U.S. Crypto Exchange Approved as Wyoming Bank; Firms Integrate Blockchain for Data Management; Multiple Enforcement Actions by Treasury, SEC, DOJ and CFTC | JD Supra

U.S. Crypto Exchange Approved as Wyoming Bank, MSB Regulations to be Simplified

By: Robert A. Musiala Jr.

This week Kraken, a major U.S. cryptocurrency exchange, announced that it has received approval from the State of Wyoming to form a Special Purpose Depository Institution (SPDI), Kraken Financial. According to a blog post, Kraken Financial “will be the first regulated, U.S. bank to provide comprehensive deposit-taking, custody and fiduciary services for digital assets … From paying bills and receiving salaries in cryptocurrency to incorporating digital assets into investment and trading portfolios, Kraken Financial will enable Kraken clients in the U.S. to bank seamlessly between digital assets and national currencies.”

Also this week, a nationwide organization of financial regulators from all 50 U.S. states announced an initiative, MSB Networked Supervision, that will allow “78 of the nation’s largest payments and cryptocurrency companies” to “undergo a single comprehensive exam to satisfy all state regulatory requirements” related to money transmission.

In a recent press release, the U.S. Commodity Futures Trading Commission (CFTC) “granted temporary no-action relief to Tassat Derivatives LLC, a CFTC-registered swap execution facility.” The CFTC action allows Tassat Derivatives LLC to list a bitcoin swap contract in the fourth quarter of 2020.

In international news, the Bank of Thailand recently announced the launch of a “new platform leveraging Blockchain Technology for Government Savings Bond issuance.” And in France, late last week the governor of the Banque de France indicated in a speech that European central banks should consider options for a potential central bank digital currency (CBDC).

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Auto, Mining and Financial Firms Integrate Blockchain for Data Management

By: Jordan R. Silversmith

A major French automobile manufacturer announced this week that it had developed a new blockchain project to track and certify the regulatory compliance of all vehicle components and sub-components used throughout the production chain. The project, based on the Hyperledger Fabric blockchain, creates a trusted network for parts manufacturers and vehicle manufacturers to share and track compliance information.

One of Brazil’s leading mining corporations has announced its first sale of iron ore using blockchain technology. The company reports that using blockchain for the transaction, which involved a cargo of 176,000 tons of material being shipped from Malaysia to China, “drastically reduced” the amount of paperwork and emails exchanged among the parties involved. According to the company, the letter of credit for the sale was issued through the blockchain platform Contour, and all stages of the transaction were consolidated in the Contour blockchain.

CULedger, a credit union service organization (CUSO), issued a press release this week announcing a new initiative relating to identity and fraud protection underpinned by the Hyperledger Indy blockchain. The initiative seeks to advance models for a permanent and portable digital identity that will improve trust in digital interactions with credit unions.

For more information, please refer to the following links:

OFAC, DOJ, IRS and FATF Take Various Actions Against Cryptocurrency Crimes

By: Robert A. Musiala Jr.

On Sept. 10, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added four Russian individuals to OFAC’s Specially Designated Nationals (SDN) list of sanctioned persons. According to a press release, the individuals were added to the SDN list due to their involvement with attempts to influence the U.S. electoral process through “cultivating false and unsubstantiated narratives concerning U.S. officials” and “providing material support” to the Internet Research Agency, a “Russian troll factory.” In a similar action, on Sept. 16 OFAC sanctioned two more Russian nationals “for their involvement in a sophisticated phishing campaign” that targeted customers at two U.S. cryptocurrency exchanges and one foreign cryptocurrency exchange and “resulted in combined losses of at least $16.8 million.” As part of these actions, Treasury added multiple cryptocurrency addresses to the OFAC SDN list that were used to facilitate the activities of the sanctioned individuals.

A recent press release from the U.S. Department of Justice (DOJ) provided details on charges against a Russian national “for his alleged role in a conspiracy to use the stolen identities of real U.S. persons to open fraudulent accounts at banking and cryptocurrency exchanges.” The charges relate to “Project Lakhta,” which is described as “a Russia-based effort to engage in political and electoral interference operations.” The scheme allegedly involved the Internet Research Agency, which was mentioned in the OFAC press release described above.

