[co-author: Jordan R. Silversmith]
Cryptocurrency Exchanges Move Closer to Live Trading, New Stablecoins Announced
By: Joanna F. Wasick
More cryptocurrency exchanges are going live. ErisX announced the launch of its spot market, saying it will immediately support dollar trading pairs with tokens such as bitcoin, bitcoin cash, litecoin and ether. The announcement comes on the heels of a recent $20 million capital raise – the company’s third. It will focus next on derivatives offerings. The Beaxy Exchange says it will be fully operational by mid-May, offering a comprehensive exchange platform that will support traders of every experience level. Beaxy is partnering with OneMarketData, a market data management and analytics company that provides OneTick, a software aimed at accelerating transaction times, facilitating fund management, and increasing security features. Bakkt, the emerging bitcoin futures exchange platform, announced its purchase of the Digital Asset Custody Company and a partnership with a major New York-based bank. Bakkt says these changes will allow it to hold assets in cold storage and ultimately set up geographically distributed private key storage. Some speculate these changes will also enable Bakkt to add other cryptocurrencies besides bitcoin. And reports indicate that a major electronic brokerage firm may soon launch cryptocurrency trading on its platform. If so, it would be one of the largest securities brokerages to allow cryptocurrency trading.
More stablecoins (coins backed by fiat currency) are coming to market. Ontology announced it will launch the Paxos Standard (PAX) stablecoin on the Ontology blockchain. PAX, which is backed 1-to-1 by U.S. dollars, launched last September, but had been available only on the ethereum blockchain. Ontology said PAX ensures open auditing and that all U.S. dollar deposits are kept in individual accounts at FDIC-insured banks. Separately, TrustToken released its latest stablecoin, TrueCAD, which is linked to the Canadian dollar. TrustToken has already issued stablecoins backed by the U.S. dollar (TrueUSD), the British pound (TrueGBP) and the Australian dollar (TrueAUD). Stablecoins backed by the Euro and the Hong Kong dollar are set to release later this year.
A recent report by Datalight, a crypto-research firm, tracks where cryptocurrency trading is happening. The report follows trading on 100 platforms and concludes that most visitors are American – an average of 22.2 million site visits per month were by U.S.-based users. Japan was second, with 6.1 million visits. Perhaps most striking is that nearly every other country in the world had some platform activity as well, with the exception of Greenland and parts of central Africa. Even India placed 11th on the rating – despite its central bank’s almost yearlong ban on exchange financing.
For more information, please refer to the following links:
New Blockchain Initiatives Targeting Enterprise Use Announced
By: Robert A. Musiala Jr.
An article published late last week by the World Economic Forum (WEF) highlighted three key emerging applications for blockchain: (1) product provenance and traceability, (2) streamlining global supply chain operations, and (3) anti-corruption and humanitarian operations. In Wyoming, according to a report published the same day as the WEF article, a blockchain initiative for the food supply chain, BeefChain, became the first blockchain company to receive certification from the U.S. Department of Agriculture (USDA) as a Process Verified Program. BeefChain uses the Ethereum blockchain to track data related to cattle, such as verifying source and age, and that the cattle have not been treated with hormones. According to a press release published this week, Gartner predicts that by 2025, 20% of the top 10 global grocers by revenue will be using blockchain for food safety and traceability.
According to a recent report, a major multinational electronics company recently launched Nexledger Universal, an updated version of its enterprise blockchain platform. Nexledger provides a standard API applicable to multiple blockchain protocols and is available for use through a major global cloud service provider. In another recent announcement, a Big Four accounting and consulting firm launched a “smart contract testing and security service for the public Ethereum blockchain” that will become available to the public later this year. Also this week, a new blockchain-based digital identity network, Verified.Me, has become available in Canada for customers of select financial institutions that are participating in an early adopter program. The service seeks to improve the efficiency and security of the sharing and verification of customer onboarding information.
Initiatives aimed at promoting government support for the blockchain industry continue. In Quebec, Canada, regulators recently released new rules to make additional energy resources available to cryptocurrency miners selected for a new program. In the U.S., newly available data on lobbying activities indicates that more than half of the 80 firms that reported lobbying on fintech issues listed blockchain and cryptocurrencies among their concerns, with total spending on fintech lobbying reaching approximately $42 million in the first quarter of 2019.
For more information, please refer to the following links:
DoJ Arrests Operators of ‘Shadow Banking Services,’ Regulators Warn of Scams
By: Robert A. Musiala Jr.
This week the U.S. Department of Justice issued a press release announcing the arrest of an Arizona man and an Israeli woman who have been charged in connection with providing “shadow banking services” for cryptocurrency exchanges. The indictment alleges the man and woman participated in a conspiracy to facilitate unlicensed money transmission of hundreds of millions of dollars worldwide on behalf of numerous cryptocurrency exchanges. According to the press release, the co-conspirators falsified electronic wire payment instructions and made false and misleading statements to banks to open accounts used to receive deposits for cryptocurrency purchases. According to reports analyzing the indictment, the scheme may have connections to two cryptocurrency exchanges, QuadrigaCX and Bitfinex, that have recently been under scrutiny. Late last week, the New York Attorney General announced a court order enjoining iFinex Inc., operator Bitfinex and Tether Limited from further violations of New York law in connection with activities that may have defrauded New York investors.
