Below are articles referencing more detailed precedence set, from January 2019 to present day. The subject matter is extensive. I highly recommend performing a “Ctrl+f” command to lookup any specific topics you are interested in.
Argentina Passes Sanctions and Public Registry Law, Condemns Hezbollah- On the 25th anniversary of the AMIA bombing, Argentina passed a sanctions and public registry and asset freeze law. FinCEN Director Kenneth A. Blanco confirmed in a statement: "Argentina’s Unidad de Informaciὀn Financiera de la República Argentina (UIF-AR) took courageous action to freeze assets belonging to the Hezbollah terrorist organization and list them on a public registry pursuant to a new law just instituted by the Marci government of Argentina to designate, sanction, and publicly list terrorist organizations along with the individuals and entities connected to them." Hezbollah “continues to represent a current and present threat to national security and the integrity in the Argentine Republic’s financial economic order,” the UIF said regarding its inclusion in the new registry. Said Blanco, “FinCEN is proud of the work we are doing together with our Argentine partners… we continue to value our strong partnership and shared commitment to fight terrorism and the financing that supports it.”
Australian Government Publishes Update on Cryptocurrency and ICO Rules- Going forward, companies issuing crypto assets deemed to be financial products will be required by law to procure an Australian Financial Services (AFS) license. On the flipside, for crypto assets which aren’t financial products, promoters must ensure that they don’t engage in any form of deceptive advertising.
Australia / AUSTRAC
Australia Watchdog Suspends Two Cryptocurrency Exchanges For Drug Offences- The Australian Transaction Reports and Analysis Centre (AUSTRAC) and Australian Federal Police issued a joint statement announcing a man involved in a multimillion-dollar darknet drug dealing syndicate has been arrested. Following the arrest, AUSTRAC suspended the registrations of two cryptocurrency exchanges associated with the man, reportedly AUSCOIN ATM and MK Buy & Sell, which trades as SK BTC. The businesses lost their licenses to operate for allegedly facilitating the crimes that go back to at least 2017 when two other members of the syndicate were arrested with 30 kilograms of narcotics.
Bahrain / Central Bank
The Central Bank of Bahrain has released a final version of new rules concerning cryptoassets in the Kingdom, which span from trading and custody guidelines to licencing requirements for exchanges.
How Virtual Currency Businesses Can Obtain and Maintain a Bank Account- Securing a banking partner is one of the biggest challenges virtual currency businesses face. That’s why it is crucial for them to know what to expect in the due diligence process. Michelle Sabins, SVP Managing Principal in the Fintech Consulting Practice at Silvergate Bank, works with hundreds of virtual currency businesses and has shared a few tips with us. Read on.
Cryptocurrency exchange Binance announced the forthcoming launch of Binance.US, a trading service for users in the United States, in tandem with a ban on United States users until this service is launched. Binance will license its technology to U.S. partner BAM Trading Services Inc., a recently registered money services business with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). “We are excited to finally launch Binance.US and bring the security, speed, and liquidity of Binance.com to North America,” said CZ, CEO of Binance. “Binance.US will be led by our local partner BAM and will serve the U.S. market in full regulatory compliance.” In the meantime, Binance revealed that it “is unable to provide services to any U.S. person” in a 14 June revision to their Terms of Service. Binance had already included six U.S. states, including New York, on its restricted list. Users will have 90 days to comply or face a trading ban, according to the general statement accompanying the revision. “Binance constantly reviews user accounts to improve our platform security and to comply with global compliance requirements,” the statement said.
BIS- Bank for International Settlements (known as the Central Bankers' Bank)
Central Bank Plans to Create Digital Currencies Receive Backing- Agustín Carstens, who heads the Bank for International Settlements (BIS), known as the central bankers’ bank, told the Financial Times: “Many central banks are working on it; we are working on it, supporting them… and it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.” Commenting on tech-company coins, Carstens said, “How will the currency be used? Will there be a discovery of information or data that can be used in credit provision and how will data privacy be protected?” Adding, “a very simple way to regulate this is to start with anti-money laundering rules. That is a very immediate and very obvious concern.” In Carsten’s view, digital currency launches may be accelerated based on market demand: “Perhaps people can do what they want by using electronic wallets provided by banks or fintech companies. It depends on the development of payment systems.” BIS published its annual reportlast week.