According to another recent DOJ press release, the DOJ has brought charges against “five computer hackers, all of whom were residents and nationals of the People’s Republic of China (PRC), with computer intrusions affecting over 100 victim companies in the United States and abroad.” Among other things, the DOJ alleges that the hackers’ activities included ransomware, crypto-jacking, and “unauthorized use of victim computers to “mine” cryptocurrency.”

A recent solicitation by the U.S. Internal Revenue Service (IRS) is seeking to procure tools for tracing and attribution of privacy focused cryptocurrencies like Monero. According to reports, proposals accepted by the IRS will receive an initial payment of $500,000 and will be eligible for a further grant of $125,000.

In a final notable development, a recent report from the Financial Action Task Force (FATF) provides details on red flag indicators of money laundering and terrorist financing involving cryptocurrency transactions. The FATF report was published on Sept. 14.

For more information, please refer to the following links:

SEC Charges ICO Issuers, DOJ and CFTC Charge Defendants in Crypto Fraud Schemes

By: Marc D. Powers

The Securities and Exchange Commission (“SEC”) settled an enforcement action this week involving registration violations of the federal securities laws related to an initial coin offering (ICO). The SEC Order alleged that Unikrn Inc., an operator of an online eSports gaming and gambling platform based in Seattle, Washington, conducted an unregistered ICO of its UnikoinGold (UKG) token between June and October 2017. The Order found that Unikrn planned to use the ICO proceeds to add features on the gaming platform and to develop additional applications for the UKG tokens, and that Unikrn promised it would facilitate an increase in the value of UKG with a secondary trading market. Notably the ICO continued after the SEC’s issuance of The DAO Report on July 25, 2017, where it warned the public and companies against the issuance of tokens in ICOs or otherwise that might be subject to U.S. registration laws. Unikrn agreed to settle the charges by paying a $6.1 million penalty, which was alleged to be substantially all of its assets, to be distributed to investors through a Fair Fund under the securities laws. It also agreed to disable the UKG token and remove it from all digital asset trading platforms.

In a public statement, SEC Commissioner Hester Peirce disagreed that the Unikrn offering constituted a securities offering. Commissioner Peirce’s statement noted that no fraud was involved and that the enforcement action will “effectively force the company to cease operations.” In her statement, Commissioner Peirce promoted her previously published idea of a safe harbor that would have afforded a company like Unikrn a three-year regulatory window within which to further develop and refine its platform with ultimate benefits to token purchasers, token issuers and the Commission. In disagreeing with the SEC’s action against Unikrn, Commissioner Peirce said, ”[p]osterity will feel the cumulative loss to society of innovation forgone because of such actions.”

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DOJ, SEC and CFTC Charge Defendants Alleging Cryptocurrency Fraud Schemes

By: Marc D. Powers

In another series of civil, criminal and administrative actions by the SEC and DOJ, allegations of fraud, manipulation and registration violations were brought against film producer, Ryan Felton, in Georgia for two unregistered ICOs involving the tokens of FLiK and CoinSpark. Also charged with fraud is rapper and actor, Clifford Harris, Jr, known as T.I. or Tip, and three others who are alleged to have promoted the offerings. The complaint alleges that Felton promised to build a digital streaming platform for FLiK, and a digital-asset trading platform for CoinSpark, but instead misappropriated the funds, and reaped an additional $2.2 million from trading and manipulating the SPARK token.

In a DOJ action filed in Miami, a Washington, D.C. man, Jose Angel Aman, was criminally charged with running a Ponzi scheme from May 2014 through May 2019 where he solicited people in the U.S. and Canada to invest in diamond contracts purportedly valued at $25 million. According to a DOJ press release, when the scheme was about to collapse, Aman set up a new business to perpetuate the fraud scheme by claiming to develop a cryptocurrency token backed by diamonds.

This week the Commodity Futures Trading Commission filed a complaint in Texas against four individuals for fraudulently soliciting investors to speculate in bitcoin price movements. The complaint alleges that from August 2016 through October 2017, the defendants raised almost $1 million from 27 customers by, among other things, falsely representing that their business, Global Trading Club, employed traders who had years of experience trading bitcoin “24 hours a day, 7 days a week.”

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