Banks and Retailers Venture Further into Cryptocurrencies and Blockchain
By Maria S. Luevano
According to reports, a major U.S.-based global investment bank has allowed a borrower to use bitcoin as collateral for a cash loan, for the first time in the bank’s history. In other financial news, according to reports, the Global Shipping Business Network (GSBN), a technology consortium that includes three China- and Hong Kong-based banks, recently unveiled two proof-of-concept trade finance products. The products are designed to collect data from the shipping industry using GSBN’s blockchain-enabled platform, allowing banks to directly access bill of lading data.
In other developments, a high-end fashion designer and retailer has announced that it will begin to accept payment in cryptocurrency in some U.S. stores by the end of May and plans to expand to stores across North America later this summer. According to the announcement, the retailer will accept payments from customer cryptocurrency wallets in more than 10 cryptocurrencies.
Meanwhile, the Wikimedia Foundation is reportedly ending its practice of accepting cryptocurrency donations. According to reports, 71% of the foundation’s members voted to end the practice due to concerns around energy consumption, use by sanctioned individuals and exposure to potential scams.
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Congress Spars with Industry on Environmental Impact of Bitcoin Mining
By Joanna F. Wasick
The debate over the environmental effects of cryptocurrency mining continues. Last month, Rep. Jared Huffman (D-Calif.) sent a letter to the U.S. Environmental Protection Agency (EPA), warning of “significant greenhouse gas emission” and “major electronic waste challenges” caused by the proof-of-work (PoW) mining industry. The letter, which was signed by 22 additional congressional representatives, urged the EPA to evaluate mining facilities’ compliance with environmental statutes, and investigate and address any harm existing PoW facilities are causing communities.
This week, the bitcoin and mining industry responded with its own letter to the EPA, published by the Bitcoin Mining Counsel and signed by a number of bitcoin industry leaders, including Michael Saylor of MicroStrategy and Jack Dorsey of Block Inc. The response asserts that the congressional letter is based on a number of misconceptions, and that at least some of the data on which it was based, including the backup for assertions on electronic waste, is faulty and biased. The response letter further asserts that mining centers are no different from data centers run by major U.S. technology firms and should be assessed the same way by the EPA. The letter concludes by stating that public officials need further education to understand that the digital asset mining sector does not contribute to the environmental issues raised in the congressional letter, and that bitcoin and PoW are critical to the financial and economic well-being of the country.
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New NFT Offerings Revealed by Entertainment, Social and Crypto Companies
By Keith R. Murphy
According to a recent report, a major entertainment studio and its comics publisher have a new non-fungible token (NFT) collection that features unique bat cowls inspired by the character Batman. The company reportedly is employing integrated storytelling via a new collection of comics enabling the NFT holders to be part of the creation of the narrative and their own superheroes. According to the head of NFT Commercial Development for the company, the outcome will be a new comic collaboratively developed with fans.
An announcement from an American multinational chain of coffeehouses this week reveals that the company plans to create a series of branded NFT collections. Ownership of the NFTs reportedly will grant community membership and access to exclusive experiences and perks, with the initial collection based on coffee art and storytelling coming sometime later this year.
In a final development, a well-known cryptocurrency exchange platform recently went live with a beta version of its Web3 social marketplace for NFTs, according to a release from the company. Among other features noted, the marketplace is intended to allow “creators and collectors [to] build and engage their communities,” and will provide users with personalized recommendations for NFTs, which will improve based on whom users follow, what they buy and what is trending.
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FinCEN Director and NY DFS Address Cryptocurrency Risks
By Robert A. Musiala Jr.
Late last week, Acting Director of the U.S. Financial Crimes Enforcement Network (FinCEN) Himamauli Das addressed digital assets during testimony before the U.S. House of Representatives Financial Services Committee. According to reports, in his responses to questions from the committee, Das addressed Section 311 of the PATRIOT Act, saying, “Currently, the Section 311 authority is not right-sized for the types of threats that we’re seeing through the use of cryptocurrency.” Das also reportedly commented on money laundering risks related to unhosted cryptocurrency wallets, saying, “Unhosted wallets often engage in transactions with cryptocurrency exchanges, which are subject to AML/CFT regulation …. Law enforcement can engage with cryptocurrency exchanges with respect to suspicious activity reporting and other reports that might be applicable to them in terms of getting some degree of understanding in terms of transactions with unhosted wallets as well.”
