USPTO to Address NFTs; Treasury Dept. Publishes Digital Asset Fact Sheet; Financial Regulators Address Digital Assets; Crypto Enforcement Continues



CryptoPunk Sold at $2.6M, USPTO to Address NFTs, Court Approves NFT Service

By Christina O. Gotsis

A rare NFT from the CryptoPunk collection recently sold for approximately $2.6 million, the fifth-largest sale in the collection’s history. According to reports, the collection’s floor price has increased 61 percent in the past 30 days despite a downturn in the larger crypto markets. A derivative of the CryptoPunk collection, a Saudi Arabia-themed free-to-mint NFT collection, also hit markets this July, reportedly topping the volume charts with $7.7 million in sales in its debut weekend. The debut was not without drama, however. According to reports, the Saudi team discovered an automated bot being used to artificially create a lower floor price and influencers claiming others were able to profit from early knowledge about the mint.

In other recent NFT developments, the U.S. Patent and Trademark Office and the U.S. Copyright Office have reportedly resolved to launch a study aimed at examining the impact of NFTs on intellectual property rights. According to reports, the study will likely consider potential intellectual property challenges with NFTs, the rights associated with transferring ownership of an NFT, licensing rights and infringements, and the potential IP rights given to NFT creators. News of the study comes among a slew of suits by well-known brands seeking legal recourse against NFT marketplaces and NFT sellers that may have infringed on their IP rights.

In a final notable development, a U.K. court recently ruled that NFTs are a valid device for serving legal process in a $2.1 million cryptocurrency fraud case. According to reports, the London judge approved the embedding of a legal notice in an NFT to be sent to a digital wallet controlled by an anonymous defendant allegedly responsible for tricking the plaintiff into transferring his digital assets to a Hong Kong-based company masquerading as a legitimate American online trading platform. The approval of this type of service comes after a New York court similarly approved the use of an NFT to provide notice to an anonymous defendant in a cryptocurrency theft case.

For more information, please refer to the following links:

Treasury Dept. Publishes Digital Asset Policy Fact Sheet, Seeks Public Comment

By Shade Quailey

Following President Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets, the U.S. Treasury Department has taken steps toward fulfilling its responsibility under the executive order to assess and develop policy recommendations on digital assets. On July 7, 2022, the Treasury Department issued a fact sheet outlining its framework on international engagement on digital assets, which was written in consultation with the secretary of state, the secretary of commerce, the administrator of the U.S. Agency for International Development and other heads of relevant agencies.

According to the Treasury Department, the goal of the framework is to encourage the development of digital assets while respecting “America’s core democratic values”; protecting consumers, investors and businesses; minimizing the misuse of digital assets for illicit finance and national security risks; and maintaining the safety and stability of the global financial and international monetary systems. The announcement also stressed the crucial role international cooperation among public authorities, the private sector and other stakeholders will play in order to maintain high regulatory standards.

The Treasury Department noted that the United States has already been active in international fora on several issues concerning digital assets and intends to expand those relationships and continue working with international partners to develop a regulatory scheme. For example, the Treasury Department stated that the United States will continue to engage with the Group of 7 (G7) on a variety of issues related to digital assets, including the private and public sectors’ role in the creation and movement of money, the role of central bank digital currencies, and the implications of new technologies for the international monetary system. Other key relationships the Treasury Department seeks to utilize and expand include the Group of 20 (G20), the Financial Stability Board, the Financial Action Task Force, the Organization for Economic Cooperation and Development, the International Monetary Fund, and the World Bank.

In a press release published on July 12, 2022, the Treasury Department announced that it is requesting public comment from the American people and market participants on the opportunities and risks associated with the development and adoption of digital assets. The request for comment period began on July 8, 2022, and will close on Aug. 8, 2022.

For more information, please refer to the following links:

Multiple Financial Regulatory Bodies Publish Reports on Digital Assets

By Robert A. Musiala Jr.

