starting from the material’s sources in Africa to downstream EV production sites. The EV manufacturer plans a final pilot across its entire supply line by year-end, and the launch of the final industry solution is anticipated to occur in 2022.

According to a recent press release, the team and technology behind a zero-knowledge cryptography-based scaling project, Hermez Network, is merging into the Polygon Network ecosystem, resulting in a new network to be named Polygon Hermez. The release states that Hermez is a fully functional, decentralized rollup processing thousands of transactions and verifying them on Ethereum L1, and that the planned combination will be the first full-blown merger of one blockchain network into another.

For more information, please refer to the following links:

Bitcoin “Tumbler” Operator Pleads Guilty, Crypto AML Report Published

By Jordan R. Silversmith

This week, an Ohio man pleaded guilty to operating a money laundering scheme through Helix, a darknet-based cryptocurrency laundering service. According to court documents, the man admitted he operated Helix, a bitcoin “mixer” or “tumbler,” from 2014 to 2017. In total, Helix moved more than 350,000 bitcoin – valued at over $300 million at the time – on behalf of its customers. The man will be sentenced to a maximum of 20 years in prison and a fine of $500,000 or twice the value of the property involved in the transaction, among other penalties. As part of his plea, he has also agreed to forfeit more than 4,400 bitcoin, valued at more than $200 million today.

A prominent blockchain analytics company recently released its cryptocurrency crime and anti-money laundering report for 2021. According to the report, the $681 million stolen in major crypto thefts, hacks and frauds by the end of July 2021 is a much smaller amount than previous years’ amounts. However, the report notes an alarming quarter-over-quarter rise in decentralized finance (DeFi)-related crimes. DeFi-related hacks already account for 76 percent of major hacks in 2021, a 2.7-times increase from 2020. DeFi-related fraud accounted for 54 percent of major crypto fraud volume this year, while DeFi-related fraud only made up 3 percent of 2020’s total. The report also noted the continued growth of ransomware targeting critical national infrastructure this year.

For more information, please refer to the following links:

Cryptocurrency Exchange and DeFi Market Hacked, Crypto Malware Reported

By Kayley B. Sullivan

According to recent reports, Japan’s Liquid Gold cryptocurrency exchange has been hacked and has since suspended deposits and withdrawals. Liquid did not provide an estimate for the value of the loss, but reports indicate that it may be in excess of $90 million. In another recent hack, DeFi market maker Popsicle Finance was reportedly hacked in an attack that drained approximately $25 million in ether.

Late last week, a cybersecurity firm released a report discussing a recently uncovered cryptomining scheme. The scheme reportedly uses malicious Docker images to hijack computing resources and mine the Monero cryptocurrency. The Docker containers, a way to electronically package software, are made to look as though they are the organization’s own Docker images.

For more information, please refer to the following links:

Crypto, CBDC and Blockchain Supply Chain Initiatives Announced; More SEC and FinCEN Enforcement; Crypto Tax Amendment Fails; DeFi Hacked for $600M

In this issue:

Crypto Firms Pursue Bank Charters, Traditional Financial Firms Integrate Crypto

CBDC and Blockchain Remittance Initiatives Launch Across Foreign Markets

Blockchain Supply Chain Initiatives Launch Across Various Industries

SEC Charges DeFi Company and Digital Asset Exchange Platform

FinCEN Settles Enforcement Action Against Major Cryptocurrency Exchange

Senate Passes Bill Expanding Crypto Tax Reporting Without Amendments

Senator and SEC Chair Discuss Crypto Concerns as DeFi Is Hacked for $600M

Crypto Firms Pursue Bank Charters, Traditional Financial Firms Integrate Crypto

By Veronica Reynolds

This week, the Wyoming Division of Banking granted a new Special Purpose Depository Institution (SPDI) bank charter to Commercium Financial Inc., a financial entity positioning itself to be a fully digitized bank. According to a press release, this is the fourth SPDI to receive approval in Wyoming, and the charter will allow the SPDI entity “to deploy a unique set of technology solutions that connect traditional banking systems to tokenized assets and securities.” Also this week, Circle announced plans to become a U.S. federally chartered national commercial bank operating under the risk management requirements of the U.S. Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Circle’s goal, according to its blog, is to leverage digital currency technology to facilitate a more efficient and resilient financial system.

This week, a major U.S. consumer payments platform announced, “Cash Back to Crypto, a new way for … credit card customers to automatically purchase cryptocurrency … using cash back earned from their card purchases.” Also this week, a major global bank based in Singapore announced that its brokerage arm “has received in-principle approval from the Monetary Authority of Singapore (MAS) … to provide digital payment token services as a major payment institution.” According to a press release, the license will allow the bank’s brokerage arm “to directly support asset managers and companies to trade in digital payment tokens.” The press release also notes that beginning August 16, the bank’s “digital exchange” will begin operating 24 hours per day to enhance its customers’ ability “to seize opportunities and manage risks arising from changes in cryptocurrency spot prices.”

Bitcoin has become more environmentally friendly as a result of reduced mining in China, according to a recent article published by Bitcoin Magazine. According to the article, recently obtained data indicates that almost a third of Bitcoin’s hash rate is powered by low-emissions energy sources, with reportedly 56 percent of Bitcoin’s needed energy now being produced from sustainable sources such as wind, solar, hydro, nuclear and other renewables.