A Toronto judge ordered the forfeiture of over 280 BTC from a Canadian cocaine, PCP, and ketamine dealer, making it Canada's largest BTC seizure to date. An Oregon man also pled guilty to distributing fentanyl or its derivatives via darknet markets, which resulted in the death of a Wisconsin man in 2017.
Additionally, the People’s Bank of China published a 2019 priority agenda which included "strengthen supervision of virtual currency monitoring" and reiterated their plans to "promote the research and development of central bank digital currency." While not technically a "central bank" itself, the Asian Development Bank Institute distributed a working paper that categorized the spectrum of proposals central banks are considering with regard to central bank digital currency, and stated, "digital coins, such as bitcoin, can be considered as newly emerged private sector money."
Coinbase and Circle UDSC Stablecoin soon to be issuable and redeemable across platforms- The U.S. Dollar-pegged USD Coin Stablecoin (USDC) launched by Circle and Coinbase will soon be able to be issued and redeemed across multiple platforms, the firms announced last Thursday. The jointly founded CENTRE Network (a “membership-based framework and governance scheme for the development and growth of money on the internet”) will grant licensed institutions the right to issue or redeem USDC, provided that those institutions follow CENTRE’s operating rules, issuer settlement, and liability framework, and meet certain technological standards. USDC is the second largest stablecoin with a market cap of over $300m USD.
Dutch / FIOD
Law Enforcement Seizes Cryptocurrency Money Laundering Service- Law enforcement shut down the cryptocurrency mixing platform, Bestmixer.io, in the first seizure of its kind. The Dutch Fiscal Information and Investigation Service (FIOD), in close cooperation with Europol and the authorities in Luxembourg, conducted a year-long investigation that led to the seizure of six servers in Luxembourg and the Netherlands. The Bestmixer.io service enabled users to mix cryptocurrency funds to obscure their origin while maintaining user anonymity. The investigation so far into this case has shown that many of the mixed cryptocurrencies funds on Bestmixer.io had a criminal origin or destination. The site launched in May 2018 and has since had over $200m EUR worth of turnover in cryptocurrency. FIOD gathered records from the site, including IP addresses, chats, and transactions, and seeks to share this intelligence with other countries to support criminal investigations.
Police Arrest Dutch Man in Cryptocurrency Fraud- A man leading a counterfeit Bitcoin mining operation was arrested according to an announcement by the Dutch tax authority’s investigative department, FIOD. The fraud claimed approximately €23 million ($25 million) in funds from victims who thought they were funding the purchase of computers and other equipment for the mining operation. The man is accused of fraud, forgery, and money laundering. The business began in 2017, promising investors a return of 0.3 bitcoin per month. Following complaints, FIOD raided the man’s apartment in November 2018. Dutch financial authorities earlier this year suggested a licensing scheme for cryptocurrency firms to prevent financial crime.
The University of Michigan Board of Regents disclosed that their endowment invested $3MM in Andreessen Horowitz’s cryptonetworks fund, CNK Fund I, in June 2018 and is now planning additional investments from its $12B endowment.
A startup called Electroneum launched a separate blockchain-enabled phone priced at roughly $80, known as the M1.
Facebook Announces Libra Cryptocurrency- In a whitepaper released Tuesday, Facebook announced its cryptocurrency, Libra, “a simple global currency and infrastructure that empowers billions of people,” will launch in the first half of 2020. Facebook focused Libra’s mission on providing access to the 1.7 billion adults who do not have to bank services but may have a mobile phone or internet access. Here are the key components:
The Libra blockchain is open source and supported by a new programming language called Move. Move defines the core mechanisms of the blockchain, which “enable the creation of a unique governance mechanism that builds on the stability and reputation of existing institutions in the early days but transitions to a fully open system over time.” The Libra protocol does not link accounts to real-world identities, following the example of Bitcoin and Ethereum in that it provides pseudonymity for users. Features include support for smart contracts that may facilitate lending and other activities on the Libra Blockchain.
The Libra Association is the not-for-profit independent entity based in Geneva that will govern Libra. The Libra Association already has several committed firms who will work on the organization’s charter, including Mastercard, Paypal, eBay, Uber, Vodafone, and several other technology and venture capital firms. Each member will be empowered to operate a node on the blockchain, though Facebook intends for the governance of Libra to become permissionless.
