Blockchain Capital Markets Platforms Achieve and File for Regulatory Approvals
By: Simone O. Otenaike
The Intercontinental Exchange recently received approval from the New York State Department of Financial Services for its emerging bitcoin futures exchange platform, Bakkt. According to reports, Bakkt previously received approval for its bitcoin futures product from the U.S. Commodity Futures Trading Commission through the self-certification process. The recent approval allows Bakkt to hold custody of customers’ bitcoins through its Bakkt Warehouse, which utilizes the same physical and digital protections of the New York Stock Exchange. Additionally, Bakkt may soon allow investors to buy derivatives that pay out with bitcoin. Bakkt recently reported that it aims to promote institutional investment in bitcoin by addressing concerns related to a lack of liquidity, market reliability, regulation, fees and operational risks, with a transparent offering. The first contracts will reportedly be offered Sept. 23, 2019.
Earlier this month, the Financial Industry Regulatory Authority (FINRA) approved the application of Houston-based IOI Capital and Markets, LLC (IOICM). This approval allows IOICM to be a placement agent for digital private securities issued on the blockchain-based platform developed and operated by its parent company. According to reports, the firm’s Iownit platform will seek to digitize the securities issuance, asset life cycle management and secondary trading processes to create an efficient private market for institutional and accredited investors. The firm reportedly plans to act as a placement agent for privately placed digital securities on a permissioned Hyperledger Fabric blockchain.
According to reports this week, Securitize is now the first SEC-registered transfer agent with a working blockchain protocol, active issuers and integrations that allow trading of digital securities on SEC-registered alternative trading systems. Securitize also reportedly offers a transfer verification tool that allows investors to pre-check the transfer of any digital security token powered by its DS protocol.
This week Gibraltar-based cryptocurrency trading platform INX indicated plans to launch a security token initial public offering (IPO). According to the draft prospectus filed with the SEC on Monday, INX plans to raise $130 million through the sale of 130 million INX tokens, which are based on Ethereum’s ERC-20 standard. The prospectus further outlines the firm’s plans for the IPO proceeds – up to $8 million for research and development, up to $2.93 million for sales and marketing, up to $3.2 million for regulatory and legal, and up to $1.6 million for product development. According to reports, INX token holders will not be equity holders but will be entitled to 40 percent of the company’s net cash flow from operating activities.
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New Initiatives by Cryptocurrency Exchanges, Payment Platforms and Financial Institutions
By: Robert A. Musiala Jr.
This week, major U.S.-based cryptocurrency exchange Gemini announced that it has officially launched operations in Australia. According to a press release, Gemini is now available in “49 U.S. states, Washington D.C., Puerto Rico, Canada, Hong Kong, Singapore, South Korea, the United Kingdom, and Australia.” Also this week, Binance, the world’s largest cryptocurrency exchange by volume, announced plans to launch “Venus, an initiative to develop localized stablecoins and digital assets pegged to fiat currencies across the globe.” Binance is reportedly seeking to launch the initiative in partnership with national governments. Some reports have described the initiative as a potential competitor or alternative to the recently proposed Libra project. According to a report published early this week, the Libra project is on the agenda of a delegation of U.S. lawmakers that will visit Switzerland, where the foundation governing Libra is based, to meet with the Swiss Federal Data Protection and Information Commissioner.
This week Lolli, a bitcoin rewards platform, announced a new partnership with a U.S. online food delivery service that will allow users to earn bitcoin when making online purchases. According to another report this week, a luxury condominium complex in Florida has partnered with bitcoin payment processor BitPay to allow purchases of real estate with bitcoin. And new data cited this week indicates that the philanthropic arm of a major U.S.-based multinational financial services firm has received more than $100 million in cryptocurrency donations since 2015.
Blockchain initiatives at two other major financial institutions were reported this week. One involves a major Spanish bank that has expanded its use of a blockchain-based remittance platform. Another relates to a recently published patent application by a U.S. bank that describes a “Multi-Tiered Digital Wallet Security” system that appears aimed at providing increased security and control over cryptocurrency funds.
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U.S. Enforcement Actions Continue from OFAC, SEC, DoJ and IRS
By: Joanna F. Wasick
On Wednesday, the U.S. Office of Foreign Assets Control (OFAC) identified three Chinese nationals and a related entity for allegedly manufacturing fentanyl and other drugs and distributing them to numerous countries, including the United States. As part of the action, the government identified and blocked bitcoin public key addresses associated with the purported drug ring. This marks the second time OFAC has blacklisted cryptocurrency accounts, leading some to remark that the practice will likely become commonplace. Earlier in the week, an individual in California was sentenced to 70 months in prison by a federal judge for crimes related to his purchase and sale of fentanyl and other drugs. As part of his guilty plea, the defendant forfeited millions of dollars in cryptocurrencies, and admitted that these funds were proceeds from drug trafficking and were used in money laundering over the Dark Web.
The Securities and Exchange Commission (SEC) announced this week that ICO Rating, a Russia-based analytics firm, agreed to pay $268,998 to settle charges that the company failed to disclose payments received from issuers for publicizing their digital asset securities offerings. An SEC associate director remarked, “The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments …. This requirement applies regardless of whether the securities … are issued using traditional certificates or on the blockchain.” Last week, the Maryland attorney general announced the Maryland Securities Division’s participation in “Operation Cryptosweep,” an initiative of the North American Securities Administrators Association, which, since the beginning of this year, has been involved in 35 enforcement actions against initial coin offerings and related cryptocurrency investment products. In conjunction with that initiative, the Maryland Securities Division began its own enforcement action against a bitcoin trading platform, and a Maryland resident operating on it, for falsely informing investors that they could earn as much as 150% in passive cryptocurrency investments.
According to reports, the Internal Revenue Service (IRS) recently issued a second round of tax warnings to cryptocurrency investors. The letters reportedly informed recipients that their federal tax returns did not match the information received from cryptocurrency exchanges (although the IRS acknowledged that the exchanges may have made errors in reporting). In July, the IRS sent similar letters to more than 10,000 investors, warning that they may owe taxes on cryptocurrency transactions.
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Study of Ethereum Vulnerabilities and Defenses Released, While Dusting and Mining Malware Attacks and Cryptojacking Continue
By: Diana J. Stern
According to reports, late last week a large-scale dusting attack affected almost 300,000 litecoin wallets. By leveraging the divisibility of cryptocurrency, dusting attackers can target certain networks by sending tiny amounts of litecoin, bitcoin and other cryptocurrencies (“dust”) to many different wallets. There can be a number of motives for this kind of attack.
Also this week, it was reported that crypto-mining malware was recently found hidden in popular Ruby code libraries. According to reports, half of the malicious libraries were blockchain-related, and they were downloaded hundreds of times.
An academic paper published last week surveyed Ethereum vulnerabilities, attacks and defenses. Aimed at an audience of researchers, practitioners and students, the paper highlights the need for more secure programming languages. The paper also discussed how Ethereum smart contracts introduce new kinds of vulnerabilities that do not have traditional counterparts. The authors systematize 26 attacks according to layers of the Ethereum architecture, as well as 47 proactive and reactive defenses.
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