For more information, please refer to the following links:

CBDC and Blockchain Remittance Initiatives Launch Across Foreign Markets

By Joanna F. Wasick

Three countries recently announced important developments with their central bank digital currencies (CBDCs) initiatives. On Wednesday, the Bank of Ghana announced that it was partnering with a German payments company to launch a CBDC pilot to be tested with banks, payment service providers, merchants, consumers and other relevant stakeholders. The project is part of the “Digital Ghana Agenda,” and it is designed to provide alternatives to physical cash and to facilitate payments without a bank account. Earlier this week, the Bank of Jamaica announced it minted Jamaica’s first batch of CBDC, part of the total of J$230 million in CBDC to be issued to deposit-taking institutions and authorized payment service providers during Jamaica’s CBDC pilot, which runs through December. And last week, a major South Korean electronics and communications conglomerate announced it will join the Bank of Korea’s CBDC pilot program, which began late last month and has been co-managed with GroundX, a blockchain affiliate of a messenger platform. The conglomerate and bank stated that the project will involve issuing and distributing CBDC and monitoring its use in virtual environments. It will also focus on money transfers and remittances between countries.

This week, Velo Labs, TEMPO Payments and Bitazza opened up a remittance corridor between 27 European Union countries and Thailand. The cross-border transactions utilize the Velo Protocol, Velo and Velo digital credits, and each transaction reportedly settles in seconds over the Stellar blockchain. On Tuesday, a U.S. fintech firm announced that one of the largest nonbank remittance service providers in South Korea joined its global financial network. By joining, the service provider is now connected to Thailand’s largest bank (in terms of market capital). Also this week, Chilean peso-pegged stablecoin CLPX launched on Stellar. While initial trading volume appears low (reportedly $12,689 from fewer than 13,000 trades, as of early Thursday), the stablecoin aims to provide a cheaper alternative to traditional remittances and to make it easy for investors worldwide to use the copper-linked Chilean peso as a hedge.

For more information, please refer to the following links:

Blockchain Supply Chain Initiatives Launch Across Various Industries

By Robert A. Musiala Jr.

A major U.S. healthcare services company recently announced a partnership with the MediLedger Network “to leverage a new blockchain-powered solution … to streamline operations across the pharmaceutical supply chain and enable a reliable, frictionless experience for pharmacies across the country.” According to a press release, the blockchain solution will allow the healthcare company “to optimize the complex process of pharmaceutical chargebacks and create greater connectivity for its suppliers and customers.” In other supply chain developments, blockchain enterprise firm BlockApps recently launched “Genesis – Blockchain for Beef,” a solution designed to “allows users to record and track animal data such as health protocols, performance indicators, current locations, and progress across the supply chain … optimizing the value and quality of beef.”

According to a recent press release, a U.S. electric car company has agreed to work with a major Australian mining firm on an initiative aimed at achieving “end-to-end raw material traceability using blockchain.” In a related development, the Provenance Proof Blockchain recently announced new functionality for its blockchain platform used to trace the supply chain of precious stones.

According to reports, the UK Fashion and Textile Association recently launched a blockchain traceability project for the fashion industry supply chain in partnership with several major clothing retailers and a major global technology firm. The initiative will reportedly seek to leverage “blockchain technology to share information about the clothing products – such as place and date of production, product composition and environment-related certificates – accessible to consumers via a QR code.”

For more information, please refer to the following links:

SEC Charges DeFi Company and Digital Asset Exchange Platform

By Teresa Goody Guillén

Shortly after the U.S. Securities and Exchange Commission (SEC) Chair indicated that the SEC’s enforcement efforts would be aggressive in the crypto space, the SEC brought two significant crypto-related actions. First, the SEC charged two Florida men and their Cayman Islands company for unregistered sales of more than $30 million of securities using smart contracts and decentralized finance (DeFi) technology, and for misleading investors concerning the operations and profitability of their business, DeFi Money Market. According to the order, in offering and selling the tokens, the respondents stated that DeFi Money Market would use investor assets to buy “real world” assets that generated income. However, the order finds that the respondents, upon learning that DeFi Money Market could not operate as promised, did not notify investors of this roadblock but instead misrepresented how the company was operating, including by making false claims that DeFi Money Market had bought the assets.

Also, this week, the SEC announced that a digital asset trading platform agreed to pay more than $10 million to settle charges for operating an unregistered online digital asset exchange that facilitated buying and selling of digital asset securities. According to the SEC’s order, the trading platform met the criteria of an “exchange” because the trading platform provided the nondiscretionary means for trade orders to interact and execute through the combined use of the platform’s website, an order book and the platform’s trading engine, but it did not register as a national securities exchange or operate pursuant to an exemption from registration. The SEC’s order further finds that platform employees stated internally that they wanted to be “aggressive” in making available for trading new digital assets on the trading platform, including digital assets that might be considered securities under the Howey test.

SEC Commissioner Hester Peirce issued her own statement criticizing the enforcement action against the digital asset trading platform. According to Peirce’s statement, during the period at issue the process for the trading platform to have registered as a securities exchange or broker-dealer and alternative trading system (ATS) would have been too long. Peirce’s statement noted that market participants are surprised by the SEC’s “enforcement guns blazing” given how “slow” the SEC has been in determining how regulated entities can interact with crypto, and in addressing outstanding questions and issues that need to be resolved before a crypto trading platform can register as an exchange or an ATS.

For more information, please refer to the following links:

FinCEN Settles Enforcement Action Against Major Cryptocurrency Exchange

By Robert A. Musiala Jr.

This week, the U.S. Financial Crimes Enforcement Network (FinCEN) announced that it has “assessed a civil money penalty in the amount of $100 million against BitMEX, one of the oldest and largest convertible virtual currency derivatives exchanges, for violations of the Bank Secrecy Act (BSA) and FinCEN’s implementing regulations.” According to a press release, the settlement is part of a global settlement with the U.S. Commodity Futures Trading Commission and relates to charges that BitMEX “operated as an unregistered futures commission merchant (FCM) and provided money transmission services” while failing to comply with its obligations under the BSA.

