Ethereum Network Completes Transition to Proof of Stake Consensus
By Joanna F. Wasick
After years of development and delays, Ethereum’s long-awaited “merge” occurred this week, changing the network’s consensus mechanism from proof-of-work (POW) to proof-of-stake (POS) (specifically, Ethereum’s newer POS-based “Beacon Chain,” unveiled in December, “merged” with the original Ethereum blockchain). The update ends the network’s reliance on the energy-intensive process of cryptocurrency mining to create blocks on the Ethereum blockchain. Instead, the Ethereum network will now rely on “validators” — people who “stake” or “lock” ETH by sending their ETH to an address on the Ethereum network where they cannot be bought or sold. The more ETH a validator stakes, the more likely it will be chosen by the network to validate/write the next “block” of transactions for Ethereum’s blockchain. The upgrade is expected to reduce Ethereum’s energy consumption (by more than 99 percent according to some estimates) and make the platform easier and less costly to use.
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Crypto Exchange, Bitcoin Futures ETF Launch; Crypto Adoption Data Published
By Jordan R. Silversmith
This week, a consortium of major U.S. financial services firms, broker-dealers, market makers and venture capital firms announced the launch of a new digital asset exchange, EDX Markets (EDXM). According to a press release, “The new exchange will combine proven technology … with best practices from traditional financial markets and tighter spreads enabled by greater liquidity, to support secure, fast and efficient cryptocurrency trading for U.S. retail and institutional investors.”
In another recent press release, a cryptocurrency asset management company announced the launch of the first U.S.-based Bitcoin futures exchange-traded fund (ETF) to be registered and regulated exclusively under the Securities Act of 1933 (Securities Act). According to the press release, other existing Bitcoin futures ETFs are registered and regulated under the Investment Company Act of 1940 (Investment Company Act). And a third press release published this week announced that Securitize, a digital assets security firm, launched a new fund tokenizing a major health-care growth fund on the Avalanche blockchain.
Also this week, blockchain analytics firm Chainalysis released its 2022 Global Crypto Adoption Index. Rather than rank countries by raw cryptocurrency transaction volume, the index aims to measure grassroots adoption of cryptocurrencies by studying where individual, nonprofessional investors are embracing digital assets. The report found that emerging markets are leading grassroot adoptions of cryptocurrency, with Vietnam, the Philippines and Ukraine in the top three spots. India and the United States rounded out the top five, and China, despite its ban on all cryptocurrency trading, was ranked 10th in grassroots adoption, suggesting ineffective or loose enforcement of the ban.
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Major Coffee and Scotch Brands Launch NFT Initiatives
By Jordan R. Silversmith
This week a major American multinational chain of coffeehouses and roasters announced its plans to offer a non-fungible token (NFT)-based loyalty program. According to a press release, the company’s program will allow customers to buy and earn collectible NFT stamps that will offer access to benefits and immersive, coffee-related experiences. Among other things, the press release also notes that the program “will utilize a ‘proof-of-stake’ blockchain technology built by Polygon, which uses less energy than first generation ‘proof-of-work’ blockchains.” Customers of the coffee chain can join a waitlist now to gain access to the loyalty program, which will reportedly launch later this year.
In other NFT news, a famous scotch whisky company announced it would partner with the world’s first direct-to-consumer NFT marketplace for wine and spirits to release a limited set of digital NFT bottles. A limited-edition physical bottle will be available to buyers who “burn” – effectively remove the NFT from the blockchain – their NFT. According to reports, this will be the company’s third Web3 campaign of the year.
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OFAC Adds Crypto Public Keys to SDN List, Addresses Tornado Cash Sanctions
By Joanna F. Wasick
On Wednesday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 10 individuals and two entities for their roles in conducting malicious cyber acts, including ransomware activity. OFAC added the individuals and entities to OFAC’s Specially Designated Nationals (SDN) List – including seven cryptocurrency public keys associated with certain individuals. The sanctioned individuals and entities are all affiliated with Iran’s Islamic Revolutionary Guard Corps, a group known to exploit software vulnerabilities in order to carry out their ransomware activities as well as engage in unauthorized computer access, data exfiltration and other malicious cyber activities.
