Financial Firms Complete Blockchain Pilot, UK Approves Crypto ETNs
By Robert A. Musiala Jr.
A recent press release announced completion of the Canton Network pilot, “a first-of-its-kind program demonstrating the interoperability of twenty-two independent distributed ledger applications (dApps) in the capital markets domain.” According to the press release, “The Canton Network is the financial industry’s first privacy-enabled interoperable blockchain network designed for institutional assets.” The press release notes that in the recently completed pilot, “155 participants from 45 major organizations demonstrated settlement across 22 permissioned blockchains connected on Canton while maintaining the controls demanded for regulated capital markets.”
In other news, the UK’s Financial Conduct Authority (FCA) recently published notice that the FCA “will not object to requests from Recognised Investment Exchanges (RIEs) to create a UK listed market segment for cryptoasset-backed Exchange Traded Notes (cETNs),” making such products “available for professional investors, such as investment firms and credit institutions.” On the same day, the London Stock Exchange published notice that the exchange “will accept applications for the admission of Bitcoin and Ethereum crypto ETNs in the second quarter of 2024.”
In a final notable item, a recent press release announced a “strategic collaboration” that “connects financial institutions to Zodia Custody’s Interchange … on the .” According to the press release, the integration “offers an additional security layer, risk management and solvency protection when trading digital assets” and provides financial institutions “with a seamless one-stop shop to manage all of their digital asset holdings.”
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Ethereum Implements Upgrade; Ethereum and Bitcoin Network Data Published
By Robert A. Musiala Jr.
On March 13, the Ethereum Network successfully implemented the “Dencun” upgrade, which is expected to significantly reduce transaction fees on Ethereum layer-2 networks. According to reports, the upgrade has resulted in some Ethereum layer-2 protocols seeing transaction fees drop up to 99 percent.
In related news, recent reports provide new data on the total value invested in the Ethereum Network. One report indicated that over 31.5 million ETH, valued at $115 billion, is currently staked on the Ethereum Network across over 980,000 individual validator stakes. The report noted that the total amount of staked ETH represents over 26 percent of the total supply of ETH. According to another recent report, the total value locked (TVL) on Ethereum layer-2 protocols has reached over $36.7 billion. The Arbitrum One layer-2 network reportedly has the highest TVL, with $15.7 billion in valued locked on the protocol.
In Bitcoin Network news, a major U.S. cryptocurrency exchange recently published the latest in a series of reports analyzing the expected effects of the forthcoming “Bitcoin Halving” event, in which the reward for Bitcoin Network miners will be cut in half from 6.25 BTC per block to 3.125 BTC per block. Among other things, the report finds that studies of prior Bitcoin Halving cycles should be interpreted cautiously due to the small sample size. The report also finds that “[b]itcoin’s market dynamics have fundamentally changed with the advent of U.S. spot BTC ETFs,” and predicts that “the current price move is only the beginning of a longer bull run.”
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USPTO and Copyright Office Publish Report on NFTs and Intellectual Property
By Robert A. Musiala Jr.
The United States Patent and Trademark Office and the United States Copyright Office recently published a report to Congress titled Non-fungible Tokens and Intellectual Property. The 112-page report provides an overview of non-fungible token (NFT) technology and examines the relationship between NFTs and copyrights, trademarks and patents. With regard to copyrights, the report finds (1) to the extent that an NFT is associated with a copyrightable work, the creation, storage, marketing or transfer of that NFT may implicate copyright owners’ exclusive rights, “but these are not new problems in the online space”; (2) proposals to use NFTs to replace or supplement copyright recordkeeping did not demonstrate added value; and (3) NFTs may offer opportunities for U.S. artists to obtain remuneration from downstream resales of their works, but “these opportunities depend on the code underlying the NFTs and the rules of the platforms on which they’re sold rather than any statutory entitlement.”
Regarding trademarks, the report finds (1) NFT technology and blockchain networks pose challenges for trademark owners, including the fact that records stored on blockchain networks are theoretically immutable, which can complicate efforts to remove inaccurate or fraudulent records; (2) trademark infringement is prevalent on NFT marketplaces and “trademark enforcement efforts are complicated by the decentralized and anonymous nature of NFT platforms, and the decentralized nature of the blockchain networks on which NFTs are stored”; (3) most commenters disfavored new, NFT-specific laws to address trademark infringement; and (4) trademark applicants, registrants and practitioners need guidance regarding obtaining and enforcing trademark registrations in the context of NFTs.
Regarding patents, the report finds (1) while blockchain technology and NFTs can play a role in supporting management, transfer and licensing of patent rights, concerns regarding the difficulty of identifying bad actors on NFT platforms and correcting inaccurate or fraudulent information stored on blockchain networks also apply in the context of patent rights; and (2) patent applicants and practitioners could benefit from guidance regarding obtaining patents in the context of NFTs. Among other conclusions, the report concluded that “changes to IP laws are not currently necessary to address the use of NFTs as the unique aspects of the technology generally do not raise new IP problems.”
