Crypto, CBDC and Blockchain Supply Chain Initiatives Announced; More SEC and FinCEN Enforcement; Crypto Tax Amendment Fails; DeFi Hacked for $600M

BakerHostetler

Crypto Firms Pursue Bank Charters, Traditional Financial Firms Integrate Crypto

By Veronica Reynolds

This week, the Wyoming Division of Banking granted a new Special Purpose Depository Institution (SPDI) bank charter to Commercium Financial Inc., a financial entity positioning itself to be a fully digitized bank. According to a press release, this is the fourth SPDI to receive approval in Wyoming, and the charter will allow the SPDI entity “to deploy a unique set of technology solutions that connect traditional banking systems to tokenized assets and securities.” Also this week, Circle announced plans to become a U.S. federally chartered national commercial bank operating under the risk management requirements of the U.S. Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Circle’s goal, according to its blog, is to leverage digital currency technology to facilitate a more efficient and resilient financial system.

This week, a major U.S. consumer payments platform announced, “Cash Back to Crypto, a new way for … credit card customers to automatically purchase cryptocurrency … using cash back earned from their card purchases.” Also this week, a major global bank based in Singapore announced that its brokerage arm “has received in-principle approval from the Monetary Authority of Singapore (MAS) … to provide digital payment token services as a major payment institution.” According to a press release, the license will allow the bank’s brokerage arm “to directly support asset managers and companies to trade in digital payment tokens.” The press release also notes that beginning August 16, the bank’s “digital exchange” will begin operating 24 hours per day to enhance its customers’ ability “to seize opportunities and manage risks arising from changes in cryptocurrency spot prices.”

Bitcoin has become more environmentally friendly as a result of reduced mining in China, according to a recent article published by Bitcoin Magazine. According to the article, recently obtained data indicates that almost a third of Bitcoin’s hash rate is powered by low-emissions energy sources, with reportedly 56 percent of Bitcoin’s needed energy now being produced from sustainable sources such as wind, solar, hydro, nuclear and other renewables.

For more information, please refer to the following links:

CBDC and Blockchain Remittance Initiatives Launch Across Foreign Markets

By Joanna F. Wasick

Three countries recently announced important developments with their central bank digital currencies (CBDCs) initiatives. On Wednesday, the Bank of Ghana announced that it was partnering with a German payments company to launch a CBDC pilot to be tested with banks, payment service providers, merchants, consumers and other relevant stakeholders. The project is part of the “Digital Ghana Agenda,” and it is designed to provide alternatives to physical cash and to facilitate payments without a bank account. Earlier this week, the Bank of Jamaica announced it minted Jamaica’s first batch of CBDC, part of the total of J$230 million in CBDC to be issued to deposit-taking institutions and authorized payment service providers during Jamaica’s CBDC pilot, which runs through December. And last week, a major South Korean electronics and communications conglomerate announced it will join the Bank of Korea’s CBDC pilot program, which began late last month and has been co-managed with GroundX, a blockchain affiliate of a messenger platform. The conglomerate and bank stated that the project will involve issuing and distributing CBDC and monitoring its use in virtual environments. It will also focus on money transfers and remittances between countries.

This week, Velo Labs, TEMPO Payments and Bitazza opened up a remittance corridor between 27 European Union countries and Thailand. The cross-border transactions utilize the Velo Protocol, Velo and Velo digital credits, and each transaction reportedly settles in seconds over the Stellar blockchain. On Tuesday, a U.S. fintech firm announced that one of the largest nonbank remittance service providers in South Korea joined its global financial network. By joining, the service provider is now connected to Thailand’s largest bank (in terms of market capital). Also this week, Chilean peso-pegged stablecoin CLPX launched on Stellar. While initial trading volume appears low (reportedly $12,689 from fewer than 13,000 trades, as of early Thursday), the stablecoin aims to provide a cheaper alternative to traditional remittances and to make it easy for investors worldwide to use the copper-linked Chilean peso as a hedge.

For more information, please refer to the following links:

Blockchain Supply Chain Initiatives Launch Across Various Industries

By Robert A. Musiala Jr.

A major U.S. healthcare services company recently announced a partnership with the MediLedger Network “to leverage a new blockchain-powered solution … to streamline operations across the pharmaceutical supply chain and enable a reliable, frictionless experience for pharmacies across the country.” According to a press release, the blockchain solution will allow the healthcare company “to optimize the complex process of pharmaceutical chargebacks and create greater connectivity for its suppliers and customers.” In other supply chain developments, blockchain enterprise firm BlockApps recently launched “Genesis – Blockchain for Beef,” a solution designed to “allows users to record and track animal data such as health protocols, performance indicators, current locations, and progress across the supply chain … optimizing the value and quality of beef.”

According to a recent press release, a U.S. electric car company has agreed to work with a major Australian mining firm on an initiative aimed at achieving “end-to-end raw material traceability using blockchain.” In a related development, the Provenance Proof Blockchain recently announced new functionality for its blockchain platform used to trace the supply chain of precious stones.

According to reports, the UK Fashion and Textile Association recently launched a blockchain traceability project for the fashion industry supply chain in partnership with several major clothing retailers and a major global technology firm. The initiative will reportedly seek to leverage “blockchain technology to share information about the clothing products – such as place and date of production, product composition and environment-related certificates – accessible to consumers via a QR code.”