According to the press release, “for over 6 years, BitMEX failed to implement and maintain a compliant anti-money laundering program and a customer identification program, and it failed to report certain suspicious activity.” The press release further notes that BitMEX “conducted at least $209 million worth of transactions with known darknet markets or unregistered money services businesses providing mixing services,” and “failed to file a Suspicious Activity Report (SAR) on at least 588 specific suspicious transactions.” In addition to paying a civil monetary penalty, BitMEX has agreed to engage independent consultants to perform a “SAR lookback” investigation and conduct reviews to ensure that appropriate policies, procedures and controls are in place to ensure that BitMEX is not operating wholly or in substantial part in the United States.

For more information, please refer to the following links:

Senate Passes Bill Expanding Crypto Tax Reporting Without Amendments

By Nicholas C. Mowbray

On August 10, the Senate passed a $1.2 trillion infrastructure bill that included stringent reporting of cryptocurrency transactions to the Internal Revenue Service. The cryptocurrency provisions were the subject of significant debate, with bipartisan groups of lawmakers introducing amendments to narrow its application to cryptocurrency exchanges. The final legislation, however, did not contain these amendments.

As drafted, the legislation expands the definition of a “broker” to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Absent further changes to the legislation or interpretations by the U.S. Treasury Department and Internal Revenue Service after the legislation becomes law, the legislation may require noncustodial blockchain users (i.e., software developers and blockchain network validators) to collect and report personal information (i.e., the name and U.S. tax identifying number of a transferee, the sales price, and the transferee’s tax basis) from users of blockchain networks. The legislation will now be taken up by the U.S. House of Representatives when it returns from its summer recess.

For more information, please refer to the following links:

Senator and SEC Chair Discuss Crypto Concerns as DeFi Is Hacked for $600M

By Kayley B. Sullivan

On July 7, U.S. Sen. Elizabeth Warren, chair of the Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Economic Policy, sent a letter to SEC Chair Gary Gensler requesting information about the agency’s authority to regulate cryptocurrency exchanges and protect consumers from risks associated with the cryptocurrency market. In response, in a letter dated August 5, Chair Gensler expressed his views that investors using cryptocurrency platforms are not adequately protected and that legislative priority should center on cryptocurrency trading, lending and decentralized financial platforms. According to Gensler, “Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”

Meanwhile, in what may be the largest DeFi hack to date, this week the Poly Network DeFi platform was hacked, losing over $600 million in cryptocurrency from the Ethereum, Binance Chain and Polygon Networks. According to tweets from the company, the hacker then began returning funds to wallet addresses on the three chains, so far returning approximately half of the stolen proceeds. According to reports, the hacker has since been communicating with the public and has “conducted an Ask Me Anything (AMA) using embedded messages in Ethereum transactions.”

For more information, please refer to the following links:

SEC Doubles Down on Crypto Enforcement

In a speech before the Aspen Security Forum on August 3, 2021, Securities and Exchange Commission (“SEC” or “Commission”) Chair Gary Gensler urged lawmakers to provide him with the power to police cryptocurrency trading, referring to it as the “Wild West.”[1] While he noted that the views he was sharing were his own and not those of the SEC, Chair Gensler made clear his concerns that the markets are “rife with fraud, scams, and abuse” where, in many cases, investors are unable to get the data they need in order to make an informed decision.[2] These statements come after many months of the market wondering where Chair Gensler would fall on cryptocurrency enforcement, especially given the omission of digital assets from the SEC’s recently published regulatory agenda, which listed a number of the Commission’s rule proposals for the next year.[3] Nevertheless, it is clear that the SEC plans to regulate cryptocurrency markets to the maximum extent possible using its existing authority. And the two enforcement actions brought by the SEC in the days following Chair Gensler’s speech illustrate the Commission’s clear intention to double down on crypto enforcement.[4] Continue Reading

Cryptocurrency Payment Products and NFT Initiatives Launch, SEC Chairman Addresses Crypto, Pending Legislation Includes New Crypto Tax Reporting Rules

In this issue:

New Crypto Products Launch in Payment Cards, Gold and Sandwiches

More NFTs Launch in Sports, Fashion, Gaming and Charity Auctions

SEC Chairman, Kentucky and UK Address Various Aspects of Crypto Industry

Proposed Legislation Expands Crypto Tax Reporting, Senators Seek Amendment

New Crypto Products Launch in Payment Cards, Gold and Sandwiches

By Joanna F. Wasick

Coinjar, an Australian cryptocurrency exchange, recently announced its launch of a payment card backed by a major U.S. credit card and financial services business. The card, reportedly the first of its kind in Australia, will allow users to buy, sell and spend cryptocurrency directly from its platform using local dollars. According to CoinJar’s press release, the card supports up to 30 different cryptocurrencies and features a 1 percent conversion rate that makes returns to customers via an in-house reward program.

Kitco, a Canada-based provider of news and data on gold and other precious metals, recently announced that it will issue a gold-backed stablecoin, Kitco Gold. The stablecoin will reportedly be fully backed by physical gold kept in Kitco’s own reserve vaults and will track gold’s real-time market value. A spokesperson from the company says that initial trading will begin in the coming weeks.

Earlier this week, Bakkt Holdings, LLC, the digital asset marketplace behind the Bakkt App, a digital wallet provider, announced a partnership with a major fast-food restaurant featuring toasted submarine sandwiches. The two entities are working together to allow restaurant customers to pay with bitcoin at select locations. The pilot will start in the Denver market, including in the location in the Denver airport.

A national television news station recently reported that a Washington, D.C., couple could not access their 3,000 ETH, now valued at around $8.4 million. The couple maintains that when they bought the cryptocurrency in 2014, they were unable to complete the download of a JSON file that holds an encrypted version of their private key. The couple reportedly contacted the Ethereum Foundation with proof of their purchase and screenshots of the problematic download. The Foundation allegedly promised to help resolve the issue, but, the couple says, it has not yet done so. The story is one of many in which cryptocurrency holders can no longer access their cryptocurrencies because they are unable to access – or remember – their private keys.

