Reports Address Crypto M&A and Metaverse, New Crypto Products Launch
By Joanna F. Wasick
A Big Four accounting firm recently released its “2021 Global Cryptocurrency Mergers and Acquisition and Fundraising Report.” Key takeaways from the report include the following: (1) the total value of crypto mergers and acquisitions (M&A) increased 4,846 percent in 2021; (2) crypto M&A deals have shifted back to the Americas, with 51 percent of deals occurring in the region; and (3) the total value of crypto fundraising deals increased 645 percent in 2021.
In another recent report, “Opportunities in the Metaverse,” a major U.S. financial services company offered a guide for exploring business opportunities in the metaverse, which the report defines as “a seamless convergence of our physical and digital lives, creating a unified, virtual community where we can work, play, relax, transact and socialize.” Among other things, the report explores how digital currencies and NFTs allow creators and metaverse participants to monetize their activities and participate in digital community and governance. The report also explores new business opportunities driven by increased facility of cross-border or borderless transactions, and digital asset-backed financing.
Earlier this week, Fireblocks, a digital asset custody, transfer and settlement platform, announced its acquisition of First Digital, a stablecoin and digital asset payments technology platform. According to reports, the purchase will expand Fireblocks’ existing support for payments and remittances in stablecoins and other cryptocurrencies. Separately, on Tuesday, a major U.S. cryptocurrency exchange introduced a new way to send remittances to Mexico directly from the exchange’s app. Once the remittance is sent, the recipient can keep the funds in their cryptocurrency exchange account or generate a redemption code from the app and use it to receive cash at 37,000 physical retail outlets and convenience stores in Mexico.
Late last week, a major U.S. tech firm—best known for developing microprocessors and semiconductor chips—announced it was working on creating an energy-efficient blockchain accelerator using a crypto-specialized silicon chip. The accelerator is expected to have over 1,000 times better performance per watt than mainstream hash function and mining algorithms used in cryptocurrency mining.
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Treasury Dept. Letter Addresses Crypto Tax; Reports Address Crypto Risks
By Nicholas C. Mowbray
In a recent letter to several U.S. senators, the U.S. Treasury Department stated that, in upcoming guidance, it does not intend to treat cryptocurrency miners, stakers and wallet providers as “brokers” under the tax information reporting rules that were enacted by the Infrastructure Investment and Jobs Act on Nov. 15, 2021. The letter indicated that miners, stakers and wallet providers should not be subject to the broker reporting rules because they do not engage in business activities that provide them with access to information about sales of digital assets. The letter also notes persons who validate transactions through consensus mechanisms, sell storage devices used to hold private keys or write software code are not carrying on broker activities and therefore should likewise not be subject to the broker reporting rules. The letter does not constitute formal guidance and cannot be relied upon by taxpayers.
Several cryptocurrency exchanges and other firms this week announced a compliance initiative, Travel Rule Universal Solution Technology, or TRUST, designed to achieve compliance with the Financial Action Task Force (FATF) “travel rule.” Among other things, the travel rule requires financial institutions to collect information about the sender and recipient of transactions worth more than $3,000. According to reports, the TRUST initiative seeks to ensure compliance with the travel rule while also protecting customer privacy.
A recent report published by the Financial Stability Board (FSB) examines risks related to unbacked crypto assets, stablecoins, decentralized finance and cryptocurrency trading platforms. Key risks noted by the report include (1) the increased linkage between crypto-asset markets and the regulated financial system; (2) liquidity, credit and operational risks that make stablecoins susceptible to runs on reserves; (3) increased use of leveraged investment strategies; (4) concentration of risk in a small number of trading platforms; and (5) lack of regulatory oversight.
In a final notable item, a recent article published by the New York branch of the U.S. central bank casts doubt on whether stablecoins represent the future of payments. The article notes that stablecoins tie up liquidity, those that don’t tie up liquidity are risky and less fungible, and digital forms of money already exist.
