Crypto Apps Launch New Features, Custody Firm Achieves CCSS Certificate
By Christopher Lamb
According to recent reports, Uniswap V3 was the most used Ethereum contract in 2022, seeing over 15.5 million transactions throughout 2022 and using over 2.8 million in gas (gas fees are paid in Ethereum’s native currency, ether (ETH), and are denoted in gwei, which is a denomination of ETH with each gwei equal to 0.000000001 ETH). Reports also note that Uniswap recently enabled functionality in its Uniswap Web App that allows users to buy cryptocurrency using traditional credit cards, debit cards and bank transfers.
A major U.S. financial services firm recently published a paper that proposes a new system known as “account abstraction” that would use smart contracts to allow automatic payments to be programmed for users on the Ethereum layer 2 network StarkNet. The proposal aims to combine user accounts and smart contracts into a singular account on Ethereum, which will allow the creation of “delegable accounts” that can establish automatic programmable payments that pull from a user’s self-custodial wallet, with functionality similar to traditional auto-payments used in online banking applications.
In other news, a global crypto custody tech provider has received the first “level three” Cryptocurrency Security Standard (CCSS) certificate, the first such certificate awarded since the CCSS’s inception in 2014. The level three certification is the highest under the CCSS and has reportedly eluded startups in the space due to the stringent requirements and practices necessary for qualification.
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NFTs Permitted for Political Fund Raising; Analysis Details NFT Wash Trading
By Keith R. Murphy
The U.S. Federal Election Commission recently issued an advisory opinion allowing the use of non-fungible tokens (NFTs) for political fundraising efforts by DataVault Holdings, according to a recent report. Under the opinion, the company is permitted to provide NFTs to political campaign contributors without running afoul of rules relating to corporate contributions. As stated in the advisory opinion, “Because DataVault proposes to sell the NFTs to political committees in the ordinary course of business, at the usual and normal charge, and under the same terms and conditions as its non-political clients, the Commission concludes that the proposals would not result in prohibited in-kind contributions and are, therefore, permissible.” The advisory opinion also provides that any person involved in “any specific transaction or activity which is indistinguishable in all its material aspects from the transaction or activity with respect to which this advisory opinion is rendered” is also permitted to rely on the opinion.
According to a recent analysis, more than $30 billion of historic NFT trading volume on Ethereum is the result of “wash trades,” where the buyer and seller are either the same or are colluding together to raise prices. The analysis suggests that 58 percent of NFT trading on Ethereum during 2022 was wash trading, based on reports discussing the analysis. One of the reports notes that wash trading is illegal in the United States, and that while the amounts involved seem significant, overall they represent a small fraction of the total number of trades that have occurred on Ethereum.
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U.S. and International Regulators Address Crypto Risk Factors for Banks
By Joanna F. Wasick
Earlier this week, the board of governors of the U.S. central bank system and other U.S. federal banking agencies (collectively, the Agencies) issued a joint statement identifying the following “crypto-asset risks” that banking organizations should note: (1) risk of fraud and scams; (2) legal uncertainties related to custody practices, redemptions and ownership rights; (3) inaccurate or misleading representations and disclosures by crypto-asset companies; (4) significant volatility in crypto-asset markets; (5) susceptibility of stablecoins to run risk; (6) contagion risk in the crypto-asset sector resulting from interconnections among certain participants, including through opaque lending, investing, funding, service and operational arrangements; (7) crypto risk management and governance practices that belie a lack of maturity and robustness; and (8) heightened risks associated with open, public and/or decentralized networks or similar systems. The Agencies also described an overall safety and soundness concern with business models that are concentrated in crypto-related activities or have concentrated exposures to the crypto-asset sector.
The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (which sets global standards for bank regulation), recently met to endorse standards for the prudential treatment of banks’ exposure to crypto-assets. In particular, the standards state that cryptocurrencies without backing and stablecoins with ineffective stabilization mechanisms will be subject to strict regulatory measures. Specifically, banks are advised to limit exposure to these assets, such that exposure does not exceed 2 percent and should generally be lower than 1 percent. GHOS members have agreed to implement the standards by Jan. 1, 2025.
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Treasury Dept. and IRS Issue Transitional Digital Assets Guidance for Brokers
By Robert A. Musiala Jr.
