BD-ATS to Issue Blockchain Securities, Crypto Hedge Fund Report Published
By: Teresa Goody Guillén
Blockchain-based trading platform tZERO recently announced an agreement with an energy projects funding platform to digitize approximately $25 million of equity interest in an energy fund that will invest in oil and gas assets throughout the United States. According to a press release, the “digital security” will be “built on the Ethereum Blockchain” and “is expected to become tradeable on the tZERO ATS.” The energy projects funding platform reportedly expects to launch its Regulation D 506(c) offering this month.
A major U.S. bank has reportedly announced plans to offer a cryptocurrency investment platform for its wealthy clients by mid-June. The bank’s investment institute reportedly wrote that “[c]ryptocurrencies have gained stability and viability as assets, but the risks lead us to favor investment exposure only for qualified investors, and even then through a professionally managed fund.”
A Big Four accounting and consulting firm recently issued its annual crypto hedge fund report. Key takeaways from the report include:
- The estimated total assets under management (AuM) of crypto hedge funds globally increased from US$2 billion in 2019 to nearly US$3.8 billion in 2020.
- The median crypto hedge fund returned +128 percent in 2020 (vs. +30 percent in 2019).
- The median management and performance fees remained unchanged at 2 percent and 20 percent, respectively; average management fees were stable at 2.3 percent; and average performance fees increased from 21.1 percent to 22.5 percent.
- The vast majority of investors in crypto hedge funds are either high-net-worth individuals (54 percent) or family offices (30 percent).
- The most common crypto hedge fund strategy is qualitative (37 percent of funds), followed by discretionary long/short (28 percent), discretionary long-only (20 percent) and multi-strategy (11 percent).
- The proportion of crypto hedge funds using an independent custodian decreased in 2020 from 81 percent to 76 percent; the proportion with at least one independent director on their board decreased from 43 percent to 38 percent in 2020; and the proportion using an independent fund administrator increased from 86 percent in 2019 to 88 percent in 2020.
- Funds tend to be domiciled in the same jurisdictions as traditional hedge funds, with the top three being the Cayman Islands (34 percent), the United States (33 percent) and Gibraltar (9 percent).
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NFTs and Loyalty Tokens Launch, Regulators Target Crypto Ads as Scams Spike
By: Veronica Reynolds
The Associated Press (AP) announced a non-fungible token (NFT) drop this week to celebrate 175 years of photojournalism. The organization plans to auction 10 NFTs that represent iconic photographs taken throughout history, some coupled with music scores. Proceeds from the auction will support the organization’s journalism efforts.
In Europe, the Italian post office, which operates an online marketplace in addition to mail delivery, has turned to Hyperledger Besu to build an integrated loyalty points system. According to a press release, the system allows customers to accrue points through merchant apps and convert those points into fungible loyalty tokens that can be redeemed across the platform for a variety of rewards.
Spanish economic authorities have launched a royal decree that grants the country’s financial services regulator the authority to regulate crypto-asset advertising. According to reports, the decree is based on the premise that cryptocurrencies pose risks related to anonymity, self-custody of private keys and accessibility.
In the United Kingdom, a self-regulating ad industry organization recently banned an advertising campaign by Luno, a cryptocurrency exchange, “for being misleading and irresponsible.” The ads reportedly encouraged people to buy bitcoin, stating that “it’s time to buy,” without warning consumers that the asset is highly volatile and risky. The exchange has reportedly agreed not to post such ads in the future and to include a “risk warning” on future ads.
According to a recent press release from the Federal Trade Commission (FTC), consumers have lost more than $80 million to cryptocurrency scams since October 2020 – a more than 10-fold year-over-year increase. The median amount individual consumers reportedly lost as a result of the scams was $1,900. According to the FTC, consumers between the ages of 20 and 49 “were over five times more likely than older age groups to report losing money to a cryptocurrency investment scam.”
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Nebraska Passes Digital Asset Bank Charter, Tax Case Addresses Crypto Mining
By: Keith R. Murphy
Nebraska’s state legislature recently passed a bill to create a state bank charter for digital asset depository institutions, which was signed into law by the state’s governor on Wednesday this week. According to recent reports, new businesses are able to obtain a state banking charter as digital asset depositories, and existing state-chartered banks are now permitted to open cryptocurrency banking divisions. The reports further note that while the digital asset depositories can engage in custody and payment services relating to digital assets, they are not able to accept deposits or make loans in fiat currency, and must maintain 100 percent of their assets in reserve under the law.
A Tennessee couple is challenging in court the right of the IRS to tax the mining or staking of cryptocurrency, arguing that mining is an act of creation and therefore not taxable, according to multiple news sources. The couple, who are seeking a refund for taxes paid, claim that the IRS instead must wait until cryptocurrency is sold or exchanged in order for a taxable event to have occurred.
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China and Hong Kong Implement New Crypto Regulation, Iran Halts Mining
By: Keith R. Murphy
Three major Chinese banking and finance associations recently issued a directive significantly limiting access to and protection for cryptocurrency in that country. According to a recent report, the restrictions prohibit banks from allowing their customers access to cryptocurrency trading or storage, and prohibit banks from providing insurance to cryptocurrency businesses or investments. The restrictions also reportedly prohibit web platforms from hosting cryptocurrency coin companies and running advertisements for cryptocurrency-related activities.
In Hong Kong, according to recent reports, the government has issued proposals to restrict cryptocurrency exchanges to professional investors, and to require that the exchanges be licensed by the city’s market regulator. The current existing rules reportedly provide for an “opt-in” approach pursuant to which exchanges may apply to the Securities and Futures Commission, but they are not required to do so.
Citing power grid concerns, the president of Iran has issued a moratorium on all cryptocurrency mining in the country until late September, according to a recent report. As noted in the report, a combination of authorized and unauthorized miners are utilizing more than 2,000 megawatts of electricity, and the country is experiencing hydropower shortages as a result of an unusually dry spring this year.
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Report Provides New Data on Cryptocurrencies and Sanctions Evasion
By: Joanna F. Wasick
A recent report by a major blockchain analytics firm finds that more than 4.5 million unique bitcoin addresses are linked to more than 72,000 unique Iranian IP addresses, which were either involved in direct cryptocurrency transactions or used to query the blockchain to verify funds in cryptocurrency addresses that they control. The report continues to find that many of the identified bitcoin addresses were linked to multiple Iranian IP addresses, indicating the usage of mobile wallets connected to multiple internet sources. A result of this, according to the report, is that financial institutions have little to no visibility into the connection between a bitcoin address and users in sanctioned countries, such as Iran. The report cautions that financial institutions should supplement all sanctions risk mitigation strategies to ensure that cryptocurrencies are not being used to transact with sanctioned countries.
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