[co-author: Jordan R. Silversmith]
The Blockchain Effect: NASA, IoT, Supply Chain and State Initiatives
By: Diana J. Stern
On Monday, NASA Ames Research Center published a paper about a permissioned blockchain framework that addresses privacy and security issues for FAA air traffic data using certificate authority, smart contract support and secure communication channels. The impetus for the proposal is that the FAA is mandating national adoption of an Automatic Dependent Surveillance Broadcast system, but, as the paper argues, the system leaves a question mark around certain security concerns. Also in security, a report found that only approximately 48 percent of businesses can detect a breach of their IoT devices – and that there will be more than 20 billion connected devices by 2023. In addition, of 950 IT professionals surveyed, 23 percent believe blockchain could be the answer for securing IoT devices. The results of the study suggest that 91 percent of organizations that do not use blockchain technology today are likely to consider it going forward.
In supply chain initiatives, a major U.S.-based international automaker and other companies at various stages of the mineral supply chain launched a pilot to monitor the responsible production, trade and processing of cobalt. The eventual goal is to explore an open, industrywide blockchain platform for tracking minerals used in consumer products. The World Wildlife Fund was also active in supply chain this week. The WWF Australia launched a tool that enables businesses and consumers to track food using QR codes and blockchain technology. In other enterprise news, a major U.S.-based package delivery and supply chain management company made a strategic investment in Inxeption Corporation, a blockchain-based B2B e-commerce platform that helps merchants increase online sales.
A major energy company in Spain is using Energy Web Foundation, a blockchain-based platform purpose-built for the energy industry, for a renewable energy pilot. One of the company’s takeaways from the test drive was to use blockchain tech to issue a guarantee of origin so that consumers have a verifiable certificate about the source of the energy they consume. The largest cargo shipping company in Israel, Zim, has been piloting a blockchain-enabled platform for electronic bills of lading for over a year, and is now making the offering available to its clients for selected trades. Zim said the value proposition includes improved workflow and digitization of paper-based processes. Finally, Vermont put out an RFI to test whether blockchain technology can improve the efficiency, accuracy, security and transparency of regulatory processes. The pilot program will allow new captive insurance companies to register with the state.
For more information, please refer to the following links:
Blockchain Announcements From Traditional Financial Institutions and Emerging Platforms
By: Robert A. Musiala Jr.
On Monday, one of the largest banks in the world announced that over the course of 2018 it settled $250 billion in foreign exchange trades using an internally developed blockchain platform that, among other benefits, allowed the bank to verify settlement without external confirmation. Meanwhile, a major Swiss investment bank announced that it is launching a cryptocurrency custody service targeted at institutional market participants. In the commodities markets, the blockchain-based commodities trading platform Vakt, which runs on the Quorum blockchain, has added a major U.S.-based multinational energy company to its platform and industry consortium. On Jan. 10, cryptoasset index provider Bitwise Asset Management filed a registration statement with the SEC seeking approval for a physically held bitcoin exchange-traded fund (ETF). According to a press release, the proposed ETF will differ from prior ETF proposals because it will use regulated third-party custodians to hold its physical bitcoin.
According to reports, late last week the security token trading platform tZERO announced that it has begun releasing security tokens into the custody of investors who purchased the tokens during a private offering completed in August 2018. Another announcement this week stated that the Aspencoin, a securitized token associated with the St. Regis Aspen Resort, will be migrated to the Securitize platform to enable trades across multiple exchanges. In Europe, the Belarus-based blockchain technology company Currency.com issued a press release claiming to have launched “the world’s first fully-functional trading platform for tokenised securities.” According to the press release, the platform will offer “a tokenised version of a contract for exchange of a specific equity, commodity or index.”
In recently published findings, a study by MarketWatch searched the SEC’s Edgar database and identified 287 Form D filings that contained key terms indicating that funds raised from accredited investors involved an initial coin offering (ICO). The study estimated the total value of Reg D exempt ICO-related fundraising events at $8.7 billion for the year 2018. Another study recently published by BitMEX analyzed ICO tokens issued to members of ICO teams. The study found that the total value of tokens held by ICO team members has declined from $24 billion to $5 billion, due mostly to falling market prices for the tokens.
