Global Blockchain Developments: Zero-Knowledge Proofs on Ethereum, New Foreign Regulatory Frameworks, Continued Enforcement Actions


[co-author: Taylor Thompson]

Supply Chain and Banking Pilots Expand, Zero-Knowledge Proofs Meet Ethereum

By: Jaime B. Petenko

This week, a leading diamond mining company announced that it joined the Tracr diamond blockchain traceability program, which aims to provide consumers with confidence and information about their diamonds and raise the bar for the traceability, authenticity and provenance of diamonds. Also this week, the Canada Border Services Agency announced that it will pilot TradeLens, a blockchain platform for supply chains that enables participants to track import and export data in real time with a secure audit trail, which could reduce transit times and costs by improving visibility and communication. While more than 100 participants have signed on to TradeLens, the platform is reportedly facing challenges attracting other shipping carriers due to concerns related to the terms of engagement, including ownership of intellectual property rights. In related news, a leading enterprise software company recently announced that in early 2019 it will launch a suite of blockchain applications for supply chains that will focus on four specific use cases and offer packaged solutions requiring minimal system integration and customization.

Recently, the world’s leading provider of financial transaction messaging services and a voting solutions provider teamed up to demonstrate a blockchain proof of concept for voting built on Hyperledger Fabric. Also this week, a Big Four accounting firm announced the launch of a prototype for the world’s first implementation of zero-knowledge proof technology on the public Ethereum blockchain. The technology seeks to enable companies to use the standard, secure infrastructure of the public Ethereum blockchain but keep transactions private. According to a press release, the technology intends to support payment tokens and tokens similar to Ethereum ERC-20 and ERC-721 tokens, with the goal of allowing companies to reduce the costs and resources required to set up their own networks.

Last week, a multinational financial services corporation announced the expected launch date of Q1 2019 for its blockchain-based digital identity system for cross-border payments. The system, which is designed for financial institutions, seeks to allow for quick and secure business-to-business global payments. The system will reportedly utilize tokenization of an organization’s sensitive business information (e.g., account numbers and banking details) to produce a unique cryptographic identifier to facilitate transactions. In related news, a Japanese multinational information technology company announced that it has been selected as an application development vendor for a field trial by nine Japanese banks for a blockchain-based interbank settlement system. According to a press release, the proposed solution would utilize the technology firm’s peer-to-peer money transfer platform as well as “a digital currency” for interbank settlements. According to reports, in China the Shenzhen Court of International Arbitration officially recognized bitcoin as property, thereby allowing bitcoin to be owned and transferred without violating financial regulations. The decision by the court allows merchants to legally accept bitcoin as a form of payment.

To read more about the information covered in this week’s post, see the following:

Cryptocurrency Exchange Announcements, Malta Blockchain Laws Take Effect

By: Simone O. Otenaike

On Monday, a Belgium-based investment company acquired Bitstamp, the largest digital currency exchange in the European Union by volume, with turnover of $100 million per day. The acquiring company has more than 2 billion euros in assets under management and is the European subsidiary of the South Korea-based investment company that owns Korbit, a South Korean cryptocurrency exchange. Also this week, Bittrex International announced plans to launch a digital trading platform that will feature a streamlined and feeless token approval process. The platform will seek to identify tokens that are consistent with their jurisdiction’s regulatory environment and match token teams to a network of international exchange partners. According to a press release, Bittrex International will operate within the regulatory framework established by the European Union and the Malta Virtual Financial Assets Act.

Malta, recently dubbed “Blockchain Island,” is scheduled to host the Malta Blockchain Summit this week. During the summit, three new blockchain technology bills that were adopted earlier this year will take effect: (1) The Malta Digital Innovation Authority Act, (2) The Innovative Technological Arrangement and Service Act, and (3) The Virtual Financial Asset Act. The Malta Digital Innovation Authority Act establishes an agency that will regulate the blockchain industry, protect consumers and financial markets, and promote transparency. The Innovative Technological Arrangement and Service Act establishes a regime for the registration and certification of technology service providers and lays the groundwork for future technology developments. And The Virtual Financial Asset Act establishes the “financial instruments test,” which provides guidance on whether a cryptocurrency or token issued in an initial coin offering (ICO) constitutes a security. Any asset that does not squarely pass the test will be deemed a “virtual financial asset” regulated by the new law.

