Blockchain Identity Solutions Advance, Federal Reserve and Financial Regulators Address Blockchain, Crypto Institutional Survey Published, US and Foreign Enforcement Actions

BakerHostetler

Fish Producer Joins Food Trust, Blockchain Identity Solutions Advance in UK and US

By: Jordan R. Silversmith

Last week, a major Norwegian fish producer announced it will join the Food Trust – a permissioned, permanent and shared ledger of food system data stored on the blockchain – to improve traceability of its products and promote consumer trust across its supply chain. Corporate buyers, including select grocery stores in the United States and Canada, will be able to scan a QR code to obtain a history of the company’s arctic salmon and the feed it was raised on.

Three companies in the United Kingdom working in the U.K. Financial Conduct Authority’s (FCA) regulatory sandbox recently announced their successful completion of a blockchain digital identity pilot. The program was conducted to study the ways financial institutions can use self-sovereign identity in customer onboarding and to reduce compliance costs. The companies plan to further develop the pilot to use self-sovereign identity for other services, such as renting a car or automated check-in at a hotel.

A leading American software company, in one of many efforts by members of the Decentralized Identity Foundation to create tools for COVID-19 response programs, released a beta version of its Bitcoin-based identity tool on Bitcoin mainnet earlier this week. The identity tool is intended to allow user-controlled logins that fit the needs of independent companies or services rather than having large system-providers own a user’s login credentials. Moving the open-source tool to Bitcoin mainnet will allow the public to use and test the beta version of the tool.

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Federal Reserve, CFI, OCC and NY DFS Address Blockchain and Cryptocurrencies

By: Joanna F. Wasick

Both the Federal Reserve and its research initiative, the Consumer Finance Institute (CFI), recently issued statements related to blockchain and cryptocurrency in banking. Late last month, the Federal Reserve announced, in response to a question posed by Sen. Thomas Cotton, R-Ark., that it was considering whether AMERIBOR, a permissioned version of the Ethereum blockchain that captures interbank lending rates, was a suitable replacement for the London Interbank Offered Rate (LIBOR), a widely used benchmark for short-term interest lending rates that has been the subject of past manipulation scandals. This month, the CFI published a working paper on the creation and use of a central bank digital currency (CBDC), noting, among other things, that a CBDC could not only eliminate cash, but also give consumers the possibility of holding a bank account with the central bank directly.

Late last week, the Office of the Comptroller of the Currency (OCC), the U.S. bank regulator, issued a notice of proposed rulemaking (NPR) for public comment to update its rules for national bank and federal savings association activities. The OCC also released an advance notice of public rulemaking (ANPR), seeking comment on how cryptocurrencies and blockchain technology are, and can be, used in banking. Both the NPR and ANPR were issued in conjunction with potential changes to 12 CFR 7, which serves to update or eliminate outdated regulatory requirements. Notably, the notices come on the heels of a new OCC acting comptroller, Brian Brooks, who, prior to serving as OCC chief operating officer, was the general counsel of Coinbase, a major cryptocurrency exchange.

The New York State Department of Financial Services (DFS) and French regulator Autorité de Contrôle Prudentiel et de Résolution (ACPR) have entered into a memorandum of understanding (MOU) to strengthen their positions as fintech hubs. Under the MOU, DFS and ACPR will refer fintech innovators to each other, which can improve speed to market; exchange information about regulatory and policy issues; ensure that innovators in each other’s jurisdiction receive equivalent levels of support; and share regulatory and supervisory expertise and best practices. In a press release issued June 3, the DFS superintendent said the MOU “will foster collaboration to support cross-border fintech developments, providing entrepreneurs speed to market opportunities in New York and France.”