For more information, please refer to the following links:

More NFTs Launch in Sports, Fashion, Gaming and Charity Auctions

By Lauren Bass

According to a press release this week, the owner and operator of a major U.S. cryptocurrency exchange has teamed with a boutique production shingle to launch a new non-fungible token (NFT) marketplace. The “large-scale,” “consumer-facing” venture aims to be a “seamless user experience” that will design, curate and sell NFTs for sports, entertainment and lifestyle brands.

According to recent reports, Vegas basketball fans will soon be presented with a unique opportunity to purchase one-of-a-kind “moment-in-arena” NFTs exclusively at stadium kiosks. According to reports, this marks the first time that NFTs will be sold at a physical location.

In other sports news, a celebrated soccer player will reportedly be commemorated with his own authenticated NFT collection. The NFT series will reportedly consist of four unique artworks and will be available exclusively on the Ethernity Chain.

According to recent reports, a luxury British fashion house is the latest designer to embrace NFTs as a new means of brand promotion. The style icon will offer limited-edition product drops via the multiplayer online game Blankos Block Party. The branded NFT collection will be available for purchase exclusively in the game.

To celebrate International Friendship Day, a multinational beverage corporation has reportedly partnered with a Utah-based designer of avatars and digital wearables to offer a special edition NFT via auction. The NFTs will be offered on the Ethereum blockchain, and proceeds from the auction will benefit Special Olympics International.

For more information, please refer to the following links:

SEC Chairman, Kentucky and UK Address Various Aspects of Crypto Industry

By Veronica Reynolds

On August 3, 2021, the chairman of the U.S. Securities and Exchange Commission, Gary Gensler, spoke on the topic of cryptocurrencies at the Aspen Security Forum. The chairman’s speech emphasized the need for increased investor protection in the cryptocurrency ecosystem. The chairman acknowledged that Bitcoin “has been and could continue to be a catalyst for change in the fields of finance and money.” However, he observed that the lack of central intermediaries fosters a financial ecosystem that skirts regulations created to protect public policy goals. He emphasized the Commission’s role in addressing such legal violations and said the Commission “will continue to take [its] authorities as far as they go.” Among other things, the chairman noted that while “[c]ertain rules related to crypto assets are well-settled,” there “are some gaps in this space” that need to be addressed, including the need for congressional authorities to “prevent transactions, products, and platforms from falling between regulatory cracks.”

The Kentucky Department of Financial Institutions is the latest state agency to issue an emergency cease and desist order against Blockfi Inc. and its affiliate entities (Blockfi), instructing the company to refrain from unlawfully soliciting or selling securities in Kentucky. The agency noted that Blockfi has accepted close to $15 billion in customer cryptocurrency deposits in order to fuel its cryptocurrency lending and borrowing services. The agency’s action comes on the heels of other recent actions brought against the company by New Jersey, Alabama, Texas and Vermont.

According to recent reports, the Financial Action Task Force’s so-called “travel rule” for cryptocurrency transactions may be implemented by the U.K’s finance ministry, HM Treasury. The Treasury unveiled the proposed implementation for public comment last week, emphasizing its relevance in protecting against terrorism financing and money laundering. The Treasury stated that it waited to formally propose adoption of the rule “in order to allow compliance solutions to be developed” by cryptocurrency-focused firms.

For more information, please refer to the following links:

Proposed Legislation Expands Crypto Tax Reporting, Senators Seek Amendment

By Nicholas C. Mowbray

The United States Senate introduced legislation this week to advance a portion of the White House’s infrastructure plan. Included in the legislation is a proposal intended to enhance cryptocurrency tax reporting and enforcement and to raise $28 billion of revenue to pay (in part) for the infrastructure plan’s price tag.

As currently drafted, the legislation could have broad and sweeping impacts on the entire cryptocurrency industry by imposing tax information reporting requirements on cryptocurrency transfers conducted by persons acting under an expanded definition of the term “broker.” In its current form, the legislation would expand the definition of “broker” to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Included in this information reporting would be the name and U.S. tax identifying number of the transferee, the sales price, and the transferee’s tax basis. If enacted in its current form, the proposed legislation would have an effective date of January 1, 2023.

Cryptocurrency groups have expressed concerns that the amended definition of broker is too broad and captures miners, software developers, stakers and other individuals who do not perform functions similar to those of a traditional broker (i.e., effectuating the purchase and sale of a cryptocurrency for a client). To address these concerns, a group of U.S. Senators has introduced a proposed amendment that attempts to limit the information reporting obligations to cryptocurrency exchanges. Specifically, the amendment would exempt from the definition of “broker” (and in turn the information reporting obligations) “any person solely engaged in the business of –

(A) validating distributed ledger transactions,

(B) selling hardware or software for which the sole function is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger, or

(C) developing digital assets or their corresponding protocols for use by other persons, provided that such other persons are not customers of the person developing such assets or protocols.”

For more information, please refer to the following links:

Regulator Seeks Comments on DeFi; Crypto Firms Announce Products, Licenses, DAO Application Updates; NFT Boom Continues; OFAC Adds Bitcoin Address

In this issue:

NCUA Seeks Comment on DeFi, Crypto Firms Launch Products, Gain Licenses

Reports Describe Developments in Decentralized Platforms and FinTech Funding

Fashion, Sports, Art and Music: the NFT Market Continues to Boom

OFAC Adds Bitcoin Address to SDN List, Anchorage Selected for USMS Services

NCUA Seeks Comment on DeFi, Crypto Firms Launch Products, Gain Licenses

By: Robert A. Musiala Jr.