For more information, please refer to the following links:

SEC Charges DeFi Company and Digital Asset Exchange Platform

By Teresa Goody Guillén

Shortly after the U.S. Securities and Exchange Commission (SEC) Chair indicated that the SEC’s enforcement efforts would be aggressive in the crypto space, the SEC brought two significant crypto-related actions. First, the SEC charged two Florida men and their Cayman Islands company for unregistered sales of more than $30 million of securities using smart contracts and decentralized finance (DeFi) technology, and for misleading investors concerning the operations and profitability of their business, DeFi Money Market. According to the order, in offering and selling the tokens, the respondents stated that DeFi Money Market would use investor assets to buy “real world” assets that generated income. However, the order finds that the respondents, upon learning that DeFi Money Market could not operate as promised, did not notify investors of this roadblock but instead misrepresented how the company was operating, including by making false claims that DeFi Money Market had bought the assets.

Also, this week, the SEC announced that a digital asset trading platform agreed to pay more than $10 million to settle charges for operating an unregistered online digital asset exchange that facilitated buying and selling of digital asset securities. According to the SEC’s order, the trading platform met the criteria of an “exchange” because the trading platform provided the nondiscretionary means for trade orders to interact and execute through the combined use of the platform’s website, an order book and the platform’s trading engine, but it did not register as a national securities exchange or operate pursuant to an exemption from registration. The SEC’s order further finds that platform employees stated internally that they wanted to be “aggressive” in making available for trading new digital assets on the trading platform, including digital assets that might be considered securities under the Howey test.

SEC Commissioner Hester Peirce issued her own statement criticizing the enforcement action against the digital asset trading platform. According to Peirce’s statement, during the period at issue the process for the trading platform to have registered as a securities exchange or broker-dealer and alternative trading system (ATS) would have been too long. Peirce’s statement noted that market participants are surprised by the SEC’s “enforcement guns blazing” given how “slow” the SEC has been in determining how regulated entities can interact with crypto, and in addressing outstanding questions and issues that need to be resolved before a crypto trading platform can register as an exchange or an ATS.

For more information, please refer to the following links:

FinCEN Settles Enforcement Action Against Major Cryptocurrency Exchange

By Robert A. Musiala Jr.

This week, the U.S. Financial Crimes Enforcement Network (FinCEN) announced that it has “assessed a civil money penalty in the amount of $100 million against BitMEX, one of the oldest and largest convertible virtual currency derivatives exchanges, for violations of the Bank Secrecy Act (BSA) and FinCEN’s implementing regulations.” According to a press release, the settlement is part of a global settlement with the U.S. Commodity Futures Trading Commission and relates to charges that BitMEX “operated as an unregistered futures commission merchant (FCM) and provided money transmission services” while failing to comply with its obligations under the BSA.

According to the press release, “for over 6 years, BitMEX failed to implement and maintain a compliant anti-money laundering program and a customer identification program, and it failed to report certain suspicious activity.” The press release further notes that BitMEX “conducted at least $209 million worth of transactions with known darknet markets or unregistered money services businesses providing mixing services,” and “failed to file a Suspicious Activity Report (SAR) on at least 588 specific suspicious transactions.” In addition to paying a civil monetary penalty, BitMEX has agreed to engage independent consultants to perform a “SAR lookback” investigation and conduct reviews to ensure that appropriate policies, procedures and controls are in place to ensure that BitMEX is not operating wholly or in substantial part in the United States.

For more information, please refer to the following links:

Senate Passes Bill Expanding Crypto Tax Reporting Without Amendments

By Nicholas C. Mowbray

On August 10, the Senate passed a $1.2 trillion infrastructure bill that included stringent reporting of cryptocurrency transactions to the Internal Revenue Service. The cryptocurrency provisions were the subject of significant debate, with bipartisan groups of lawmakers introducing amendments to narrow its application to cryptocurrency exchanges. The final legislation, however, did not contain these amendments.

As drafted, the legislation expands the definition of a “broker” to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Absent further changes to the legislation or interpretations by the U.S. Treasury Department and Internal Revenue Service after the legislation becomes law, the legislation may require noncustodial blockchain users (i.e., software developers and blockchain network validators) to collect and report personal information (i.e., the name and U.S. tax identifying number of a transferee, the sales price, and the transferee’s tax basis) from users of blockchain networks. The legislation will now be taken up by the U.S. House of Representatives when it returns from its summer recess.

For more information, please refer to the following links:

Senator and SEC Chair Discuss Crypto Concerns as DeFi Is Hacked for $600M

By Kayley B. Sullivan

On July 7, U.S. Sen. Elizabeth Warren, chair of the Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Economic Policy, sent a letter to SEC Chair Gary Gensler requesting information about the agency’s authority to regulate cryptocurrency exchanges and protect consumers from risks associated with the cryptocurrency market. In response, in a letter dated August 5, Chair Gensler expressed his views that investors using cryptocurrency platforms are not adequately protected and that legislative priority should center on cryptocurrency trading, lending and decentralized financial platforms. According to Gensler, “Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”

Meanwhile, in what may be the largest DeFi hack to date, this week the Poly Network DeFi platform was hacked, losing over $600 million in cryptocurrency from the Ethereum, Binance Chain and Polygon Networks. According to tweets from the company, the hacker then began returning funds to wallet addresses on the three chains, so far returning approximately half of the stolen proceeds. According to reports, the hacker has since been communicating with the public and has “conducted an Ask Me Anything (AMA) using embedded messages in Ethereum transactions.”

For more information, please refer to the following links:

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