Blockchain Week in Review - April 2021 #4

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Weekly Focus:

  • Bipartisan crypto bill passes House of Representatives
  • Fed leaves interest rates unchanged, while Chairman Powell says equity markets are a “bit frothy”
  • Paxos becomes third federally regulated crypto bank (& raises $300 million)
  • Wyoming DAO law to go into effect in July
  • DOJ announces arrest of Bitcoin Fog founder who allegedly laundered $335M in crypto
  • Turkey bans cryptocurrency payments, sets up central custodian
  • South Korea set to tax crypto trading gains

U.S. Developments

Bipartisan crypto bill passes House of Representatives

Last week, the U.S. House of Representatives passed H.R. 1602, titled “Eliminate Barriers to Innovation Act of 2021.”  The bill was first introduced back in March by Representatives Patrick McHenry (R-N.C.) of the House Financial Services Committee and Stephen Lynch (D-Mass.) of the Task Force on Financial Technology.  According to the text of the bill, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) will jointly establish a working group known as the “SEC and CFTC Working Group on Digital Assets.”  Members of this group will include government representatives as well as members of financial technology companies, financial firms, academic and research institutions, and investor protection organizations, among others.  If the bill becomes law, the Working Group will also be required to submit a report to the SEC and CFTC that includes (i) an analysis of the legal and regulatory framework of digital assets, specifically the impact that lack of clarity in such framework has on digital asset markets; and (ii) recommendations for the improving and creating digital asset markets, establishing standards for custody and private key management, and best practices for reducing fraud and improving investor protection in digital asset markets.

On April 22, 2021, the bill was referred to the Senate Committee on Banking, Housing and Urban Affairs, which is led by Senators Sherrod Brown (D-Ohio) and Pat Toomey (R-Penn.).

Fed leaves interest rates unchanged, while Chairman Powell says equity markets are a “bit frothy”

In a press conference on Wednesday, U.S. Federal Reserve Chairman Jerome Powell was asked by a reporter at Yahoo Finance whether the Federal Reserve believes there is a relationship between low interest rates and easy monetary policy, especially in light of the recent rise of GameStop and the meme-inspired cryptocurrency, Dogecoin.  Powell replied, “Some of the asset prices are high.  You are seeing things in the capital markets that are a bit frothy.  That’s a fact.  I won’t say it has nothing to do with monetary policy, but it also has a tremendous amount to do with vaccination and reopening of the economy.  That’s really what has been moving markets a lot in the past few months, this turn away from what was a pretty dark winter to now a much faster vaccination process and a faster reopening, so that’s part of what is going on.”

The press conference followed a two-day, closed-door meeting by the Federal Reserve’s monetary-policy panel, known as the Federal Open Market Committee (FOMC).  The FOMC concluded unanimously at that meeting to continue its current approach of maintaining the benchmark U.S. interest rate near zero and buying $120 billion worth of bonds each month.  Even though the FOMC voted to keep interest rates the same, the Committee statement did recognize the current economic recovery:  “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.”  The FOMC also admitted that inflation has risen and is targeting an inflation rate moderately above 2 percent in the near term.

You can view the full press conference here and here.  You can read the full FOMC statement here.

Paxos becomes third federally regulated crypto bank (& raises $300 million)

Last Friday, the Office of the Comptroller of the Currency (OCC) issued a preliminary conditional approval for a federal trust bank to Paxos National Trust, New York.  Paxos is a stablecoin issuer and blockchain startup, known for its Paxos Standard (PAX) stablecoin and PAX Gold, which is a digital asset backed by physical gold.  With this conditional approval, Paxos will join Anchorage Digital Bank and Protego (see Feb. 12, 2021 Week in Review) as the third crypto-native company to secure a conditional federal trust charter.  The OCC letter listed a range of permissible activities including digital asset custody, management of stablecoin reserves, trading services, and providing KYC as a service.

“This is a preliminary conditional approval, which means that the OCC is approving our business plan,” said Paxos General Counsel Dan Burstein.  “It’s deeming the activities that we have identified in the business plan to be those that can be carried out by a national trust, that we have the right team in place and the right controls and plan in place to control our risk and to operate as a national trust company.”  Paxos will now have 18 months to meet the terms of its conditional approval and set up the trust bank before it begins to operate.

In 2015, Paxos was also the first crypto company to secure the New York Department of Financial Services state Trust charter.  If ultimate approval is granted by the OCC for the federal charter, Paxos will become the first digital assets custodian to be regulated at both the state and federal levels.

Following the conditional approval of its federal charter, Paxos announced on Thursday that it had raised a $300 million Series D funding round, valuing the company at $2.4 billion.

The OCC approval notice can be read here.  The OCC press release can be viewed here.

