In this issue:
• Cryptoasset Study Published, Bahamas Launches CBDC, Zcash Service Announced
• Ethereum Enterprise Solutions Announced, US Air Force Expands Blockchain Initiative
• SEC Approves Digital Asset Settlement Process, Crypto Brokerage Registers in Canada
• Court Rules in Favor of SEC in Kik Case, SEC Settles with Two More ICO Issuers
• Singapore Exchange Hacked, French Arrest 29 in Crypto Terrorist Financing Scheme
Cryptoasset Study Published, Bahamas Launches CBDC, Zcash Service Announced
The University of Cambridge has published its 3rd Global Cryptoasset Benchmarking Study. The report analyzes data from the cryptocurrency exchange, payments, custody and mining sectors. Among its many findings, the report notes that the cryptocurrency industry “has entered a growth stage despite the notable headwinds” and cites improved regulatory clarity as having assisted in this growth. The report highlights regulatory compliance, IT security and insurance as areas that pose “hurdles” to continued growth.
Late last week, the Central Bank of The Bahamas announced that beginning on Oct. 20 it will “gradually release a digital version of the Bahamian dollar nationally … through authorised financial institutions.” According to a press release, the Bahamian central bank digital currency (CBDC) will be named the “sand dollar” and the first phase of its rollout will involve “low value personal wallets … with more restricted transaction limits … regular personal accounts in line with … existing banking and financial services” and “business or enterprise accounts, subject to further KYC rigour and with higher limits.”
This week, major U.S. cryptocurrency exchange Gemini announced “shielded Zcash (ZEC) withdrawals.” According to a blog post, the new service will allow “confidential, encrypted withdrawals” of ZEC that give users “control of your privacy.” The blog post notes that “with the right controls in place and the proper education, regulators can get comfortable with privacy-enabling cryptos.”
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Ethereum Enterprise Solutions Announced, US Air Force Expands Blockchain Initiative
Earlier this week, a major Big Four professional services firm issued two press releases about new blockchain solutions under development. The first relates to a blockchain-based procurement solution on its proprietary platform that allows companies to run private, secure end-to-end procurement activities on the public Ethereum blockchain. The second announcement relates to the beta launch of a new “Explorer & Visualizer” that will allow users to track and analyze in-depth patterns and trends for data stored on a blockchain. According to the press release, the solution will make it possible for internal audit teams and forensic accountants to search for specific transactions, addresses and blocks to gather relevant information to support the management of legal, compliance and fraud risks, among others.
A recent report by Dutch academics discussing the use of blockchain technology to improve organic or fair trade food traceability under EU regulations found that organic food supply companies using blockchain to improve traceability face two key decisions: optimizing chain partner collaboration and choosing which data to capture in the blockchain. The authors noted that one practical implication of their findings is that blockchain is already being used successfully on a small scale to create whole-chain traceability of organic and fair trade food in Europe.
This week, a blockchain-based data management startup announced it had raised additional funding of $2.5 million from venture capital backers to further develop a distributed data management platform for the U.S. Air Force. The new capital pushes the company’s total seed funding to $6.5 million and also unlocks a $1.5 million defense contract pledged as matching funds through the Air Force’s Small Business Innovation Research (SBIR) program. A spokesman for the company said that they will use the funds to hire more engineers to work on its verifiable credential and distributed identity infrastructures.
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SEC Approves Digital Asset Settlement Process, Crypto Brokerage Registers in Canada
On Sept. 25, the U.S. Securities and Exchange Commission (SEC) issued a letter to the Financial Industry Regulatory Authority (FINRA) regarding the role of alternative trading systems (ATS) in the settlement of digital asset security trades. The SEC letter was in response to questions from FINRA about the application of the SEC and FINRA’s previously published Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities. According to the letter, “since the issuance of the Joint Staff Statement, several broker-dealers seeking to operate an ATS that trades digital asset securities” have expressed a preference for a certain process for settling ATS trades – termed the “Three-Step Process” – that was not specifically addressed by the Joint Staff Statement. The SEC letter describes the Three-Step Process for ATS trade settlement and confirms that SEC staff will not recommend enforcement action if “a broker-dealer operating an ATS that trades digital asset securities uses the Three-Step Process.”