The National Credit Union Administration (NCUA), a federal agency that charters and regulates federal credit unions, recently published a notice of request for information and comment on “the current and potential impact of activities connected to digital assets and related technologies on federally insured credit unions (FICUs), related entities, and the NCUA … including current and potential uses in the credit union system, and the risks associated with them.” According to the notice, the NCUA is seeking to learn how the credit union community is using emerging distributed ledger technology and decentralized finance (DeFi) applications. The NCUA is also seeking feedback on “the role the NCUA can play in safeguarding the financial system and consumers in the context of these emerging technologies.”

According to a press release this week, Ripple has completed its first “On-Demand Liquidity (ODL) service implementation in Japan, setting the stage to drive more adoption of crypto-enabled services in the region.” The service will reportedly leverage Ripple’s XRP cryptocurrency and be implemented through payments firms in Japan and the Philippines to “provide faster, more affordable remittance options for customers” in those countries.

In another recent announcement, cryptocurrency exchange Crypto.com has reportedly become “the first global cryptocurrency platform to receive an Electronic Money Institution (EMI) License from the Malta Financial Services Authority (MFSA).” The announcement notes that the license “allows Crypto.com to issue cards and offer bank transfers directly to consumers.”

A report published this week provided details on the expansion of cryptocurrency ATMs across the globe. Citing data from Coin ATM Radar, the report notes that “crypto ATM installations in 2021 have witnessed a spike of 71.73%, pulling up the numbers from 13,993 on Jan. 1 to 24,030 at the time of reporting.” According to the report, “Crypto ATMs can be accessed across 75 sovereign nations and are powered by 42 producers.”

For more information, please refer to the following links:

Reports Describe Developments in Decentralized Platforms and FinTech Funding

By:  Kayley B. Sullivan and Robert A. Musiala Jr.

The MakerDAO Foundation recently announced that “MakerDAO is now completely decentralized.” MakerDAO is an Ethereum-based decentralized autonomous organization (DAO) that enables Dai, an ERC20 cryptocurrency designed to keep its value as close to one U.S. dollar as possible through an automated system of smart contracts. According to the announcement, “[t]he global Maker community is now responsible for every aspect of the Maker Protocol and the DAO.” The announcement states that “the DAO is now fully self-sufficient and the Maker Foundation will formally dissolve within the next few months.”

In another recent announcement, Uniswap Labs, “a software development studio that contributes to the Uniswap Protocol” and that provides the open source app.uniswap.org portal for interaction with the Uniswap Protocol, has “taken the decision to restrict access to certain tokens through app.uniswap.org.” The announcement includes a link to the full list of restricted tokens and notes that Uniswap Labs “monitor[s] the evolving regulatory landscape.” According to the announcement, the “action has no impact on the Uniswap Interface code, which remains open source, or the many other portals or locally run instances used to access the Uniswap Protocol.” The announcement distinguishes the app.uniswap.org portal from the Uniswap Protocol, which it describes as “a set of autonomous, decentralized, and immutable smart contracts” that “provides unrestricted access to anyone with an Internet connection.”

Late last week, CB Insights released its State of FinTech report for the second quarter of 2021. Among other things, the report notes that funding for Blockchain-related ventures has hit a record high, crossing $4 billion in the quarter. The largest reported deal was Circle, a cryptocurrency payment platform, which raised approximately $440 million. According to the report, Q2 was the largest funding quarter on record; mega-rounds drove the funding boom; South America led growth in both funding and deal count; and Fintech public exits reached new highs. The report discusses fintech financing trends in the payments, banking, digital lending, wealth management, insurance, capital markets, SMB and real estate sectors.

For more information, please refer to the following links:

Fashion, Sports, Art and Music: the NFT Market Continues to Boom

By: Lauren Bass

According to recent reports, a high-end Italian fashion house has partnered with a luxury digital marketplace to offer a haute couture collection of “fashion NFT (non-fungible token) wearables.” The one-of-a-kind digital pieces, inspired by the city of Venice, will be promoted during the house’s upcoming fashion shows in Italy in late August, and will reportedly be available to “wear” virtually through augmented reality.

In other NFT news, a multinational e-commerce platform has reportedly integrated an NFT marketplace, which will eliminate the need for third-party resellers and allow its merchants to issue and sell NFTs directly to consumers. The integration will support NFTs issued via Ethereum’s ERC-721 standard, Simple Ledger Protocol’s SLP token standard and Dapper Labs’ Flow blockchain. A major sports franchise team will reportedly be the first customer to take advantage of the new offering. The team will offer an exclusive digital collection, minted by Flow, featuring six unique pieces celebrating the legendary team’s iconic championship wins.

NFTs are also making their way into the not-for-profit arena. Earlier this month, a global nonprofit working to eradicate hunger reportedly commissioned three independent artists to create and release unique digital collectibles to help raise awareness for the organization’s sustainability programs. According to press releases, the NFTs will be auctioned on a community-owned digital marketplace, and the sale proceeds will help fund the nonprofit’s blockchain initiatives, including the creation of an agricultural network to introduce farmers to expanding markets.

Similarly, a major U.S. orchestra has reportedly released a series of classical music NFTs to raise funds to benefit musicians impacted by the COVID-19 pandemic. The series combines live orchestral performances captured on video, with behind-the-scenes concert footage, and various in-person VIP experiences. It also celebrates a historic musical event marking the first time many orchestral members had performed live since the coronavirus shutdown.

For more information, please refer to the following links:

OFAC Adds Bitcoin Address to SDN List, Anchorage Selected for USMS Services

By: Keith R. Murphy

This week the  U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated a Turkey-based financial facilitator for materially assisting al-Qa’ida, and separately designated a Syria-based fundraiser and recruiter for providing material support to Hay’et Tahrir Al-Sham, according to a press release. In related updates to OFAC’s Specially Designated Nationals (SDN) List, OFAC included a Bitcoin Network public key address associated with one of the individuals.