This week the U.S. Securities and Exchange Commission announced the temporary suspension of trading in the securities of Bitcoin Generation Inc., a cryptocurrency mining and trading firm, due to “concerns about the accuracy and adequacy of information in the marketplace.” Overseas, the Malta Financial Services Authority recently issued new guidance warning the public against scams involving cryptocurrencies, initial coin offerings and cryptocurrency exchange platforms. According to a recent report by the Australian Competition and Consumer Commission, cryptocurrency-related scams increased 190% in 2018, with Australian consumers losing $4.3 million. In other news from Australia, the Australian Tax Office has announced an initiative to collect purchase and sale information from cryptocurrency exchanges to improve tax compliance in the cryptocurrency trading industry.
For more information on these developments, please follow these links:
Cyberattacks Target Cryptocurrencies, Threat Actors Employ Crypto Techniques
By: Jordan R. Silversmith
In an ongoing Distributed Denial-of-Service (DDoS) attack on Electrum cryptocurrency wallets, almost 152,000 Electrum wallets have reportedly been infected. Victims were initially tricked into downloading a fraudulent update to the Electrum software that stole their cryptocurrencies. The hackers later launched DDoS attacks in response to developers of the popular wallet’s efforts to protect users, with the amount of stolen funds increasing to $4.6 million. The infection in Electrum’s infrastructure reportedly grew from just below 100,000 wallets on April 24 to 152,000 the next day.
A major email application was breached earlier last month when a hacker got hold of a customer support worker’s login credentials, gaining access to the accounts of all noncorporate users of the program. Victims of the breach are now discovering what may be the chief motivation behind the attack: accessing and emptying users’ cryptocurrency accounts. The company initially said the breach impacted only email metadata and customer information, but affected users with cryptocurrency wallets have reported that after the breach, their wallets have been emptied and their funds stolen. Another recently reported “cryptojacking” campaign, termed Beapy, appears to be attacking enterprises based in China, South Korea, Japan and Vietnam. According to reports, Beapy infects victims through malicious emails and installs crypto-mining malware.
Following declining funding from Iran and the closing of hundreds of tunnels under the Gaza-Egypt border in 2013, the armed wing of Hamas appears to be turning to bitcoin to raise funds and evade law enforcement. The Gaza-based Izz el-Deen al-Qassam Brigades, designated as a terrorist organization by the EU and the U.S., originally asked donors to send bitcoin to a single wallet. Now, however, the group has changed the mechanism: Instead of a single wallet, its website generates a new wallet with every transaction, making funds harder to track. Financial regulators are also encountering increased difficulty in tracking payments sent through cryptocurrency exchanges, as cross-border payments from the U.S. to offshore exchanges have increased by 46% since early 2017. This increase poses a quandary for U.S. financial regulators: Once the payments reach exchanges and wallets outside the country, they are very difficult for domestic authorities to track. As governments around the world increase scrutiny on blockchain transactions, reports indicate a rise in novel techniques to mask user identities. So-called CoinJoins, where users mix their bitcoins with each other in a single transaction, enable cryptocurrency users to hide the connection between the sender and the recipient of a payment. According to a recent report, so-called mixed cryptocurrency transactions now represent 4.09% of all bitcoin payments.
To read more about the topics covered in this week’s post, see the following:
Tax Analysis: New Crypto Tax Tools Available, New Disclosure Category Added
By: Nicholas C. Mowbray
2019 has seen significant developments in the crypto tax reporting tools and guidance available from the IRS on how to address previously undisclosed crypto assets.
A recent interview noted that reports from crypto exchanges likely lacked the requisite data points that a taxpayer needs to meet its U.S. tax filing obligations. The interview noted that certain tools allow taxpayers to aggregate all of a taxpayer’s crypto asset transactions across all wallets and exchanges, effectively summarizing all transactional activity for 2018. Taxpayers can then use the report in filing their U.S. tax returns.
Several recent startups have worked to develop tools such as this but mainly for the use of fund managers and accounting firms. These specific tools are intended to comply with the American Institute of Certified Public Accountants’ Service Organizational Control reporting standards, which will permit the startups to provide certified statements of crypto transactions to its customers. The provision of the certified statements may lead to an increase in market participation by investors that were otherwise concerned about the complexity of U.S. tax reporting obligations.
In addition, certain crypto exchanges have paired with companies specializing in tax software and preparation to upload their exchange activity directly into the tax software. The software company will then assist the customers with determining what events are taxable and in turn help the customers satisfy their U.S. tax obligations.
With respect to enforcement, the IRS recently released a new Form 14457 “Voluntary Disclosure Practice Preclearance Request and Application” that includes a question on disclosing special features. One category listed under this question is virtual currencies. The form is used to make a preclearance request and determine the eligibility of a taxpayer to utilize the IRS’ voluntary disclosure program.