Multiple financial regulatory bodies addressed digital assets this week. First, the Financial Stability Board (FSB) issued a statement on international regulation and supervision of crypto-asset activities. Among other things, the statement noted “[t]he recent turmoil in crypto-asset markets highlights their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system.” The statement called for regulation and oversight commensurate with the risks of crypto assets, including stablecoins. The statement also notes that the FSB “will report to the G20 Finance Ministers and Central Bank Governors in October on regulatory and supervisory approaches to stablecoins and other crypto-assets.”

Second, the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) published guidance on the application of the Principles for Financial Market Infrastructures (PFMI) to systemically important stablecoin arrangements (SA), including the entities integral to such arrangements. According to a press release, “The guidance highlights that the transfer function of an SA is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI.” The guidance highlights various risks related to stablecoins, including the risk that “stablecoins, interacting with cryptos and Defi, could lead to a fragmented and fragile monetary system.”

Third, late last week, the IOSCO published the IOSCO Crypto-Asset Roadmap for 2022-2023, which will focus on two workstreams: (1) crypto and digital assets (CDA) and (2) decentralized finance (DeFi). According to a press release, “Both workstreams will primarily focus on analysing and responding to market integrity and investor protection concerns within the cryptoasset space.” The CDA workstream will be led by the UK Financial Conduct Authority and “will entail looking closely at (i) fair, orderly trading, transparent markets, suitability and market manipulation (Part 1), and (ii) safekeeping, custody and soundness (Part 2).” The DeFi workstream will be led by the U.S. Securities and Exchange Commission and will “explore the market integrity, investor protection and financial stability risks of DeFi.”

Finally, this week the U.S. Department of the Treasury’s Office of Financial Research (OFR) published a paper addressing central bank digital currencies (CBDCs). The paper explores how introducing a CBDC would affect the stability of the banking system. Among other things, the paper addresses concerns that “the option to hold CBDC can increase the incentive for depositors to run on weak banks.” The authors “suggest that a well-designed CBDC may decrease rather than increase financial fragility.”

For more information, please refer to the following links:

Crypto Enforcement Targets Interest Products, Unlicensed Money Transmission

By Joanna F. Wasick

On July 12, the California Department of Financial Protections and Innovation (DFPI) announced it is investigating multiple companies nationwide that offer customers interest-bearing crypto-asset accounts, which allow customers to lend crypto assets to the company in exchange for interest paid in crypto. DFPI warned that many of these account providers may not have adequately disclosed risks customers face when depositing in these accounts, and that unlike banks and credit unions, these providers are not required to have deposit insurance. DFPI also noted that “due to market conditions,” some of these companies are preventing customers from withdrawing from and transferring their accounts. DFPI is looking into whether the providers are violating laws within its jurisdiction.

Also this week, a North Carolina respondent pleaded guilty to operating an unlicensed money-transmitting business and to willful failure to file a tax return, all in connection with operating an unlicensed business involving the exchange of millions of dollars of cash for cryptocurrencies. In separate news, the Ukrainian prosecutor’s office announced this week it has seized roughly $3.39 million of assets belonging to over-the-counter brokers who illegally facilitated cryptocurrency purchases for users from Russia and Russia-occupied territories and enabled clients to convert assets into crypto without paying taxes. Local police are reportedly investigating fraud, money laundering and tax evasion.

And late last week, Tornado Cash, a cryptocurrency mixer (i.e., a service that helps obfuscate the chain of ownership of a cryptocurrency), announced it had fully open-sourced its user interface code. The open sourcing will purportedly allow anyone to fork the repository and modify the code as they see fit. The company says the move will help ensure that Tornado Cash “will remain forever unstoppable, secured, decentralized and censorship resistant.” Tornado Cash, like other mixers, has been criticized as facilitating illegal crypto transactions and money laundering. Its proponents, however, tout its commitment to privacy and decentralization.

For more information, please refer to the following links:

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