According to a press release this week, Anchorage Digital has been selected to provide digital asset custody and financial services to the United States Marshals Service (USMS).” To help the USMS handle its seized digital assets, Anchorage anticipates providing multiple cryptocurrency services to the USMS, including custody, wallet creation, management of blockchain forks and “transformation of token assets into coin assets.”

According to a recent report, Brazil’s civil police have seized $33 million in connection with an ongoing investigation into a purported cryptocurrency money laundering scheme. The allegations include that certain cryptocurrency exchanges acquired and sold bitcoin while knowingly operating on behalf of a criminal organization focused on laundering money through cryptocurrencies.

For more information, please refer to the following links:

New Stablecoin and CBDC Developments, Blockchain Enterprise Initiatives Announced, Crypto Financial Services Firm Targeted by State Regulators

In this issue:

US Stablecoin Issuers Publish New Details on US Dollar Reserves

US Treasury, Bank of Canada and Academics Address Stablecoins and CBDCs

Australian and Georgian Governments Launch Blockchain Initiatives

Crypto Financial Services Firm Targeted by State Securities Regulators

SEC Enforcement Actions Target Cryptocurrency-Related Misrepresentations

US Stablecoin Issuers Publish New Details on US Dollar Reserves

By Robert A. Musiala Jr.

This week, Circle, the issuer of USDC – a cryptocurrency “stablecoin” with each unit backed 1:1 by U.S. dollars – published its latest reserve attestation issued by a U.S. public accounting firm. According to a blog post, Circle’s reserve attestations will now include “a breakdown of dollar-denominated reserve assets, which are all held in the care, custody and control of U.S.-regulated financial institutions and in line with laws and guidelines from our U.S. state money transmission regulators.”

The blog post notes that “[w]hile public disclosure of reserves is not currently a regulatory requirement for stablecoins or privately issued digital currencies, we want to continue leading the sector with greater transparency … especially as the role of dollar digital currencies grows in importance in the global financial system.” According to the blog post, “USDC in circulation has grown more than 2,600% since the beginning of 2021.” This week, Circle also announced a new initiative with a major U.S. financial services firm to “use USDC to facilitate crypto-to-fiat conversions” and “test using USDC as a means for card issuers to more easily settle payments.”

In a related blog post, Paxos, the issuer of the U.S. dollar-backed stablecoins PAX and BUSD, disclosed details about the reserves backing PAX and BUSD. The blog post includes a comparison of the reserves backing PAX, BUSD, USDC and tether. And it distinguishes the PAX, BUSD and GUSD stablecoins from USDC and tether by noting the differences in reserve assets backing the stablecoins and by noting that PAX, BUSD and GUSD are issued by trust companies regulated by the New York State Department of Financial Services.

For more information, please refer to the following links:

US Treasury, Bank of Canada and Academics Address Stablecoins and CBDCs

By Joanna F. Wasick

Early this week, the secretary of the U.S. Treasury convened the President’s Working Group on Financial Markets (PWG) with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to discuss stablecoins (cryptocurrencies backed by a fiat currency). Meeting topics included the rapid growth of stablecoins, their potential use for making payments, and possible risks to end users, the financial system and national security. The secretary underscored the need for a regulatory framework for these cryptocurrencies. The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, current U.S. regulations, and how to address any regulatory gaps. The PWG expects to issue recommendations in the coming months.

The Bank of Canada published a paper this week addressing the competition and innovation arguments for issuing a central bank digital currency (CBDC). According to the paper, CBDCs foster the public policy objectives of competition and innovation in the growing digital economy. The paper describes two scenarios that the bank first identified in 2020 that warrant the issuance of a CBDC. The first involves an economy where cash is not widely used, which leads to significant adverse consequences, especially for disadvantaged groups. The second scenario is one where alternative cryptocurrencies like bitcoin and stablecoins become widely adopted in Canada, thereby threatening the country’s monetary sovereignty. While the paper finds positive reasons to issue a CBDC, it concludes that more research is needed.

“Taming Wildcat Stablecoins,” an article written by a Yale professor of finance and an attorney at the board of governors of the Federal Reserve System, was also published this week. The article posits that stablecoins are just the newest type of private money – similar to private money issued in the free banking era of the mid-1800s. The authors argue that private money is an ineffective medium of exchange because it is not always accepted at par and is subject to runs. The paper also presents proposals, such as regulating stablecoin issuers like banks and issuing CBDCs, to address systemic risks created by stablecoins.

For more information, please refer to the following links:

Australian and Georgian Governments Launch Blockchain Initiatives

By Jordan R. Silversmith

The Australian government recently awarded $4.2 million through its Blockchain Pilot Grant program to two blockchain-based pilot projects. The grants were provided to a London-based blockchain provenance startup and a Canadian consultancy blockchain firm. According to the government, the two grants will help accelerate Australia’s adoption of blockchain and will permit businesses to use blockchain technology to solve real-world problems.

The country of Georgia, meanwhile, will begin collaborating with a London-based blockchain platform to promote its millennia-old wine industry. According to a recent report, the relationship will tokenize selected Georgian wines as nunfungible tokens (NFTs), with each NFT backed by an actual wine bottle. The NFTs will be available on a blockchain platform, allowing users to buy, sell and trade bottles with greater confidence in their quality and provenance. The country hopes that using blockchain technology to ensure a wine’s provenance will help modernize the industry and allow for greater international visibility.

For more information, please refer to the following links:

Crypto Financial Services Firm Targeted by State Securities Regulators

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

The New Jersey Bureau of Securities (BOS) this week issued a cease and desist Order (Order) to financial services platform BlockFi in order to prevent the company from offering certain cryptocurrency interest-bearing accounts in or from New Jersey. According to the Order, the BOS alleges that BlockFi, through certain of its affiliates, has been funding its proprietary trading and lending operations by allowing investors to purchase cryptocurrency interest accounts, referred to as “BlockFi Interest Accounts” (BIAs), which the BOS asserts are unregistered securities.