According to a press release this week, Netcoins, a Canadian “cryptocurrency brokerage,” announced that it has “applied for registration from the British Columbia Securities Commission (BCSC) and the Canadian Securities Administrators’ (CSA) regulatory sandbox.” The press release notes that, if approved, Netcoins will become “the first regulated open-loop crypto asset trading platform in Canada.”
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Court Rules in Favor of SEC in Kik Case, SEC Settles with Two More ICO Issuers
This week the Court in the closely watched case SEC v. Kik Interactive Inc. ruled in favor of the U.S. Securities and Exchange Commission (SEC) on cross motions for summary judgment related to the SEC’s enforcement action against Kik. The Court agreed with the SEC and found that Kik’s $100 million initial coin offering (ICO) was an unregistered public offering of securities in violation of Section 5 of the Securities Act. The decision creates significant precedent on the application of the Howey test, which interprets the term “investment contract” under Section 5 of the Securities Act, to fundraising events commonly known in the blockchain industry as ICOs.
The SEC has recently taken action against two more ICO issuers. In a cease-and-desist order and related settlement, the SEC settled charges of fraud and securities laws violation against SoluTech, alleging its 2018 ICO, which “raised approximately $2.4 million from more than 100 investors, including U.S. residents” was a public sale of unregistered securities. Among other things, as part of the settlement, SoluTech agreed to remove its token, SCRL, from trading on digital asset trading platforms; destroy all SCRL in its custody; and take certain steps to demonstrate its compliance with the settlement terms. The owner of SoluTech agreed to a civil penalty of $25,000 and to a ban on participating in future offerings of digital assets.
In a similar action, the SEC imposed a cease-and-desist order and entered into a related settlement with Salt Blockchain Inc. related to its 2017 ICO, which raised approximately $47 million. The SEC found that the Salt Tokens sold in the ICO were securities and the ICO was an unregistered securities offering in violation of Section 5 of the Securities Act. Among other things, Salt Blockchain Inc. agreed to register its Salt Tokens as securities; initiate a process for refunding Salt Token purchasers, including reporting to the SEC; and pay a civil penalty of $250,000.
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Singapore Exchange Hacked, French Arrest 29 in Crypto Terrorist Financing Scheme
By: Joanna F. Wasick
Late last week, a major Singapore-based cryptocurrency exchange reported large, unauthorized withdrawals of cryptocurrencies from certain exchange hot wallets to an unknown wallet beginning on Sept. 26. According to reports, the stolen funds, with an estimated value of more than $150 million, appear to be moving to decentralized exchanges. According to the exchange, the hack is being investigated by international law enforcement and the stolen money will be covered by an insurance fund.
Earlier this week, French police arrested 29 individuals for operating a cryptocurrency scheme to finance Islamist extremists in Syria. According to reports, the terrorist financing ring, reportedly active since 2019, would purchase cryptocurrency “coupons” in France and send those details by secure messaging to Syrian jihadists, who converted them into actual cryptocurrency, which was then sold for cash. Hundreds of thousands of euros are thought to have been supplied through the network, which reportedly benefited members of al-Qaida and the Islamic State group.
A leading blockchain analytics and forensics company recently issued its 2020 risk report on the know-your-customer (KYC) protocols of more than 800 virtual asset service providers (VASPs) in more than 80 countries. The report finds that, despite existing, cryptocurrency-related AML government regulations, 56 percent of VASPs have “weak or porous” KYC processes, allowing those VASPs to be used to facilitate money laundering. According to the report, the U.S., Singapore and the U.K. host the highest number of VASPs with poor KYC protocols – although the report acknowledges that this is largely due to those countries having a higher number of VASPs in general. On average, by country, the report gives its lowest VASP KYC marks to Russia and a number of other countries in Europe.
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