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US, UK and Canadian Law Enforcement Take Aim at Cryptographic Assets
By Alex Karambelas
According to a press release by the Securities and Exchange Commission (SEC), the cryptocurrency lending platform BlockFi Lending reached a $100 million settlement with the SEC earlier this week. The SEC had charged BlockFi with failing to register its cryptocurrency lending product under the Securities Act and violating the registration provisions of the Investment Company Act of 1940. The $100 million settlement reportedly includes a $50 million SEC penalty as well as $50 million in fines stemming from 32 related state enforcement actions. The press release quotes an SEC official as saying, “Crypto lending platforms offering securities like BlockFi’s … should take immediate notice of today’s resolution and come into compliance with the federal securities laws.” Following the settlement, BlockFi announced that it will seek SEC registration for a new cryptocurrency lending product.
Earlier this week, the United Kingdom’s tax enforcement agency reported the first seizure of nonfungible tokens (NFTs) by British law enforcement. According to officials, the agency seized three NFTs, which have yet to be valued, as part of a $1.9 million tax fraud probe. British officials have stated that the seizure should serve as a warning to anyone seeking to hide money in digital assets.
In a final development, the Royal Canadian Mounted Police (RCMP) have reportedly issued an order blacklisting 34 cryptocurrency addresses. A copy of the order, which was leaked on social media earlier this week, reportedly states that the RCMP will prohibit regulated financial firms from facilitating any transactions with the listed addresses. According to reports, the addresses hold nearly $1 million in cryptocurrency and appear to be linked to fundraising campaigns supporting the weekslong Canadian trucker protest against vaccine mandates.
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Counterfeits, Wash Trading and Bots: Crypto Market Threats Continue
By Lauren Bass
Earlier this week, a marketplace for nonfungible tokens (NFTs) reportedly halted transactions on its platform. Citing “rampant” issues of counterfeit transactions where users were (i) selling unauthorized NFTs, (ii) minting NFTs with content they did not own and (iii) selling sets of NFTs resembling securities, the platform’s CEO reportedly made the decision to shut down sales in an effort to protect content creators. According to reports, the marketplace is currently exploring controls that can be implemented to curb such counterfeiting before the platform will reopen. In related news, a recent sale of a high-profile NFT collection is under scrutiny as the digital collectible was reportedly purchased using funds transferred from a wallet owned by the same entity that created the NFT. According to reports, the incident raises potential concerns over wash trading—where the same actor simultaneously buys and sells an asset to manipulate its price.
Cryptocurrency investors should beware as a new bot reportedly designed to trick individuals into divulging their account’s two-factor authentication has been targeting digital asset holders. According to reports, the bots, which are being sold to scammers through Telegram, can drain entire accounts in less than two minutes. Exchanges are warning customers not to respond to unsolicited calls requesting account access.
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Reports Address Crypto M&A and Metaverse, New Crypto Products Launch
By Keith R. Murphy
Chainalysis has recently issued several blogs as a preview of their 2022 Crypto Crime Report. One recent blog report addresses the significant growth over the past year of cryptocurrency payments extorted through ransomware attacks, as well as common strains and how they are used by various actors to target and disrupt private, public and government entities. Among other findings, the report notes that 56 percent of funds sent from ransomware addresses since 2020 had a resulting destination of one of six specific cryptocurrency businesses, and that while many of the attacks are intended for financial gain, others are used for geopolitical purposes, such as espionage or disruption of infrastructure and government operations.
Another Chainalysis blog commented on ransomware and money laundering as part of Russia’s cryptocurrency crime ecosystem. The report notes that Russia-based ransomware strains appear to dominate the landscape, with a reported 74 percent of ransomware revenue in 2021—more than $400 million worth of cryptocurrency—highly likely related to Russia in some way. The report goes on to discuss that a significant amount of cryptocurrency money-laundering activity is also centered in Russia, including in Moscow City.
In a third preview of its 2022 Crypto Crime Report, a recent Chainalysis blog highlights progress made by law enforcement in seizing cryptocurrency from criminals, including the U.S. Department of Justice’s recent seizure of $3.6 billion of bitcoin related to the 2016 hack of Bitfinex. The blog also notes estimates that as of the end of 2021, the vast majority of criminal balances held in wallets (93 percent, amounting to $9.3 billion) consist of stolen funds, with other sources such as Darknet market funds, scams and ransomware contributing to the remainder of the makeup of criminal balances. Cryptocurrency criminal “whales” numbering just over 4,000 allegedly hold over $25 billion worth of cryptocurrency, according to the report.
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