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Institutional Cryptocurrency Survey Published, Bitcoin ETP Seeks to Launch in Germany

By: Veronica Reynolds

According to a recent survey from a major U.S. financial services firm, around a third of large institutional investors have holdings in digital assets such as bitcoin. And in the U.S., about 27% of institutions, such as pension funds, family offices and hedge funds, own digital assets, up from the 22% reported by the same survey last year. Of those surveyed, more than 25% hold bitcoin and 11% hold ether. The increased interest by institutional investors has prompted many companies, such as Genesis and BitGo, to launch new services geared toward these investors.

This week’s announcement of a potential new exchange-traded product (ETP), Bitcoin Exchange Traded Crypto (BTCE), also indicates increased activity in the digital asset space by mainstream investors. ETC Group plans to list BTCE on a German digital stock exchange pending approval from the country’s financial regulators. BTCE will be backed by bitcoin and will track its price. And the first blockchain-based international trade finance transaction between two countries occurred this week. According to reports, the transaction was facilitated using R3’s Corda platform between two banks, one in Turkey and the other in Germany. The technology was used to secure payments of an underlying data transfer supporting a trade of laminated glass interlayers between the two countries.

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Accounting Firms and Government Agencies Seek to Acquire Blockchain Analytics Tools

By: Robert A. Musiala Jr.

According to a recent press release, a subsidiary of a major global accounting firm has formed a partnership with CipherTrace, a blockchain analytics firm, that will allow the accounting firm to “incorporate … cryptocurrency attribution data into advanced auditing and forensics tools.” The press release notes that the partnership will allow the accounting firm “to better address growing cyber threats and compliance risks posed by illicit cryptocurrency and cross-border transactions.” In a related development, according to recent reports, major U.S. exchange Coinbase is seeking to license its blockchain analytics software to the U.S. Drug Enforcement Administration and the Internal Revenue Service.

On June 24, the Financial Action Task Force (FATF), a global anti-money laundering standards organization, will hold a meeting to discuss the progress made by Virtual Asset Service Providers (VASPs) in complying with the so-called Travel Rule, which requires VASPs to maintain information on the originators and beneficiaries of cryptocurrency transactions. According to a source cited in a recent report, “only 10% of countries in the FATF are prepared for the June 24 meeting.”

For more information, please refer to the following links:

U.S. and International Enforcement Actions Seize Assets in Alleged Crypto Frauds

By: Teresa Goody Guillén

The Securities and Exchange Commission announced that it has obtained an asset freeze and other emergency relief in an enforcement action against residents of Utah and Colombia for allegedly defrauding investors of more than $12 million in two cryptocurrency-related schemes. The complaint alleges a first scheme involved operation of a multilevel-marketing business, selling interests in a purported cryptocurrency mining operation and misappropriation of investor funds. The complaint alleges a second scheme involving fraudulent sales of “cryptocurrency trading packages” and misappropriation of investor funds in a “Ponzi-like” scheme.

The Department of Justice has charged a 20-year-old California resident with conspiracy to commit wire fraud for his alleged role in a SIM swap scam. The defendant is alleged to have used the SIM swap scam to steal a significant portion of one victim’s cryptocurrency and to have targeted, along with co-conspirators, at least 20 people.

European police have halted a multimillion-dollar illegal online streaming business operating from Spain. It is reported that the online streaming ring earned an estimated $17 million while operating over five years. European police reportedly made 15 house searches across Europe and arrested 11 people, took down 50 servers in nine countries, and seized $5.4 million in cryptocurrencies, property, jewelry, luxury cars and cash. An additional $1.25 million was frozen in several bank accounts.

Chinese police reportedly froze approximately 4,000 bank accounts owned by over-the-counter (OTC) cryptocurrency traders due to alleged money laundering using cryptocurrency. And in Russia, a power grid firm claims that illegal miners stole $6.6 million worth of electricity, and the firm found 35 cases of illegal power consumption in 20 of the 85 regions of Russia. The theft reportedly occurs when the illegal miners pull an electrical cord to the nearest power line and build their own power transforming stations (possibly underground) or tamper with the power meters to reduce the appearance of their energy consumption.

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