Wyoming DAO law to go into effect in July

Last week, Wyoming Governor Mark Gordon signed legislation that creates a legal link between decentralized autonomous organizations (DAOs) and the state government.  The act, SF0038, provides “for the formation and management of decentralized autonomous organizations.”  In other words, DAOs will be recognized as limited liability corporations (LLCs) in Wyoming, effective July 1st.

One requirement of the law is that the DAO LLCs must be domiciled in the state of Wyoming, which may pose issues to the DAOs, since DAOs—as their name suggests—is a decentralized organization with no hierarchy of control or principal place of business.  The law does allow DAOs to rely on a registered agent in Wyoming to establish domicile.  Senator Chris Rothfuss (D-Laramie) told CoinDesk that this new law may provide better protection for DAOs against being sued as general partnerships: “Digital asset stakeholders made it clear to us they were concerned about facing general partnership liability in the absence of a well-defined corporate structure.  Our DAO LLC legislation should dispel that concern.”

The text of the new law will be created under Wyoming Statute §§ 17-31-101 to -116.  The full text of the new law can be read here.

DOJ announces arrest of Bitcoin Fog founder who allegedly laundered $335M in crypto

On Wednesday, the Department of Justice announced that it had arrested Roman Sterlingov, the Russian-Swedish founder of Bitcoin Fog.  According to the DOJ announcement, Bitcoin Fog was a cryptocurrency tumbler or “mixer,” where a user’s cryptocurrency funds can be mixed with other user’s funds with the intent of obfuscating the crypto coins’ transaction histories.  Bitcoin Fog gained “notoriety as a go-to money laundering service for criminals seeking to hide their illicit proceeds from law enforcement,” according to the DOJ.  The DOJ also stated that Bitcoin Fog moved more than 1.2 million bitcoin, which were valued at $335 million at the time of the transactions.

Prior to the arrest, an affidavit was filed on Monday by a special agent for the Internal Revenue Service (IRS), which revealed that Sterlingov was identified through analyzing the Bitcoin blockchain.  Undercover transactions began in September 2019, which confirmed that Bitcoin Fog was successfully “tumbling” crypto transactions by breaking a link in the blockchain between the source and ultimate destination of the funds.

The full DOJ press release can be read here.  The affidavit from the IRS special agent can be read in full here.

International Developments

Turkey bans cryptocurrency payments, sets up central custodian

Two weeks ago, the Central Bank of the Republic of Turkey (CBRT) published the Regulation on the Prohibition of Crypto Assets to be used in Payment (the “Regulation”).  The Regulation is set to take effect on April 30, 2021.  The law defines cryptocurrencies as “assets” under Turkish law and prohibits any direct or indirect payment of cryptocurrencies.  Crypto cannot be exchanged for services, and electronic financial institutions cannot mediate platforms that offer trading, custody, transfer, or issuance services for crypto assets.

The press release published by the CBRT explains the rationale behind the Regulation: “Crypto assets entail significant risks to the relevant parties due to the following reasons: they are neither subject to any regulation and supervision mechanisms nor a central regulatory authority; their market values can be excessively volatile; they may be used in illegal actions due to their anonymous structures; wallets can be stolen or used unlawfully without the authorization of their holders; and transactions are irrevocable.”

Following the publication of the Regulation two weeks ago, two of Turkey’s local exchanges (Thodex and Vebitcoin) collapsed, prompting Turkey to announce a new plan to manage its cryptocurrency market risk.  According to a report from Bloomberg, the Turkish government is planning to establish a central custodian bank to eliminate counterparty risk.  Turkish authorities are also contemplating a capital threshold for crypto exchanges and education requirements for the executives running the exchanges.

According to Bloomberg, two of Turkey’s largest exchanges (Paribu and BtoTurk) were trading over $1 billion worth of crypto daily at the beginning of 2021, and the crypto trading volume in January alone accounted for approximately 25% of the traded volume on the Turkish stock exchange, BIST.

South Korea set to tax crypto trading gains

Earlier this week, South Korea Finance Minister Hong Nam-ki said that the South Korean government will start taxing capital gains from trading of cryptocurrencies beginning in January 2022.  The proposal will tax annual cryptocurrency gains of more than 2.5 million won (South Korea’s currency) ($2,253) at a rate of 20%.  “It’s inevitable, we will need to impose taxes on gains from trading of virtual assets,” said Hong Nam-ki.

The announcement follows last week’s remarks from Eun Sung-soo, South Korea’s top financial regular, who suggested that all cryptocurrency exchanges in South Korea could eventually be shut down, since no cryptocurrency exchange had applied for a Virtual Asset Service Provider (VASP) application.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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