New Crypto Products Launch in Custody, Cloud Collaborations and Stablecoins
By Sydney Park
This week, a major U.S. financial institution announced that its Digital Asset Custody platform is now live in the United States. According to a press release, the platform will allow “select clients … to hold and transfer bitcoin and ether.” The press release further stated that “this milestone reinforces … commitment to support client demand for a trusted provider of both traditional and digital asset servicing.”
According to recent reports, a major U.S. bank and a major U.S. financial services firm have launched a collaboration to streamline cross-border payments using their respective private blockchain networks. The collaboration will reportedly leverage the bank’s account information validation product and the financial services firm’s cross-border payments product.
In another recent announcement, a major U.S. cloud services provider and a major U.S. cryptocurrency exchange have announced this week a long-term strategic partnership to “better serve the growing Web3 ecosystem and its developers.” According to a press release, among other things, the cryptocurrency exchange will use the cloud provider’s services to “build advanced exchange and data services,” “enhance the global reach of its crypto services,” and build its “global data platform.” The press release further stated that as part of the partnership, the cloud provider “is positioned to enable select customers, starting with those in the Web3 ecosystem, to pay for its cloud services via select cryptocurrencies” using the cryptocurrency exchange’s services.
In a final notable development, privacy-focused cryptocurrency firm MobileCoin announced this week its collaboration with platform Reserve to launch a stablecoin called “Electronic Dollars” (eUSD). According to reports, eUSD is backed by a basket of stablecoins USDC, USDP and TUSD and will leverage zero knowledge encryption to protect users’ transactional data.
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FSB Proposes International Crypto Regulation Framework, Solicits Comments
This week, the Financial Stability Board (FSB) published a proposed framework for the international regulation of crypto-asset activities. The framework includes (1) regulation, supervision and oversight of crypto-asset activities and markets and (2) regulation, supervision and oversight of “global stablecoin” (GSC) arrangements. FSB is soliciting comments by Dec. 15, 2022, on its proposed recommendations and on questions specifically set out in the proposed framework. The FSB’s approach is grounded in the principle of “same activity, same risk, same regulation”; that is, “where crypto-assets and intermediaries perform an equivalent economic function to one performed by instruments and intermediaries in the traditional financial system, they should be subject to [equivalent] regulations.”
The FSB recommendations regarding crypto-asset activities and markets set forth the essential activities and interconnectedness of crypto-asset markets, various international standards and approaches to the regulation of crypto activities, and issues and challenges to regulate crypto-asset activities, as well as nine high-level recommendations. The FSB recommendations include that regulators should have adequate regulatory power and tools; identify and monitor interconnections and interdependencies within the crypto-asset ecosystem and the broader financial system; and require crypto-asset issuers and service providers to have governance, risk management, data privacy and protection, and disclosure frameworks, policies and procedures proportionate to their risk, size, complexity and systemic importance and to the financial stability risk they pose.
The FSB’s revised high-level recommendations for GSCs are reflective of the view that stablecoins (and other assets capable of being widely used as a means of payments and/or stores of value) require high regulatory standards because they could pose significant risks to financial stability. The FSB recommendations indicate that algorithms and arbitrage are not effective stabilization methods, and that the regulation of the crypto-asset ecosystem should be consistent across jurisdictions and provide for adequate transparency, accountability, market integrity, investor and consumer protections, and anti-money laundering protections.
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OECD Publishes Crypto Tax Framework; Acting Comptroller Addresses Crypto
This week, the Organization of Economic Cooperation and Development (OECD) published “a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets.” According to an OECD press release, the Crypto-Asset Reporting Framework (CARF) “responds to a G20 request that the OECD develop a framework for the automatic exchange of information between countries on crypto-assets” and “will be presented to G20 Finance Ministers and Central Bank Governors for discussion at their next meeting on 12-13 October in Washington D.C.”
Also this week, Acting Comptroller of the Currency Michael J. Hsu gave a keynote speech addressing crypto assets. Among other things the Acting Comptroller promoted collaboration, coordination, and information sharing among financial regulators and peer agencies to mitigate risk and to “help ensure that regulatory standards remain high and the playing field stays level,” noting, “this is particularly important as long as crypto businesses are not subject to comprehensive supervision.” Addressing OCC Interpretive Letter 1179, in which the Office of the Comptroller of the Currency affirmed that banks are permitted to engage in certain cryptocurrency activities (if they first obtain a supervisory non-objection), the Acting Comptroller said, “I see three areas that need clarity about supervisory expectations in the near term: (1) liquidity risk management of deposits from crypto-asset companies, including stablecoin issuers, (2) finder activities, especially related to crypto trade facilitation, and (3) crypto custody.”