The Order further alleges that the BIA’s are not registered with any securities regulatory authority, are not exempt from registration, nor are they protected by certain federal programs designed to protect investors. The provisions of the Order, which were effective July 22, 2021, do not preclude BlockFi or its affiliates from paying interest on existing BIAs or refunding principal to existing BIA investors.

In a separate but similar action, a recent press release notes that the Alabama Securities Commission has issued a show-cause order (SCO) to BlockFi, requiring that the company show cause why it should not be directed to cease and desist from selling unregistered securities in Alabama. According to the press release, the SCO alleges, among other things, that BlockFi’s BIAs are securities and that despite advertising itself as a U.S.-regulated entity, BlockFi does not disclose to its investors that the BIAs are not registered with any securities regulator.

In yet a third state action against BlockFi this week, the Texas State Securities Board filed a cease and desist order (Order) against BlockFi and two of its subsidiaries based on similar allegations that BlockFi’s offering of BIA products are sales of unregistered securities. The Texas Order alleges that as of March 31, 2021, BlockFi had more than $15 billion in assets under management, including $691 million from state residents. Among other things, the Order notes that while BlockFi is licensed as a money services business in Texas, it is not registered with the U.S. Securities and Exchange Commission or the Texas State Securities Board to offer or sell securities in Texas. The Order also alleges that BlockFi is not disclosing material information necessary for investors to make an informed decision about the risks of investing in the BIA products.

For more information, please refer to the following links:

SEC Enforcement Actions Target Cryptocurrency-Related Misrepresentations

By Kayley B. Sullivan

This week, according to press releases issued by the U.S. Securities and Exchange Commission (SEC), the SEC brought two enforcement actions against companies accused of, among other things, making false representations related to cryptocurrencies. In the first, a company which purports to be a developer of mobile phone applications allegedly made false statements that it had developed an application allowing users to transact in cryptocurrencies from their mobile phone, when in fact no such functionality existed. In the second, an action was brought against a company and its founders that told investors their money would be invested in securities trading and cryptocurrencies based on recommendations made by an “artificial intelligence supercomputer.” The SEC alleges that those funds were never invested and were misappropriated.

For more information, please refer to the following links:

Everything You Need to Know About NFTs in 10 Minutes or Less

Rob Musiala, a Counsel in the Digital Assets and Data Management group and the co-leader of our Blockchain Technologies and Digital Currencies team, breaks down everything you need to know about NFTs, all in 10 minutes or less.

Questions & Comments: rmusiala@bakerlaw.com

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Crypto Initiatives Announced in Exchanges, ETFs, Payments; NFT Initiatives Continue; Bitcoin Mining Difficulty Adjusts; Global Enforcement Actions Continue

In this issue:

Cryptocurrency Exchanges, ETFs and Payment Initiatives Announced

Hollywood, Paradise and Banking: NFT Use Cases Continue to Expand

Bitcoin Network Mining Difficulty Adjusts in Wake of China Crackdown

DOJ, CFTC and SEC Target Crypto Fraud, Registration, Anti-Touting Violations

US Ransomware Task Force Announced, Crypto Crimes Continue Across Globe

Cryptocurrency Exchanges, ETFs and Payment Initiatives Announced

By: Keith R. Murphy

Cryptocurrency firm Bullish announced its intention to go public on the New York Stock Exchange as it prepares to launch a cryptocurrency exchange, according to a recent report. The company reportedly intends to accomplish the public listing via a merger with a special-purpose acquisition company.

A major global payments company recently approved Australian company CryptoSpend to begin issuing cryptocurrency debit cards for its users, based on a report this week. CryptoSpend’s app will reportedly allow its users to spend their cryptocurrency directly, without the need to convert to fiat currency, including supported cryptocurrencies bitcoin, ether, XRP, bitcoin cash and litecoin.

Following approval by Brazil’s Securities and Exchange Commission, a blockchain investment firm plans to list an Ethereum exchange-traded fund (ETF) on Brazil’s stock exchange, according to a report this week. The firm plans to purchase ether and provide its investors with exposure to the asset without the need for separate wallets and keys.

Last week, a leading auction house accepted $12.3 million in cryptocurrency following the auction of a more than 100-carat rare diamond. According to a report, it is the first time the auction house has accepted cryptocurrency as a supported payment option.

For more information, please refer to the following links:

Hollywood, Paradise and Banking: NFT Use Cases Continue to Expand

By: Lauren Bass

According to recent reports, two major Hollywood movie studios have partnered with boutique platforms to offer limited-edition digital collectibles as nonfungible tokens (NFTs) featuring characters from the studios’ upcoming film franchises. One studio will offer its digital merchandise through an NFT-focused social media platform, while the other will showcase its through an augmented reality app.

In another NFT development, an American brewing company has reportedly enlisted a specialty digital media shop to create unique branded NFTs ranging from apparel to merchandise to one-of-a-kind experiences. The company reportedly hopes that branching out into the digital sphere will drive long-term revenue by allowing it to capitalize on its intellectual property holdings in the secondary market.

In recent weeks, a blockchain technology company reportedly launched an initiative to leverage the burgeoning NFT marketplace as a means by which to sell digital timeshares at a tropical paradise resort. In a first-of-its-kind transaction, the company will offer these limited-edition shares via a 13-day online auction. According to press releases, the company hopes its efforts will make real estate more accessible to the masses.

A boutique decentralized finance (DeFi) platform recently announced the development of a new lending and borrowing network that will allow customers to use NFTs and other digital collectibles as collateral. According to reports, the rollout will initially occur on the Binance Smart Chain, but plans are underway to expand to other blockchain networks.

