Weekly Focus:

• DOJ Seizes More Than $1 Billion in Cryptocurrency from Silk Road Hacker
• CFTC Announces Charges Against Digital Asset Ponzi Scheme
• SEC’s Enforcement Division Collected $4.68 Billion in 2020
• Vortex Blockchain Technologies Settles with the SEC
• Blockchain Industry Speculates on Regulation in a Biden Administration
• LabCFTC Announces Agenda for Empower Innovation 2020
• Cred Inc. Files for Chapter 11 in Delaware
• Deutsche Bank Publishes Report on CBDC
• Reserve Bank of Australia Partners with Blockchain Company on CBDC Project
• Lebanon’s Central Bank Progresses on Plans for CBDC
• Russian Central Bank Issues CBDC Consultation Paper
• Bank of Canada Is Working with G7 on Global Approach to Digital Currencies
• The U.K. Treasury Announces Plans to Regulate Stablecoins
• Germany Drafts Bill for Blockchain-Based Securities

U.S. Developments

DOJ Seizes More Than $1 Billion in Cryptocurrency from Silk Road Hacker

On November 5, the U.S. Department of Justice (the DOJ) announced that it seized more than 69,000 Bitcoin, now worth more than $1 billion, from an anonymous hacker. The DOJ press release states that law enforcement seized the Bitcoin and other nominal amounts of cryptocurrency on November 3. The DOJ filed a Complaint for Forfeiture in the U.S. District Court for the Northern District of California (the NDCA) on November 5. The Complaint alleges that the hacker stole from the now-defunct darknet marketplace Silk Road, which was shut down in 2013.

The DOJ’s press release and Complaint explain that since the shutdown, the DOJ and Internal Revenue Service Criminal Investigation (IRS-CI) have continued to investigate cryptocurrency addresses associated with Silk Road. The IRS-CI has worked with third parties, Chainalysis and Excygent, and used their tracing technology to follow the movement of cryptocurrency between wallet addresses to investigate suspected cybercriminals. The DOJ noticed unusual patterns of withdrawal for the address (referred to only as “Individual X” in the Complaint), which signaled that the Bitcoin had been stolen in a hack. The Complaint further alleges that the seized Bitcoin is traceable to narcotics trafficking and had been involved in money laundering. The DOJ’s announcement says that this is the largest cryptocurrency seizure ever made by the U.S. government.

The DOJ’s press release can be found here.

The NDCA Complaint for Forfeiture can be found here.

Further reporting on the seizure can be found at Reuters and The Wall Street Journal.

CFTC Announces Charges Against Digital Asset Ponzi Scheme

On November 2, the U.S. District Court for the District of Colorado entered an Order granting the CFTC’s Motion for Default Judgment against Venture Capital Investments Ltd. (Venture) and Breonna S. Clark. The District Court stated in its Order that the defendants fraudulently solicited 72 participants to trade Bitcoin, Altcoin, and other foreign and cryptocurrencies in a commodity pool run by defendants.

The CFTC issued a press release on November 4 announcing the Order.

The press release can be found

The Default Judgment can be found here.

SEC’s Enforcement Division Collected $4.68 Billion in 2020

On November 2, the SEC released its Annual Report, which says that the SEC collected $4.68 billion in disgorgement and fees for Fiscal Year 2020. The amount is the total of 715 enforcement actions that the Division brought in 2020. A large portion of these total collections is from the Telegram settlement in June 2020, which required Telegram to return $1.2 billion to investors and pay a civil penalty of $18.5 million.

The press release can be found here.

The full Report can be found here.

Vortex Blockchain Technologies Settles with the SEC

On October 22, the SEC announced the settlement and revocation of Vortex’s registration. The SEC revoked the registration of Vortex Blockchain Technologies (Vortex) for its failure to file periodic reports with the SEC since December 31, 2019. Vortex is a self-described “crypto asset holdings company.” The SEC initiated administrative proceedings against Vortex in September 2020 and announced the temporary suspension of trading in the securities of Vortex on October 6, 2020.