According to a recent press release by the U.S. Internal Revenue Service (IRS), “The Treasury Department and Internal Revenue Service announced … that brokers are not required to report additional information with respect to dispositions of digital assets until final regulations are issued under sections 6045 and 6045A.” The press release notes that this guidance is “transitional” and “applies only to information returns filed or furnished by brokers. In contrast, taxpayers are still required to report any income they receive from transactions involving digital assets.” The transitional guidance relates to the Infrastructure Investment and Jobs Act (Infrastructure Act), which was enacted in 2021 and amended provisions in sections 6045 and 6045A of the U.S. Internal Revenue Code to clarify and expand the rules regarding the reporting of information on digital assets by brokers. Further details on the transitional guidance can be found in Announcement 2023-2.
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DOJ and SEC Actions Target Crypto Fraud and Unregistered Securities Offerings
By Amos Kim
The U.S. Department of Justice (DOJ) recently announced the guilty plea of a co-founder of OneCoin, creator of the fraudulent cryptocurrency by the same name that, according to a DOJ press release, was “in fact a fraudulent pyramid scheme.” According to the DOJ allegations, the two co-founders of OneCoin “conceived of and built the OneCoin business fully intending to use it to defraud investors.” Through this scheme, “between the fourth quarter of 2014 and the fourth quarter of 2016 alone, OneCoin … earned ‘profits’ of 2.735 billion Euro.” The OneCoin co-founder pled guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering, where both counts carry a maximum potential sentence of 20 years in prison. The other co-founder of OneCoin is still at large, and the Federal Bureau of Investigation is offering a reward for information leading to an arrest.
The U.S. Securities and Exchange Commission (SEC) recently announced charges against the co-founders of Thor Technologies Inc. (Thor), a provider of identity management software, for “conducting an unregistered offering of securities through an initial coin offering.” According to an SEC press release, the defendants “offered and sold crypto assets designated as ‘Thor Tokens’ to the general public for the purpose of funding Thor’s business, which was to develop a software platform for ‘gig’ economy workers and companies.” According to the press release, the defendants “marketed the Thor Tokens as an investment opportunity by promoting the potential increase in value of the tokens and claiming that the tokens would be made available on crypto asset trading platforms.”
In another recent announcement, the SEC charged five individuals and three entities “for their involvement in a fraudulent investment scheme named CoinDeal that raised more than $45 million from sales of unregistered securities to tens of thousands of investors worldwide.” According to an SEC press release, the five individuals falsely claimed “extravagant returns by investing in a blockchain technology called CoinDeal” but “no sale of CoinDeal ever occurred and no distributions were made to CoinDeal investors” and “the defendants collectively misappropriated millions of dollars of investor funds for personal use.” The SEC complaint seeks, among other things, disgorgement plus prejudgment interest, penalties, permanent injunctions against all defendants, and officer and director bars against certain defendants.
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Reports Provide Data on 2022 Crypto Scams; QuadrigaCX BTC Is on the Move
By Lauren Bass
According to a report recently released by blockchain risk monitoring firm Solidus Labs, crypto token scams rose 41 percent in 2022 – with an average of 350 crypto scam tokens deployed per day. One of the most popular types of scams was the “honeypot scam,” in which purchasers are lured into buying a token and then prevented from reselling it due to the smart contract programming. Per the report, the Squid Game token was the most prolific honeypot scam of 2022, bilking purchasers out of approximately $3.3 million in mere days.
In similar news, according to a study released by the U.S. National Bureau of Economic Research (NBER), 70 percent-80 percent of unregulated crypto exchange transactions involve “wash trading.” Wash trading – also referred to as round-trip trading – is an illegal practice in which investors simultaneously buy and sell the same financial asset to manipulate the market, which creates distortion in price, volume and volatility of the asset. The report further suggests that such manipulated transactions were used to inflate an unregulated exchange’s rating on sites such as CoinMarketCap and CoinGecko to help lure new users.
According to reports, in mid-December five unhosted wallets tied to the now-defunct crypto exchange QuadrigaCX moved approximately $1.7 million worth of bitcoin. Following the death of Quadriga’s founder and CEO in 2018, the wallets were believed to be inaccessible, as it was reported that he had sole responsibility for the private keys. It remains unknown who is controlling these wallets or if the transfer of funds is related to recovery efforts by the exchange’s estate.
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