In a related development, the New York Department of Financial Services (NY DFS) recently published new guidance for cryptocurrency businesses licensed under the NY DFS BitLicense regime. The new guidance emphasizes “the importance of blockchain analytics to effective policies, processes, and procedures, including, for example, those relating to customer due diligence, transaction monitoring, and sanctions screening.” Among other things, the guidance “emphasizes the importance of blockchain analytics … in addressing … anti-money laundering requirements … and across a range of BSA/AML and OFAC-related compliance controls, including but not limited to: Augmenting Know Your Customer (or ‘KYC’)-related controls; Conducting transaction monitoring of on-chain activity; and Conducting sanctions screening of on-chain activity.”
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DOJ Targets Crypto Fraud, SEC Doubles Crypto Staff, JF Issues NFT Red Flags
By Teresa Goody Guillén
The U.S. Department of Justice (DOJ) recently charged Japheth Dillman and David Mata each with one count of wire fraud (18 U.S.C. § 1343) in connection with an alleged scheme to defraud victims into investing in a San Francisco-based cryptocurrency trading fund, Block Bits Fund I, LP (Block Bits). According to a DOJ press release, the complaint alleges Dillman misrepresented the status and functionality of a cryptocurrency arbitrage autotrader technology that was being developed to invest investor funds and made false representations regarding the use of investor proceeds, and that Block Bits investors lost approximately $508,000 as a consequence of the scheme.
This week, the U.S. Securities and Exchange Commission (SEC) announced that it is nearly doubling the size of its Crypto Assets and Cyber Unit (the Unit) to 50 staff members, which is stated to include supervisors, investigative staff attorneys, trial counsel and fraud analysts. According to the SEC press release, the Unit will focus on investigating securities law violations related to (1) crypto asset offerings, (2) crypto asset exchanges, (3) crypto asset lending and staking products, (4) decentralized finance (DeFi) platforms, (5) NFTs and (6) stablecoins. Replying to the SEC’s tweet of the announcement, Commissioner Hester Peirce tweeted, “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?”
Late last week, the Joint Chiefs of Global Tax Enforcement (J5) issued the first-of-its-kind intelligence bulletin titled “J5 NFT Marketplace Red Flag Indicators,” which provides guidance to banks, law enforcement partners and private investigators regarding indicators of potential misconduct related to NFTs. Some of the “strong” fraud indicators J5 listed are (1) a network of sending and receiving parties to the same transaction or group of transactions; (2) clearly overpriced/underpriced NFTs that are traded frequently in short time frames; (3) artificial increases in sale value through a series of trades between linked accounts, known as “wash trading”; (4) newly minted NFTs immediately sold at high price points that are not in line with those of other NFTs in the collection; and (5) NFTs sold for large sums and reacquired by the same party or a third party for smaller amounts. This month, J5 members are expected to meet for the fourth iteration of the J5 Challenge, in which experts from each country team up and optimize investigative data and use analytical tools to generate leads and identify tax offenders using cryptocurrency.
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Hackers Continue to Target DeFi Sector with $1.6B Reported Losses in 2022
By Alexandra Karambelas
DeFi lenders Rari Capital and Fei Protocol became the latest victims in a string of cyberattacks on DeFi platforms, according to reports this week. The hacker reportedly exploited a vulnerability in Rari’s lending protocol and made off with more than $80 million in stolen cryptocurrencies. In a statement released on social media soon after the attack, Fei Protocol offered a $10 million bounty in exchange for return of the stolen funds.
According to reports, hackers are using malicious ads as part of a phishing campaign targeting holders of UST, a popular stablecoin that is pegged to the value of the U.S. dollar. The ads reportedly direct users to fraudulent websites, mimicking services used by UST holders. Reports indicate that over $4.3 million in UST has been stolen through this scheme over the course of less than two weeks.
Recent reports estimate that more than $1.6 billion in cryptocurrencies has been stolen through DeFi exploits in 2022 alone. Less than six months into the year, this figure is driven by a number of high-value hacks, including the Ronin Bridge attack in March of this year, when hackers stole $600 million in user funds. The ongoing attacks reportedly coincide with a significant decline in the total value locked (TVL) in DeFi this past month, with TVL dipping below $200 billion for the first time since 2016.
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