To read more about the topics covered in this week’s post, please see the following:
Cryptocurrency Exchanges and Payment Providers Announce New Products
By: Joanna F. Wasick
Ways to exchange cryptocurrency continue to grow. Bittrex, a U.S.-based cryptocurrency exchange, announced its launch of an over-the-counter (OTC) trading desk that will support the nearly 200 cryptocurrencies the exchange currently offers. According to Bittrex, the OTC desk will allow parties to transact directly, unlike exchange trading, which matches buy and sell orders through an order book. Binance, another prominent exchange, announced its new fiat-to-crypto exchange, which will be based in the island of Jersey. “Jersey Binance” will purportedly enable traders in Europe and the UK to trade Bitcoin and Ethereum against the British pound and the Euro. New reports also reflect a continued increase in the number of cryptocurrency ATMs, citing roughly 4.9 ATMs installed per day worldwide (with more installed in the United States than in any other country). Getting paid in cryptocurrency by an employer may soon become easier as well. Bitwage, a cryptocurrency payment and wage service, announced a new system that allows companies to pay salaried employees in cryptocurrency. The system includes a new crucial feature that converts a portion of funds into dollars so employers can pay withholding taxes. And one fiat-backed cryptocurrency began the new year with positive news. Cryptocurrency finance company Circle released the third audit of its fiat-backed stablecoin USD Coin. The audit, conducted by a major U.S. accounting firm, confirmed that USDC tokens do not exceed the company’s fiat reserves.
According to recent reports, daily volatility of bitcoin is down a full 98 percent from last year. This volatility decrease comes hand in hand with a significant decrease in price ‒ the price for bitcoin is down nearly 68 percent from this time last year. Some predict that the decrease is here to stay: bitcoin’s spot price is currently higher than its futures price. Regardless of pricing, one company is making sure cryptocurrency owners can store their wealth in style. A luxury Swiss watchmaker is now offering “Blockchain Watch,” a handcrafted timepiece with a built-in crypto-wallet. The watch is priced over $100,000 and can only be purchased with bitcoin.
For more information, please check out the following links:
Cryptocurrency Exchange Hacked, Crypto-Malware and Wallet Vulnerabilities Exposed
By: Jordan R. Silversmith
On Jan. 15, several news outlets reported that a New Zealand-based cryptocurrency exchange, Cryptopia, had gone offline after being hacked, with about $2.44 million worth of ether tokens and about $1.18 million worth of centrality tokens being transferred to unknown wallets on Jan. 13. Shortly after the hack, cryptocurrency exchange Binance froze and quarantined certain tokens sent to its exchange by the entity allegedly responsible. In related news, gate.io announced that $100,000 worth of cryptocurrency stolen from its exchange during the 51 percent attack on Ethereum Classic allegedly has been returned by the hacker who took it. Gate.io mentioned in its post that the hacker may have been a “white-hat” hacker seeking to demonstrate security risks.
Recent hard forks of Ethereum Nowa (ETN) and Ethereum Classic Vision (ETCV) have reportedly been tarnished by malware that appropriates the private keys of users trying to redeem their forked coins. Meanwhile, malware posing as a movie file on popular torrenting site The Pirate Bay reportedly has been found to trigger a chain of nefarious activities that include cryptocurrency thefts. Additionally, a recent report has highlighted vulnerabilities in numerous “cold storage” cryptocurrency wallets, including Trezor One, Ledger Nano S and Ledger Blue. The report, titled “wallet.fail,” outlined research into the vulnerabilities of popular hardware wallets, which are typically considered more secure than wallets hosted online.
A recent rash of ransomware attacks known as the Ryuk ransomware, estimated to have earned hackers $2.5 million in Bitcoin, likely came from Russian cybercriminal activity rather than state-sponsored North Korean actors, crypto-focused news site Hard Fork reported on January 14. According to a recent report from Zerohedge, Russia is preparing to make major investments in bitcoin as part of a larger trend in which the country has been liquidating its U.S. Treasury holdings and investing in other foreign currencies and commodities like gold. One source has claimed that Russia intends to purchase as much as $10 billion in bitcoin, beginning as early as February. Russian government officials have refuted this claim.
