Fashion Brands Score with NFTs, but Market Trends Show Threats Abound
By Lauren Bass and Lynn Tang
According to a recent report, iconic fashion brands from ready-to-wear sportswear to haute couture have been reaping the financial rewards of their bespoke NFT (non-fungible token) collections. Reportedly, the top fashion NFT drops have collectively generated $260 million in sales since December 2021, with the top drops generating more than $185 million in revenue alone.
With millions of dollars in sales, the NFT market is a prime target for financial crimes, including money laundering, terrorist financing and scams, according to a recent report by blockchain analytics provider Elliptic. Key takeaways from their report’s findings: (i) Over $50.6 million worth of NFTs have been publicly reported stolen in the past year; (ii) sanctioned entities pose a growing threat; and (iii) since 2017, NFT-based platforms have reportedly facilitated the laundering of over $8 million in illicit funds. Despite these startling statistics, Elliptic concluded that “the perceived chances of NFT-based crime occurring is higher than it actually is” and “the true instances of these crimes account for a small proportion of NFT-related trade.”
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FDIC and Congress Members Address Crypto Representations, Sanctions, Mining
By Alexandra Karambelas
Last week the Federal Deposit Insurance Corporation (FDIC) announced that it had issued cease and desist letters to five blockchain-related companies, demanding that the companies “cease and desist from making false and misleading statements about FDIC deposit insurance” and instructing the companies to “take immediate corrective action.” The FDIC alleged that each company made false and misleading statements indicating that certain cryptocurrency products or accounts were FDIC insured, with one company alleged to have registered a domain name suggesting affiliation with the FDIC.
This week, U.S. Rep. Tom Emmer published a letter to Treasury Secretary Janet Yellen asking for clarification on the Office of Foreign Assets Control’s (OFAC) recent sanctions against the cryptocurrency mixing service Tornado Cash. Emmer described the sanctions as the “first of their kind” in that OFAC sanctioned the protocol’s smart contracts rather than a natural person or entity. In his letter, Emmer raised due process and privacy concerns, writing that “the sanctioning of neutral, open-source, decentralized technology presents a series of new questions, which impact not only our national security but the right to privacy of every American citizen.” This letter comes just weeks after the arrest in the Netherlands of a tech developer allegedly involved with Tornado Cash.
In a press release published last week, leaders of the House Energy and Commerce Committee announced that they had sent letters to four U.S.-based cryptocurrency mining companies, seeking further information on the environmental impact and energy consumption of proof-of-work (PoW) mining. The letter raises concerns regarding the effect of mining operations on both climate change and local power grids. According to the letter, “[w]hile blockchain technology is emerging as a potentially important tool in fighting climate change, increasing demand on the grid and burning more fossil fuels to power PoW cryptomining facilities only serves to undermine the potential climate benefits of blockchain technology and hold us back from achieving our climate pollution reduction goals.” The companies have until Sept. 17 to respond to the committee’s requests for information.
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Foreign Regulators Issue Crypto Guidance, Act Against Unregistered VASPs
By Robert A. Musiala Jr.
Last week, the European Central Bank (ECB) published a press release addressing “crypto-asset activities and services” in the European Union. According to the press release, “the finalisation of several regulatory initiatives at European and international level[s] … will lay down the broader regulatory framework under which crypto activities are allowed, and how banks should manage the risks they pose.” Among other things, the press release notes that in evaluating bank activities involving cryptocurrencies, the ECB will focus on risks related to cybersecurity, the use of third-party providers, and anti-money-laundering efforts/combating the financing of terrorism. According to the press release, the ECB is assessing “banks’ digital transformation, including the role of crypto technologies, that will result in horizontal analysis by the end of 2022.”
The South African Reserve Bank recently published guidance “to inform banks and controlling companies of practices related to the effective implementation of adequate anti-money-laundering and counter-financing of terrorism (AML/CFT) controls in relation to crypto assets (CAs) and crypto asset service providers (CASPs).” The guidance seeks to further implement recommendations from the Financial Action Task Force. Among other things, the guidance defines “crypto asset” and “crypto asset service provider,” addresses a risk-based approach to identifying and assessing CA and CASP risks, and underscores the importance for banks to monitor client transactional activity.
Last week, the South Korean Financial Intelligence Unit (KoFIU) published a press release warning that 16 virtual asset service providers (VASPs) are targeting South Korean consumers without proper registration. According to the press release, the KoFIU has informed the relevant financial regulators in their respective countries about the violations and has taken steps to block South Korean consumer access to the unregistered VASPs, including steps to block transfers of virtual assets to and from the unregistered entities.
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DOJ Targets Cryptocurrency Fraud, Report Cites Recent Crypto Crime Trends
By Jordan R. Silversmith
According to a press release published this week by the U.S. Department of Justice (DOJ), three individuals from Miami have been arrested for their involvement in a scheme that used cryptocurrency to defraud U.S. banks. According to the indictment, the three defendants used stolen identities to buy more than $4 million in cryptocurrency and then falsely claimed that the cryptocurrency transactions were unauthorized. This deceived U.S. banks and a leading cryptocurrency exchange into reversing those transactions and depositing the ill-gotten funds into the defendants’ bank accounts. According to the press release, the defendants’ scheme resulted in U.S. banks processing more than $4 million in fraudulent transaction reversals and the cryptocurrency exchange losing more than $3.5 million in cryptocurrency. The defendants face multiple charges of fraud and conspiracy to commit fraud, and face over 30 years in prison.
A leading blockchain analytics firm recently released its midyear cryptocurrency crime update. The report finds that despite this year’s downturn in cryptocurrency prices, illicit activity in the area is resilient. Among other things, the study found that illicit trading volumes are down 15 percent year over year, compared with a 36 percent decline for legitimate volumes. While scams and darknet activity are down as compared to 2021, hacks of exchanges and stolen funds buck the declining trend, with $1.9 billion of cryptocurrency stolen in hacks of services through July 2022, compared to just under $1.2 billion at the same time in July 2021.
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