The Order can be found here.

Blockchain Industry Speculates on Regulation in a Biden Administration

The 2020 election results have brought some certainty and confidence to U.S. markets. Stocks and less traditional Bitcoin futures have both seen surges in the week following the election. Other cryptocurrencies like Litecoin, Ethereum, and Bitcoin Cash have climbed in value. Several banks and other market participants have speculated about how the incoming Biden administration will treat cryptocurrencies, the fintech industry, and affect market conditions like volatility.

On November 10, the Biden-Harris transition team announced that “crypto-minded” Gary Gensler had joined as a financial expert. Gensler served as chairman of the Commodities Futures Trading Commission (CFTC) from 2009-2014 under President Obama. In 2018, Gensler said that “most” coins sold in initial coin offerings (ICOs) should be considered securities; however, Forbes reported that Gensler does not consider Bitcoin a security. Gensler has also taken the position that cryptocurrencies like Bitcoin need more regulation to ensure investor protection. Gensler is currently a professor at MIT on blockchain, digital currencies, fintech, and public policy.

Several news outlets have reported that Lael Brainard is in contention for treasury secretary in the Biden Cabinet. Brainard is currently the only Democrat serving on the Federal Reserve Board of Governors. At a conference in August, Brainard gave a speech regarding the status and the Fed’s position on digital currencies. She said that the Federal Reserve is partnering with MIT researchers to develop and test a Central Bank Digital Currency (CBDC).

News outlets have reported that a Biden administration seems research-focused and cautiously optimistic about the future cryptocurrency, but that new regulation may be slow to be implemented if there is a divided Congress over the next four years.

Further reporting can be found at Fortune, Reuters, JPMorgan, and Business Leader UK.

LabCFTC Announces Agenda for Empower Innovation 2020

LabCFTC, the research and fintech innovation hub at the CFTC, has opened registration and released the agenda for its third and final Empower Innovation 2020 session on November 17. LabCFTC will host the event, the theme of which is “The Future of Digital Finance.”  The interactive online series has focused on fintech innovation. The series has aimed to host conversation between innovators, regulators, market participants, and the public.

The CFTC press release can be found here. The agenda can be found here.

Cred Inc. Files for Chapter 11 in Delaware

On November 7, Cred Inc., a U.S.-based cryptocurrency lending platform, filed for Chapter 11 bankruptcy protection in Delaware. According to the filing and recent news reports regarding the bankruptcy, Cred has listed assets of approximately $67.8 million supporting $136 million in liabilities. The bankruptcy filing comes following an earlier announcement from the company that it would be suspending fund inflows and outflows for two weeks. As part of the first day motions, Cred identified the actions of a fraudulent asset manager who misappropriated customer funds as a significant cause leading to the present bankruptcy filing. Cred has appointed a new independent director to its Board, who will also serve during the Chapter 11 process.

International Developments

Deutsche Bank Publishes Report on CBDC

In November, Deutsche Bank published a report making predictions and recommendations for reinvigorating global economies that have suffered during the COVID-19 pandemic. The report took a definitive position that Central Bank Digital Currency (CBDCs) will replace cash. Among other recommendations, the report encouraged European countries to move swiftly toward CBDCs.

Deutsche Bank reported that Sweden and China are leading CBDC initiatives, as both countries are already piloting e-currencies as of earlier this year. The report said that the two largest hurdles, which affect developed countries in particular, are low interest rates and privacy expectations. The report said these factors were less obstructive in developing economies, which is why China has an edge.

The report also spoke about the future of blockchain. It recommended strategies for private companies to rethink the supply chain, one of which was to adopt new technologies such as blockchain, for traceability. In addition, the report predicted that the advancement of digital ledger technology (DLT or blockchain), 5G, and other technologies would disrupt traditional card payment systems.