Also this week, the U.S. Department of the Treasury issued guidance related to OFAC’s recent sanctioning of Tornado Cash, an open-source software project that uses smart contracts to allow users to send cryptocurrencies privately on the Ethereum network by obfuscating ownership history. The Department’s guidance states that a U.S. person who initiates or otherwise engages in a transaction with Tornado Cash violates U.S. sanctions prohibitions, unless exempt or specifically authorized by OFAC. Among other things, the guidance further states that persons with certain pending transactions with Tornado Cash (i.e., where the transaction was initiated before the OFAC sanctions were issued in August but where the transaction had not completed) may request a license from OFAC enabling the transaction’s completion. The guidance also addresses situations where persons receive unsolicited and nominal amounts of assets from Tornado Cash (a practice called “dusting”).
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Major U.S. Exchange Backs Lawsuit Challenging OFAC Tornado Cash Sanctions
By Joanna F. Wasick
Last week Coinbase announced that it was funding a lawsuit brought by six people that challenges the recent action by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioning the Tornado Cash smart contracts. The lawsuit asks the court to remove the Tornado Cash smart contract addresses from OFAC’s Specially Designated Nationals (SDN) List. The plaintiffs argue that OFAC exceeded its authority from Congress and the president in sanctioning open-source technology rather than sanctioning bad actors who used it and those actors’ property. They also allege that OFAC’s actions infringe on their constitutional rights “and threaten[] the ability of law-abiding Americans to engage freely and privately in financial transactions.”
Crypto investment firm Paradigm also responded to OFAC’s actions by publishing a detailed position paper, co-authored by the Crypto Council for Innovation, that addresses what monitoring and censoring obligations OFAC’s actions place on participants in crypto’s base layer. The paper goes on to criticize OFAC’s sanctioning of Tornado Cash and asserts that onerous regulation and targeted actions against players in the crypto space will eventually push blockchain innovators out of the United States, and make it more difficult – not less – to track crypto transactions that threaten national security.
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Office of Science and Technology Publishes EO Report on Crypto-Assets
By Robert A. Musiala Jr.
Last week, in accordance with President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, an interagency group led by the White House Office of Science and Technology Policy published its report titled “Climate and Energy Implications of Crypto-Assets in the United States.” The 46-page report “explores the challenges and opportunities of crypto-assets for energy and climate change issues in the United States, and answers four main questions asked in Executive Order 14067.”
The first question addressed by the report is “How do digital assets affect energy usage, including grid management and reliability, energy efficiency incentives and standards, and sources of energy supply?” In response, the report notes that “[f]rom 2018 to 2022, annualized electricity from global crypto-assets grew rapidly, with estimates of electricity usage doubling to quadrupling.” According to the report, “[a]s of August 2022, published estimates of the total global electricity usage for crypto-assets are between 120 and 240 billion kilowatt-hours per year, a range that exceeds the total annual electricity usage of many individual countries, such as Argentina or Australia.” The report also notes that “[a]s of August 2022, Bitcoin is estimated to account for 60% to 77% of total global crypto-asset electricity usage, and Ethereum is estimated to account for 20% to 39%.”
The second question addressed by the report is “What is the scale of climate, energy, and environmental impacts of digital assets relative to other energy uses, and what innovations and policies are needed in the underlying data to enable robust comparisons?” Among other things, here the report notes that “[c]rypto-asset activity in the United States is estimated to result in approximately 25 to 50 Mt CO2/y, which is 0.4% to 0.8% of total U.S. GHG emissions, similar to emissions from diesel fuel used in railroads in the United States.”
The third question addressed by the report is “What are the potential uses of blockchain technology that could support climate monitoring or mitigating technologies?” The report answers this question, in part, by stating, “There is potential for blockchain technologies to play a role in environmental markets, and DLT could potentially enable distributed energy resource coordination, as well as broader supply chain management.”
