DeFi, Stablecoin Products Launch; Bitcoin Network Spikes Due to NFTs
By Christopher Lamb
According to reports, a new decentralized finance (DeFi) protocol recently launched that allows users to deposit the stablecoins USDC or DAI in a “yield farming” product collateralized by OUSG, which is a “tokenized fund allowing stablecoin holders globally to invest in bonds and US Treasuries.”
Another recent report indicates that a Finnish fintech company has launched the EUROe as “Europe’s first and only EU-regulated full-reserve stablecoin and payment network.” According to the report, the EUROe has received an Electronic Money Institution license from the Finnish Financial Support Authority, and it “transforms a fiat Euro into a 1:1 pegged digital currency transactable on Ethereum, with planned support for an increasing number of blockchains.”
Recent reports show that the activity on the Bitcoin Network has spiked to a two-year high due to the new Ordinals protocol, which allows non-fungible tokens (NFTs) to be stored on the Bitcoin blockchain. Data shown in the report indicates that the seven-day moving average of transactions on the Bitcoin Network reached the highest it had been since China banned bitcoin miners in the second quarter of 2021. The inclusion of NFTs on the Bitcoin Network has increased the block size “with many blocks hitting the 4 megabyte (MB) block size limit.” According to reports, although the Ordinals’ share of transactions on the Bitcoin Network only neared 3% of the total transactions, they consumed almost 70% of the block space.
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Major Global Stablecoin Issuer Tether Obtains Assurance Opinion
By Christina O. Gotsis and Robert A. Musiala Jr.
Stablecoin firm Tether recently published an attestation report prepared by the foreign-based office of a global accounting firm. The “Independent Auditors’ Report on the Consolidated Reserves Report” (CRR) concluded that “the CRR as prepared by the management … as of 31 December 2022, is, in all material respects, fairly presented in accordance with the criteria, including Management’s Key Accounting Policies, set out therein.” The CRR that was the subject of the report shows that as of December 31, 2022, Tether’s consolidated assets amounted to at least $67.04 billion, with consolidated liabilities of $66.08 billion, of which $66.06 billion relates to digital tokens issued.
Among other things, the report compared the CRR report findings with those from previous periods, confirmed amounts externally, verified the management’s reconciliation with bank assets and the blockchain, employed sampling to verify asset valuation, and verified loan collateral. The report noted that it was performed as part of a “reasonable assurance engagement” specifically limiting its review “solely to the CRR and the corresponding consolidated total assets and consolidated total liabilities” as of Dec. 31, 2022, and that “[a]ctivity prior to and after this time and date was not considered when testing the balances and information described above.” The report also noted that it did not provide any assurance with respect to management’s application of a going-concern basis of accounting used to value Tether’s assets. The report reserved review on the use of the going-concern basis of accounting, which “requires significant management judgment with respect to … liquidity, market and credit risks.”
According to a recent report referencing documents obtained in connection with U.S. agency investigations, four individuals controlled 86% of Tether Holdings Limited as of 2018. The same report noted that a news article from November 2022 claimed that Tether could be deemed “technically insolvent” if its assets fell just 0.3%, which Tether said was false information. In February 2022, Tether reached a settlement with the New York Attorney General’s office, paying a $18.5 million fine as a result of alleged false statements and efforts to hide massive financial losses from investors.
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FASB Proposal Would Allow Fair-Value Accounting for Many Digital Assets
By Keith R. Murphy
The Financial Accounting Standards Board (FASB) expects to issue an update for rules relating to digital asset accounting, possibly by year-end. According to a recent report, the update would allow firms to “use fair-value accounting practices to report their digital asset holdings rather than the previous practice of reporting them as indefinite-lived intangible assets. As intangible assets, firms can only update the value of their holdings annually with the lowest value since purchase, rather than reflecting the fluctuations in value that fair-value treatment allows for.” The FASB clarified that the proposal to allow fair-value accounting practices would not extend to digital assets created or issued by the reporting entity or related parties, thereby precluding them from utilizing such value to prop up their balance sheet. The proposal would also exclude “wrapped” tokens, as noted in the report and separately in a project update issued by the FASB.
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SEC Addresses Crypto IRAs; Australia Initiates Token-Mapping Project
By Veronica Reynolds
The U.S. Securities Exchange Commission (SEC), through its Office of Investor Education and Advocacy in conjunction with the North American Securities Administrators Association and the Financial Industry Regulatory Authority, published an updated investor alert this week on the risks associated with self-directed individual retirement accounts (IRAs), which may allow investments in “alternative assets,” such as cryptoassets, in contrast to traditional IRAs offered by registered broker-dealers and investment advisors, which typically limit investments to registered securities.
Specifically, the investor alert cautions that self-directed IRAs containing cryptoasset investments present additional risks if the underlying cryptoassets qualify as unregistered securities that lack complete or accurate disclosures, which can prevent investors from making informed investment decisions. According to the investor alert, this risk is heightened due to the passive role of third-party custodians of self-directed IRAs, who do not investigate or monitor the underlying assets or their promoters on behalf of investors. Additionally, the investor alert warns that fraudsters may create fake self-directed custodians to steal investor funds or falsely represent that legitimate custodians will conduct diligence on the investments or protect investors against losses as a way to induce investment. The investor alert also explains that because self-directed IRAs penalize investors for premature withdrawals, investors may fail to regularly review account performance, creating a heightened risk that fraud will continue unnoticed.
In international news, the Australian government, under the leadership of newly appointed Prime Minister Anthony Albanese, released a token-mapping consultation paper earlier this month that seeks stakeholder responses by March 3, 2023. The consultation paper is an initial step toward facilitating a token-mapping project aimed at classifying cryptoassets by type, documenting the cryptoassets’ underlying code, and identifying how the asset class and related products and services should be regulated. According to reports, the paper signals the new government’s commitment to taking a “more serious approach to work out what is in the ecosystem and what risks need to be looked at first.”
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BTC Ransomware Defendant Pleads; Report Details North Korean Crypto Activities
By Lauren Bass
According to a recent press release by the U.S. Department of Justice, Russian national Denis Mihaqlovic Dubnikov pleaded guilty to one count of conspiracy to commit money laundering for his role in laundering the proceeds derived from the Ryuk ransomware attacks that targeted individuals and organizations throughout the United States and abroad between 2018 and 2021. According to the press release, Dubnikov’s arrest and prosecution stemmed from a July 2019 transaction in which he accepted and laundered 35 bitcoin – all of which were later traced back to a Ryuk ransomware payment made by a U.S. company.
According to recent reports referencing a currently confidential United Nations report set to be released in the coming weeks, North Korea stole more cryptocurrency assets in 2022 than in any other previous year. According to the report, North Korea used “increasingly sophisticated cyber techniques” to “gain access to digital networks involved in cyber finance” to steal cryptoassets worth between $630 million and $1 billion.
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