Large companies, the report said, have an edge in technology by virtue of their size and were better positioned to use blockchain technology by, for example, providing customers with transparency information about their products. The report said consumers are increasingly concerned about ESG (environmental, social, and corporate governance) in terms of how they choose products and that blockchains can help with that demand. As an example, the report cited JBS, one of the world’s largest meatpacking companies, which has implemented blockchain throughout its supply chain to prove the origin of its beef.

Deutche Bank’s full report can be found here.

Reserve Bank of Australia Partners with Blockchain Company on CBDC Project

The Reserve Bank of Australia (the RBA) announced on November 2 that it had partnered with two private Australian banks and a blockchain technology company, Perpetual and ConsenSys Software, to research a CBDC using blockchain. Assistant Governor Michele Bullock said that the goals of the project are to explore efficiency, risk management, and innovation. The RBA expects to complete the project around the end of 2020 and plans to publish a collaborative report in the first half of 2021.

The RBA’s press release can be found here.

Further reporting on this announcement can be found at Reuters.

Lebanon’s Central Bank Progresses on Plans for CBDC

In November, the Lebanese central bank announced that it was making progress on its implementation of a CBDC. The country is in the midst of a severe economic crisis, which the central bank says will benefit from the introduction of the CBDC in part because it will help restore confidence in Lebanon’s banking industry. The central bank says it plans to introduce the Lebanese CBDC in 2021.

Reporting on this development can be found here.

Russian Central Bank Issues CBDC Consultation Paper

In October, the Bank of Russia published a consultation paper discussing Russia’s potential CBDC. The paper said the Central Bank is contemplating the launch of a limited pilot program of its digital ruble by the end of 2021, but said it is too early to give a timeline for a country-wide launch.

The original Consultation Paper can be found here.

An English translation of the Bank of Russia’s paper can be found here.

Bank of Canada Is Working with G7 on Global Approach to Digital Currencies

On October 28, Bank of Canada Governor Tiff Macklem gave an interview to Reuters in which he said that the central bank was going forward with its CBDC, the digital loonie. He said that the bank is moving from its proof-of-concept to a more executable program, but that he does not believe there is a need for the CBDC yet. He added that a coordinated global approach was necessary to successfully implement the digital loonie to reduce risk and prevent criminals from using the technology.

Reporting on this development can be found at Reuters.

The UK Treasury Announces Plans to Regulate Stablecoins

Following its departure from the European Union, the United Kingdom has released a Financial Services Statement detailing certain new approaches that HM Treasury will take in the future. The Chancellor of the Exchequer, Rishi Sunak, said the government will propose a regulatory plan for stablecoin initiatives to bring them under the same level of oversight as traditional payment methods.

The chancellor said he supported the Treasury and Bank of England’s research and work on a CBDC in the U.K., without providing details or status of such a program. A press release from the Exchequer said that the U.K. wants to “lead the conversation” about new technologies like stablecoins and CBDCs and remain at the forefront of technological innovation.

On November 12, Bank of England Governor Andrew Bailey said in a panel discussion with the European Central Bank that he did not think stablecoins could be trusted as a store of value like traditional currencies, and did not believe they should be broadly adopted. He did, however, express confidence in a CBDC, which he believes provides a “guarantee and certainty of value.”

The U.K. Government’s press release can be found here.

Germany Drafts Bill for Blockchain-Based Securities

In November, the German parliament released draft legislation that would permit the issuance of electronic bonds, including those issued as security tokens on a blockchain. The bill removes the requirement of a paper-based note and replaces it with the entry of the “e-Security” into a supervised digital register. The register may be decentralized, to permit the issuance of blockchain-based digital securities, or it may be a central register that must be run by a licensed central securities depositary. The registrar license is separate from the license required for the provision of custody services for crypto assets. The proposed legislation would permit traditional securities to be exchanged for e-Securities and vice versa.

Reporting on the legislation can be found here.

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