On the domestic front, a major national bank received a patent on Tuesday for a device that securely stores cryptographic keys, which have been prone to hacking and cybertheft. The patent presents a significant business opportunity for the bank since most cryptographic keys are used for blockchain platforms. And a report published this week states that if bitcoin were to become a true global transactional currency, the electricity needed to mine bitcoin would generate enough carbon dioxide emissions to warm the planet beyond 2 degrees Celsius within 25 years. Critics challenge the research’s assumption that bitcoin’s energy consumption will increase linearly, claim it is too speculative to conclude whether or not bitcoin will become a true global transactional currency, and assert that hydroelectric power and other renewable energy resources provide the potential for bitcoin mining to go green.

To read more about the topics covered in this week’s post, see the following:

Global Developments in Enforcement, Regulatory Frameworks and Court Rulings

By: Taylor Thompson

On Oct. 29, the U.S. Attorney’s Office for the Southern District of California announced that a criminal defendant pleaded guilty in federal court to operating a bitcoin exchange without registering with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and without complying with anti-money laundering (AML) laws. The defendant used a bitcoin exchange in Hong Kong to purchase more than $3 million in bitcoin in hundreds of separate transactions on behalf of customers who paid him in cash at above-market rates. According to the announcement, between 2016 and 2018 the defendant arranged to import more than $1 million in U.S. currency from Mexico and exchanged the dollars with a San Diego precious metals dealer, structuring transactions to avoid reporting requirements. In other AML-related news, a recent report claims that the Russia-based cryptocurrency exchange WEX had its funds frozen by the Malta-based Binance exchange after users claimed WEX was involved in money laundering. The same report indicates that WEX, where bitcoin trades well above global norms, is a follow-on to BTC-e, an exchange subject to an investigation in the U.S. and Greece regarding a $4 billion fraud and money laundering scheme.

Recent reports claim that the U.S. Financial Industry Regulatory Authority (FINRA) will soon issue guidance to broker-dealers on how to apply the SEC’s Rule 15c3-3 to digital assets such as cryptocurrencies. And a multinational financial services firm has announced that it will launch cryptocurrency trading and custody services, amid news that competition is escalating among potential qualified custodians for digital assets. Meanwhile, the British government’s Cryptoassets Taskforce recently released a comprehensive final report claiming that there is “limited evidence of the current generation of cryptoassets delivering benefits, but this is a rapidly developing market and benefits may arise in the future.” H.M. Treasury, the Financial Conduct Authority and the Bank of England all pledged to support the development of “legitimate” crypto-related activities while cracking down on “illicit” activities.

According to a recent report, in June 2018, the Chinese Hangzhou Internet Court accepted blockchain data as evidence in a “right of communication” infringement case. The case centered on one company’s allegedly unauthorized distribution of a newspaper article. The court relied in part on data from a blockchain-based third-party data preservation firm to conclude that the plaintiff’s right of communication had, in fact, been infringed, and that all electronic data, including blockchain data, should be considered on a case-by-case basis. Meanwhile, the Thai Securities and Exchange Commission (SEC) recently issued warnings about investing in nine specific ICOs, and warned of crypto-based Ponzi schemes. Finally, multiple reports indicate that Hong Kong’s Securities and Futures Commission (SFC) will regulate cryptoassets “to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both.” The SFC announced that “[i]ntermediaries which distribute virtual asset funds, whether or not they are authorised by the SFC, are required to ensure compliance” with applicable regulations. Additionally, “the SFC will explore whether virtual asset trading platforms are suitable for regulation in the SFC Regulatory Sandbox,” but it may also deny a license to such platforms altogether. The SFC cited valuation, volatility and liquidity risks; cybersecurity; AML/CTF risk; conflicts of interest; and fraud as potential risks for the crypto space, though it also said it “will keep the development of activities related to virtual assets in view and may issue further guidance where appropriate.”

To read more about the topics covered in this week’s post, see the following:

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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