The fourth and final question addressed by the report is “What key policy decisions, critical innovations, research and development, and assessment tools are needed to minimize or mitigate the climate, energy, and environmental implications of digital assets?” In summary, the report finds that “[t]o help the United States meet its climate objectives … crypto-asset policy during the transition to clean energy should be focused on several objectives: reduce GHG emissions, avoid operations that will increase the cost of electricity to consumers, avoid operations that reduce the reliability of electric grids, and avoid negative impacts to equity, communities, and the local environment.”
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SEC Adds New Crypto Office to Disclosure Review Program; Senators Target Crypto Scams
By Keith R. Murphy
The U.S. Securities and Exchange Commission (SEC) intends to grow the Division of Corporate Finance’s Disclosure Review Program (DRP) by adding an Office of Crypto Assets and an Office of Industrial Applications and Services to review company filings by issuers, according to a recent press release. The new offices, which are expected to be established later this fall, “will enable the DRP to enhance its focus in the areas of crypto assets, financial institutions, life sciences, and industrial applications and services and facilitate our ability to meet our mission,” according to a representative.
The SEC recently published remarks made by Commissioner Mark Uyeda at the SEC Speaks Conference. Commissioner Uyeda expressed his views on many issues and commented, “Today, one big, difficult, and complex issue that is conspicuously absent from the Commission’s published regulatory agenda is how to regulate crypto assets and related services.” According to Uyeda, “There is a widespread concern that the lack of predictability with regard to our regulation may encourage crypto firms to relocate to other jurisdictions.” Recognizing the benefit of comments from crypto investors and other market participants, the commissioner proposed that “[t]o the extent that crypto assets raise unique issues not otherwise addressed in the current rule book, the Commission should consider proposing rules or issuing interpretive releases.”
In a recent letter to a major multinational social media and technology firm, Senator Bob Menendez along with five other senators questioned the firm regarding its efforts to combat cryptocurrency scams and hold bad actors accountable for cryptocurrency fraud on its platform. The senators pointed to data from the Federal Trade Commission indicating that high percentages of cryptocurrency fraud victims are victimized on a social media website, and the senators specifically referenced several of the firm’s social media platforms. The letter goes on to request information responsive to several questions, including what policies and practices the firm has to find and remove crypto scammers from the firm’s various platforms.
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DOJ and SEC Continue Crypto Enforcement; $30M in Hacked Crypto Recovered
By Keith R. Murphy
The U.S. Department of Justice (DOJ) recently published a press release announcing that the purported head trader of a cryptocurrency trading platform pleaded guilty to conspiracy to commit securities fraud in connection with an alleged cryptocurrency Ponzi scheme that took in $100 million from investors. According to the press release, the defendant admitted that he and others made numerous misrepresentations to investors, including about the existence of a proprietary trading bot and the promise of guaranteed returns. A sentencing date has not yet been scheduled.
This week, the U.S. Securities and Exchange Commission (SEC) announced an action against a cryptocurrency assets broker, Chicago Crypto Capital LLC, its owner and two salespeople, alleging violations of the securities laws. The allegations include that the company and individuals conducted an “unregistered offering of crypto asset securities” related to certain BXY tokens, and further made materially false and misleading statements in the offer, purchase and/or sale of the BXY tokens. The SEC seeks injunctive relief, disgorgement with prejudgment interest and civil penalties.
Finally, according to several recent reports, blockchain analytics firm Chainalysis has successfully assisted law enforcement agencies in recovering $30 million in funds stolen from the Ronin Bridge hack in March of this year by North Korea-linked Lazarus Group. Among other things, the reports note that while the Lazarus Group had been using the Tornado Cash mixer to launder the hacked proceeds, it subsequently switched to utilizing DeFi services to chain hop following the imposition of sanctions on Tornado Cash by the U.S. Department of the Treasury’s Office of Foreign Assets Control.
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