In a separate development this week, Sen. Elizabeth Warren and six other Democratic senators sent a letter to the CEO of the Electric Reliability Council of Texas (ERCOT) raising various concerns about electricity consumption and carbon dioxide emissions caused by cryptocurrency mining activity in the state of Texas. And in a final notable item, this week, Coin Center, a nonprofit focused on policy issues facing cryptocurrencies, announced that it has filed a lawsuit against the U.S. Department of the Treasury related to the recent sanctions levied against Tornado Cash. According to a blog post, among other things the lawsuit seeks “to delist Tornado Cash privacy tools from sanctions, and to enjoin Treasury from enforcing against ordinary Americans exercising their self-evident and basic rights to privacy.”
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Major US Crypto Exchange Fined Over $24M for FinCEN and OFAC Violations
According to a recent press release from the Financial Crimes Enforcement Network (FinCEN), FinCEN has assessed a penalty in excess of $29 million against a major U.S. cryptocurrency exchange for violations of the Bank Secrecy Act and FinCEN’s implementing regulations. The FinCEN press release notes that the action is part of a global settlement with the U.S. Office of Foreign Assets Control (OFAC). Among other issues, FinCEN’s investigation reportedly found that the exchange failed to maintain an effective anti-money laundering program and utilized as few as two inadequately trained employees to manually review for suspicious activity as many as 20,000 transactions per day. According to the FinCEN press release, the exchange conducted more than 116,000 transactions with an aggregate value of more than $260 million with individuals and entities in jurisdictions that are subject to OFAC sanctions and failed to file any Suspicious Activity Reports between February 2014 and May 2017, a period of over three years. According to the FinCEN press release, FinCEN will credit the exchange’s payment of over $24 million “to settle its potential liability with OFAC.”
The related settlement between the exchange and OFAC for an amount in excess of $24 million reportedly resolves potential civil liabilities of the company for apparent violations of sanctions against Cuba, Ukraine-related, Syria, Iran and Sudan. According to a press release by the U.S. Department of the Treasury, the exchange allegedly failed to prevent people in sanctioned jurisdictions from using its platform to conduct in excess of $263 million in virtual currency-related transactions, despite having reason to know they were doing so based on Internet protocol addresses and other information available to the company.
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DOJ Targets Crypto Money Laundering; SEC Reportedly Investigating Yuga Labs
A recent press release from the U.S. Department of Justice (DOJ) announced charges against a California man for conspiracy to commit money laundering and unlawful importation of a controlled substance. According to the DOJ press release, the defendant allegedly distributed counterfeit pills and controlled substances on dark web markets to customers who paid the defendant in cryptocurrency, usually bitcoin. The defendant and his coconspirators allegedly traded the bitcoin for U.S. currency and laundered the proceeds through scores of transactions and financial accounts.
According to recent reports, the U.S. Securities and Exchange Commission (SEC) is investigating Yuga Labs to determine whether the company’s Bored Ape Yacht Club series of non-fungible tokens (NFTs), as well as the separate ApeCoin token, are unregistered securities and violate federal law. While ApeCoin was not created or launched by Yuga Labs, the reports note that Yuga Labs allegedly benefits from ApeCoin. The investigation reportedly is part of a wider probe by the SEC into whether certain NFTs, including fractional NFTs, may fall under federal securities laws.
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October Sees Most Value Stolen in Crypto Hacks of Any Month on Record
Barely halfway through the month, crypto research firm Chainalysis reports that this October has already seen the most value ever stolen in crypto-related crimes per month: $718 million in overall losses stolen from DeFi protocols across 11 different hacks so far. The most significant October hack by value was the $565 million worth of Binance coin (BNB) stolen when hackers exploited a Binance Smart Chain cross-chain bridge known as BSC Token Hub. And earlier this week, $100 million in liquidity was drained from Solana’s “Mango Markets” trading protocol after a rogue trader manipulated spot token prices to borrow the entirety of the protocol’s assets against their position. These two events help support Chainalysis’ prediction that 2022 will likely surpass 2021 as the biggest year for hacking on record. So far, hackers have reportedly grossed over $3 billion across 125 hacks.
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