For more information, please refer to the following links:

Bitcoin Network Mining Difficulty Adjusts in Wake of China Crackdown

By: Veronica Reynolds

According to reports, bitcoin mining has become more profitable as a result of the mining crackdown in China – where more than half the world’s bitcoin was previously mined. The decrease in miners triggered an automatic bitcoin code update, resulting in a 28 percent reduction in mining difficulty and, correspondingly, increased cash to miners who continue to operate the Network. In a related development, data recently published by the Cambridge Bitcoin Electricity Consumption Index indicates that Bitcoin’s power consumption has declined steeply, with estimated power consumed by Bitcoin down from its roughly 143 terawatt-hours high in May to as low as 60 terawatt hours in July – a drop of approximately 60 percent, according to CoinTelegraph. Reports indicate that this is the “lowest energy consumption rate recorded since early November 2020.” Meanwhile, according to another recent report, Bitcoin nodes are at an all-time high – crossing the 13,000 threshold for the first time ever, potentially indicating that the Network is becoming increasingly decentralized.

According to reports, the launch date for Ethereum’s fee market improvement proposal 1559 is scheduled to kick in on Aug. 4, 2021. The upgrade, among other things, will introduce a new minimum payment dubbed a “base fee” – a dynamically adjusted fee based on network activity that will be charged for sending Ethereum transactions. The adjustment is expected to “significantly increase transaction capacity.”

For more information, please refer to the following links:

DOJ, CFTC and SEC Target Crypto Fraud, Registration, Anti-Touting Violations

By: Teresa Goody Guillén

According to a U.S. Department of Justice (DOJ) press release, a Swedish man was recently sentenced to 15 years in prison for securities fraud, wire fraud and money laundering related to a $16 million fraud scheme called Eastern Metal Securities. The scheme involved receipt of investor funds in the form of cryptocurrencies and promised victims astronomical returns tied to the price of gold. As part of the sentence, the defendant was also ordered to forfeit a Thai resort and various other properties and accounts, and was issued a money judgment in the amount of $16,263,820.

The Commodity Futures Trading Commission (CFTC) recently announced that a judge in the U.S. District Court for the Southern District of Texas entered a default judgment against Laino Group Limited d/b/a PaxForex of St. Vincent and the Grenadines (PaxForex). The order imposes permanent trading, solicitation and registration bans against PaxForex entering into transactions involving commodity interests and prohibits it from violating provisions of the Commodity Exchange Act. The order also requires the defendant to pay a civil monetary penalty of $374,864. The ruling is based on the CFTC’s complaint that alleges PaxForex engaged in illegal, off-exchange transactions in ether, litecoin and bitcoin, as well as precious metals and foreign currency, with retail customers on a leveraged, margined or financed basis, and acted as a futures commission merchant without the required CFTC registration.

This week, the Securities and Exchange Commission (SEC) announced settled charges against the operator of Coinschedule.com, a website that profiled offerings of digital asset securities, for violations of the anti-touting provisions of the federal securities laws. According to the SEC’s order, Coinschedule.com presented its website visitors with seemingly independent profiles about digital token offerings in “listing” profiles, which included a “trust score” that purported to reflect Coinschedule’s evaluation of the “credibility” and “operational risk” for each digital token offering based on a “proprietary algorithm,” but failed to disclose the compensation it received from issuers of the digital asset securities.

In a separately issued public statement addressing Coinschedule.com, SEC Commissioners Peirce and Roisman agreed that touting securities without disclosing the fact that you are getting paid, and how much, violates the federal securities laws, but expressed disappointment that the SEC’s settlement did not explain which digital assets touted by Coinschedule.com were securities. The Commissioners emphasized this as consistent with the SEC’s reluctance to provide additional guidance as to how to determine whether a token is being sold as part of a securities offering, thereby forcing market participants to rely on litigated and settled SEC enforcement actions as the go-to source of guidance, which does not produce clear answers.

For more information, please refer to the following links:

US Ransomware Task Force Announced, Crypto Crimes Continue Across Globe

By: Jordan R. Silversmith

The White House recently announced a new cross-government task force to focus on offensive and defensive measures against ransomware. Under the task force’s oversight, federal agencies are reportedly taking measures to combat ransomware threats, including promoting digital resilience among critical U.S. infrastructure companies, halting ransomware payments made through cryptocurrency platforms and coordinating activities with U.S. allies. The State Department will also offer rewards totaling up to $10 million for information leading to the identification of alleged cyber criminals, especially hackers behind state-sanctioned breaches of critical U.S. infrastructure. According to a press release, “Reward payments may include payments in cryptocurrency.”

Researchers recently released a report showing that at least 93,000 people have bought fake Android applications for cryptocurrency mining. The report identified 170 Android apps scamming people interested in cryptocurrencies. While the apps advertise themselves as providing fee-based cloud cryptocurrency mining services, researchers found that users who paid for the apps as well as various fake upgrades and services offered in the applications received no legitimate services in return. The report estimates that users were scammed out of at least $350,000 in total.

Meanwhile, abroad, Hong Kong officials have reportedly arrested four men involved in an alleged cryptocurrency money laundering syndicate. Customs authorities allege that the scheme, which took in approximately $155 million of funds from February 2020 to May of this year, operated by charging criminal clients a commission of 3 percent to 5 percent for crypto money laundering services.

Four individuals were also recently arrested in Japan related to a cryptocurrency money laundering scheme. The four men are accused of defrauding 20,000 investors out of more than $54.3 million by promising to generate large returns through artificial intelligence on their crypto trading platform.

According to reports, Ukrainian officials recently raided an allegedly illicit crypto farm in the country. The farm was located on the former premises of a Ukrainian electricity company, and the schemers allegedly hid their activities by manipulating electricity meters to steal electricity from the company, resulting in estimated losses of between $186,200 and $259,300.

For more information, please refer to the following links:

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