New Initiatives Launch in Stablecoins, CBDCs, Tokenized Securities, Supply Chain; Crypto Guidance Published for Credit Unions; CFTC Fines Events Market

BakerHostetler

Financial Messaging Network Launches Experiments in Stablecoin Sector

By Veronica Reynolds

A global messaging network used by financial institutions to send and receive financial information recently announced that it is exploring the tokenized asset market – specifically, options for improving interoperability between market participants. In furtherance of this objective, the messaging network is planning Q1 2022 experiments using established payment forms and central bank digital currencies (CBDCs) that will explore the “issuance, delivery versus payment, and redemption processes, to support a frictionless and seamless tokenized asset market.” Asset tokenization typically refers to dividing traditional (or digital) assets, such as stocks, bonds and commodities, into fractions that have values according to the size of the division. According to its website post, the messaging network notes that while the tokenized asset ecosystem remains relatively small, it has the potential to reach 24 trillion USD by 2027.

Stablecoin credit risks and market opportunities around stablecoin issuance could improve with greater regulatory certainty, according to a recent press release and report published by a U.S. credit rating agency. Clearer regulation “could clarify how far the credit profiles of stablecoin issuers diverge from traditional developed market participants in the deposit-taking space,” the press release posits. The release also notes that the EU has published draft regulations calling for stablecoin issuers to be regulated as banks or electronic money institutions, with similar recommendations included in a recent U.S. regulatory report, but that it is unclear whether or when legislation to implement these recommendations will be enacted.

For more information, please refer to the following links:

Technology and Finance Firms Announce CBDC and Digital Securities Initiatives

By Keith R. Murphy

A multinational bank and a multinational technology company recently announced that they successfully tested an end-to-end transactional life cycle covering central bank digital currencies (CBDCs), eBonds and foreign exchange settlement capability, according to a recent press release. The test, which involved direct transactions between two CBDCs in a hybrid cloud environment, is reportedly part of an effort to explore the possibility of a digital Euro and helps demonstrate how to reduce market risk and improve security for transactions among banks.

In a separate development, a digital asset trading platform announced its recent acquisition of a Securities and Exchange Commission-registered transfer agent, according to a report. The transfer agent was reportedly instrumental in the issuance and listing of some of the earliest SEC-qualified digital securities, including the token of the acquiring company. According to the company’s CEO, the intention is to build a global regulated hub for digital assets, focused on the digital securities capital markets infrastructure.

For more information, please refer to the following links:

Gold, Wool and Cargo: Global Supply Chains Continue to Adopt Blockchain

By Lauren Bass

The government of Burkina Faso has reportedly teamed with a Rwandan-based blockchain platform in an effort to bring transparency, security and efficiency to its country’s artisanal gold production. The partnership recently exported its first kilo of gold, for which each mining source was independently tracked and verified along the blockchain. According to reports, the company hopes to replicate this partnership with other mineral producing countries in sub-Saharan Africa.

In a similar move, an Australian wool industry not-for-profit has reportedly joined forces with a London-based digital transparency company to create a proof-of-concept that will help trace the lifetime journey of authentic wool products. According to reports, the blockchain-based project will provide immutable records to vendors and consumers to help verify the provenance and biodiversity claims made by Australian woolgrowers.

In related news, a multinational blockchain-based supply chain platform has reportedly entered an exclusive agreement with Pakistan Customs to digitize the import-export documentation of containerized cargo moving into and out of the country. According to reports, the technological integration will help improve the operational efficiency of legal trade and identify and deter illegal activities.

For more information, please refer to the following links:

NCUA Clarifies Crypto Guidance for Credit Unions; Crypto Tax Report Published

By Joanna F. Wasick

Late last month, the National Credit Union Administration (NCUA), a U.S. regulator overseeing credit unions, issued a statement clarifying existing authority and concluding that, provided certain conditions are met, federally insured credit unions (FICUs) can work with third-party providers that offer digital asset services to FICU members, including buying, selling and holding uninsured digital assets such as cryptocurrencies. The NCUA cautioned that FICUs should conduct “adequate due diligence” and ensure compliance with all applicable laws and regulations when engaging in such crypto activities, and that FICUs should protect cybersecurity and comply with consumer financial protection, investor protection and anti-money laundering/terrorism finance law. This letter follows the request for information that the NCUA issued last July, in which it asked how distributed ledger technology and decentralized finance (DeFi) might affect the credit union system and how the NCUA’s regulated entities could interact with these technologies and other crypto tools.

A leading U.S. accounting firm recently released its 2021 Annual Global Crypto Tax Report. As in previous reports, the 2021 report tracks the increasing number of jurisdictions issuing crypto tax guidance and employs a crypto tax index, which measures whether a particular issue is addressed by existing guidance, to illustrate and compare the comprehensiveness of tax guidance between jurisdictions. This year’s edition also includes insights from more countries; covers the tax implications of several key, newly emerging areas such as NFTs and DeFi; and addresses the impact of other notable events in 2021, including El Salvador’s adoption of bitcoin as legal tender. The report concludes by identifying areas in need of more guidance in the coming year, including guidance on how to approach Web3 decentralized business models and decentralized autonomous organizations.

For more information, please refer to the following links:

CFTC Targets Smart Contracts Market; DOJ Traces Bitcoin Linked to Theft

By Kayley B. Sullivan

According to a recent press release, the U.S. Commodity Futures Trading Commission (CFTC) entered an order settling charges against Polymarket, a cryptocurrency betting service, for failing to seek the necessary registrations to offer binary options in the U.S. According to the press release and order:

[B]eginning in approximately June 2020, Polymarket had been operating an illegal unregistered or non-designated facility for event-based binary options online trading contracts, known as “event markets.” … Polymarket offered the public the opportunity to “bet on your beliefs” by buying and selling binary options contracts related to an event taking place in the future that are susceptible to a “yes” or “no” resolution, such as: “Will $ETH (Ethereum) be above $2,500 on July 22?” … Polymarket has offered more than 900 separate event markets since its inception, while deploying smart contracts hosted on a blockchain to operate the markets.

As part of the settlement, the company agreed to pay a fine of $1.4 million, shut down its markets and offer users refunds on charges the company failed to register.

In the U.K., the Advertising Standards Authority (ASA) recently issued a decision against a cryptocurrency payment and trading platform finding that the firm’s advertisements were misleading. The ASA said that the ads took advantage of consumers’ “inexperience or credulity” and failed to clarify the risk of the investment and make clear the limitations of purchasing a cryptocurrency with a credit card.

In a final development, the U.S. Department of Justice announced in a recent press release that it has successfully returned $154 million in funds that were stolen from a major multinational electronics company after tracking that money to bitcoin. An employee of the company had diverted the $154 million and then quickly converted the funds to bitcoin. According to the press release, the FBI “was able to trace bitcoin transfers and identify that approximately 3,879.16 bitcoins, representing the proceeds of the funds stolen … had been transferred to a specific Bitcoin address and then to an offline cryptocurrency cold wallet.”

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