For more information, please check out the following links:
International Regulators Target Cryptocurrency Exchanges, ICOs and Tax Compliance
By: Simone O. Otenaike
Bitmex, a Hong Kong-based Bitcoin derivatives exchange registered in the Seychelles, reportedly deactivated the trading accounts of clients from the U.S. and the Canadian province of Quebec this week. Bitmex also imposed similar restrictions against clients from North Korea, Iran, Syria, Cuba, Sudan and Crimea, to avoid violating anti-money laundering and anti-terrorist financing laws. Coincheck, a Japanese cryptocurrency exchange registered with the Kanto Financial Bureau, recently lost $530 million in altcoin tokens due to a hack. Despite the loss, Japan’s Financial Services Agency granted full permission for Coincheck to continue operations in the country. According to a recent report from South Korea’s Ministry of Science and ICT, Internet & Security Agency, and the Ministry of Economy and Finance, only a third of cryptocurrency exchanges satisfy the government’s network, security and wallet management standards. The South Korean agencies inspected a total of 21 cryptocurrency exchanges from September to December 2018 and examined 85 different aspects. Only seven of the cryptocurrency exchanges satisfied the applicable standards: Upbit, Bithumb, Gopax, Korbit, Coinone, Hanbitco and Huobi Korea.
Also this week, the Finance Minister of Malaysia announced that the Securities Commission plans to regulate initial coin offerings and the trade of cryptocurrencies effective Jan. 15. Meanwhile, The Cyberspace Administration of China (CAC) introduced new regulations for blockchain-based companies that operate in China. The CAC’s guidelines require companies to permit authorities to access stored data and obtain an ID card or mobile number from its users ‒ the new regulations will be effective Feb. 15. In Spain, The Spanish National Securities Market Commission added 23 unauthorized cryptocurrency exchanges to its warning list this week. The Danish Tax Council will soon permit its Tax Agency to access cryptocurrency trader information from exchanges. Upon the Tax Agency’s request, cryptocurrency exchanges must produce trader information, including trades, names and addresses, and central person registration numbers, for the period spanning 2016 – 2018. The Danish Tax Agency ultimately plans to use this trader information to determine if citizens are paying taxes on any profits.
For more information, please check out the following links:
Tax Analysis: Crypto Thefts; Market Declines – Strategies to Manage Losses
By: Roger M. Brown and Nicholas C. Mowbray
It’s hard to read about developments in the cryptocurrency space without seeing articles about token thefts, post-initial coin offering declines in value and market volatility. These are recurring themes reported on in our Blockchain Monitor blog posts. According to a recent survey, U.S. investors who have sold bitcoin collectively have realized approximately $1.7 billion in losses, but only 53 percent plan to report bitcoin gains and losses on their tax returns.
Like most commercial events, tax planning presents ways to provide value, reduce risk and/or enhance operating efficiency for crypto market participants. Proper tax planning can yield positive results and should be considered by investors with significant crypto market activity. Favorable tax treatment can be achieved by addressing the fact that crypto assets are capital assets for market participants that are not dealers. That means that gains and losses are not “ordinary” from a tax perspective, which in turn means that any net capital losses of an individual taxpayer can be carried forward to provide for a $3,000 annual deduction only until the carryforward is used up (assuming there are no capital gains in that or proceeding years).
There are many strategies to minimize inefficiencies related to the characterization of gains and losses as capital verses ordinary. Some of these include:
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Disposing of crypto assets in a way that creates an ordinary deduction rather than a capital loss.
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Holding crypto assets in certain entities where character is less relevant and gains and losses offset each other without regard to character.
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Planning to achieve dealer status where crypto assets are treated as ordinary in nature.
Depending on a taxpayer’s investment strategy, there may be a trade-off between long-term capital gains tax rates and tax rates for ordinary income. However, those rates will not apply when a crypto asset is held for less than one year. Moreover, avoiding inefficiencies of mountains of capital loss carryforwards could militate in favor of employing a strategy that is not reliant on a long-term holding period.
Separately, other considerations might exist when crypto assets are held by a domestic corporation. This is because capital losses can be carried back for three years, providing refunds of prior taxes paid on capital gains. In addition, corporations can carry capital losses forward for only five years, after which they vanish (whereas individuals can carry forward their capital losses indefinitely). Thus, corporations might have more pressure to pursue strategies that avoid capital losses.