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Wyoming Passes Law Providing Legal Status for DAO Nonprofits
By Joanna F. Wasick
Wyoming recently passed a new law setting up a legal status for in-state decentralized autonomous organization (DAO) nonprofits. The law recognizing the “Decentralized Unincorporated Nonprofit Association” (DUNA) is effective July 1, 2024, and aims to facilitate DAOs’ ability to conduct business by, for example, contracting with third parties, acquiring and transferring property, appearing in court, and paying taxes. The law also aims to provide certain limited liability for members and grants protections for DAO developers. The new law is a continuation of the state’s enactment of progressive blockchain-related legislation. In 2021, the state passed the Wyoming Decentralized Autonomous Organization Supplement Act, which added DAOs to Wyoming’s existing limited liability corporation laws, giving DAOs the first legal framework to be created and managed in the state.
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DOJ Convicts Bitcoin Mixer Operator, Seizes $1.4M USDT, Seeks Forfeiture
By Keith R. Murphy
According to recent press releases from the U.S. Department of Justice (DOJ), the alleged operator of the longest-running darknet cryptocurrency “mixer,” known as Bitcoin Fog, was convicted of money laundering conspiracy and “sting” money laundering by a federal jury in Washington, D.C. Roman Sterlingov was accused of running the mixing service during the period from 2011 through 2021, “gaining notoriety as a go-to money laundering service for criminals seeking to hide their illicit proceeds from law enforcement.” During this period, Bitcoin Fog allegedly moved more than 1.2 million bitcoin, valued at approximately $400 million, the bulk of which came from darknet marketplaces and was alleged to be tied to illegal narcotics, computer crimes, identity theft and child sexual abuse material. In addition to forfeiture of bitcoin and other cryptocurrencies, Sterlingov faces sentencing before a federal judge.
In another action, the DOJ seized approximately $1.4 million of Tether (USDT) related to an alleged computer popup scam, according to a recent press release. Following a popup advising that a user’s computer had been compromised, victims were supposedly directed to one of the major computer operating system companies, and were then passed on by those “tech support employees” to purported bank representatives of the victims’ banks. The purported bank representatives then convinced victims to convert their bank account funds to cryptocurrency in order to protect it from hackers, but the funds were instead directed to unhosted wallets and then stolen, according to the press releases. Notably, the seizure of funds represents one of the first times that the government has recovered Tether (USDT) from an unhosted wallet. According to a press release by Tether, the company assisted the DOJ and the Federal Bureau of Investigation in connection with the seizure action.
In a third action, the DOJ recently commenced a civil forfeiture action to recover cryptocurrency proceeds of an alleged “pig-butchering” scheme. In a pig-butchering scheme, victims are contacted online by scammers, who establish a level of trust and then abuse that trust to fraudulently obtain funds from the victim, often by enticing the victim to make fraudulent cryptocurrency investments. In this particular civil forfeiture action, a Massachusetts resident reportedly was “tricked into wiring over $400,000 into a cryptocurrency wallet hosted by a legitimate cryptocurrency exchange.” The investigation ultimately revealed that the accounts involved in the seizure were associated with funds from 36 additional fraud victims across the United States, according to the press release.
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New Data Shows Increased Losses to Crypto Scams and Hacks
By Christopher Lamb
The Federal Bureau of Investigation (FBI) recently published its 2023 Internet Crime Report. Among its many findings, the report found that in 2023 investment fraud became the “costliest type of crime” tracked by the FBI’s Internet Crime Compliance Center, increasing from $3.31 billion in 2022 to $4.57 billion in 2023 – a 38 percent increase – with the crypto sector representing a large portion of these losses. According to the report, losses to crypto-related fraud increased from $2.57 billion in 2022 to $3.94 billion in 2023, a 53 percent increase. The report notes that crypto scams “are designed to entice those targeted with the promise of lucrative returns on their investments.”
According to recent reports, crypto-related fraud and scams are continuing in 2024, with February seeing the DeFi sector grappling with security exploits that led to losses exceeding $82 million, with only $1,325,932 recovered. According to the reports, the biggest DeFi security breach in February occurred on a Play-to-Earn (P2E) Ethereum-based app PlayDapp, where the private keys were compromised and resulted in unauthorized minting of 1.79 billion of PlayDapp’s native tokens and subsequent theft, accounting for $32 million of February’s losses.
Other recent reports indicate that fake accounts on a popular social media platform were the leading cause for over 57,000 victims of crypto phishing scams in February, representing over $46.8 million in losses. The reports indicate that 78 percent of the total thefts occurred on the Ethereum mainnet, with ERC-20 tokens being the main assets stolen. And in a final notable item, recent reports identified a vulnerability on the Python Package Index in which a set of seven packages on the repository are designed to steal BIP39 mnemonic phrases used for recovering cryptocurrency private keys.
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