The Libra reserve will back the cryptocurrency. The money in the reserve will come from two sources: investors and users of Libra. The Libra Association will pay out incentives in Libra coin to encourage adoption by users, merchants, and developers. On the user side, for new Libra coins to be created, there must be an equivalent purchase of Libra for fiat. Every time a user buys a Libra, the money will be deposited into the reserve, which will hold a basket of low volatility assets. The Libra is unpegged but will be worth about $1 USD.
Calibra is “a regulated subsidiary that will ensure separation between social and financial data and build and operate services on its behalf on top of the Libra network.” The first product Calibra will introduce is a digital wallet for Libra, which will be available in Messenger, WhatsApp, and as a standalone app.
Regarding compliance, Facebook urges the network’s wallets and exchanges to “follow applicable laws and regulations and cooperate with law enforcement,” adding “the ledger of transactions on the Libra Blockchain will be publicly accessible so that it is possible for third parties to do analysis to detect and penalize fraud.” Facebook expects the authorities to use tracking services similar to those that have been developed for Bitcoin and Ethereum. In the coming months, Calibra will conduct a risk assessment based on the guidelines of the Financial Action Task Force (FATF) and is building a “robust Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) program on its platform. Calibra has registered as a money services business in the U.S, it will follow the EU money laundering directives, and it will implement necessary KYC measures for its customers, among other security and compliance measures.”
FATF- Financial Action Taskforce, the international regulatory body against money-laundering and the financing of terrorism.
Intergovernmental Financial Action Task Force (FATF) published its regulatory guidance on virtual currencies. Chainalysis reviewed the guidance and provides key takeaways from the surprisingly comprehensive document in their latest blog post. He discusses what will happen next as different jurisdictions adopt the regulatory standard and FATF conducts mutual evaluations, as well as what cryptocurrency and related firms should be doing to comply now and how Chainalysis transaction monitoring helps.
Chainalysis Provides Feedback to FATF in Advance of Industry Guidelines- In our latest blog post, we discuss the draft regulatory guidance on virtual assets issued by the Financial Action Taskforce (FATF), the international regulatory body against money-laundering and the financing of terrorism (AML/CFT). We believe the forthcoming guidelines as they are drafted today are technically infeasible for the industry, and recommend other technical and organizational measures to achieve the AML/CFT objectives of the FATF.
Finland / Financial Supervisory Authority (FIN-FSA)
Finland’s financial regulator begins role as crypto sector supervisor- On May 1, Finland’s financial regulator, the FIN-FSA began regulating the cryptocurrency industry. The regulation will apply to virtual currency exchange services, custodian wallet providers, and issuers of virtual currencies. On May 15, the FIN-FSA will conduct a briefing to the cryptocurrency industry in Helsinki on the nature of these regulations and the registration timelines for industry participants. FIN-FSA noted that the regulations are a response to the May 2018 EU directive on anti-money laundering (AML), which focused particularly on the financing of terrorist activities. France is rumored to be the next EU member state to announce a cryptocurrency-regulation based response. While this is an exciting development for cryptocurrency legitimization in the EU, the FIN-FSA took care to remind the public that the risk virtual currencies pose to investors “remains unchanged.”
LocalBitcoins: AML Regulation and New features Update- A blog post by the widely-popular peer-to-peer bitcoin exchange stated that the Financial Supervisory Authority of Finland will now oversee the company, thanks to the passage of the Act on Virtual Currency Service Providers and the amendment of AML laws by the Finnish Parliament. In order to comply with the regulatory shift, LocalBitcoins will implement varying levels of account verification that will “provide a safer and better service conforming to the regulations.” The post goes on to say that the supervision “should improve significantly Bitcoin’s standing as a viable and legit financial network.”
France / FMA- Financial Markets Authority
France Launches New Rules on Digital Coins- France’s financial watchdog, the Financial Markets Authority, has approved new rules by which cryptocurrency firms will comply with capital and consumer protection requirements, and will pay taxes in France. “France is a precursor. We will have a legal, tax, and regulatory framework,” said Anne Marechal, executive director for legal affairs at the Financial Markets Authority. The FMA is working with “three or four candidates” for ICOs, and is in talks with several exchange platforms, custodians, and fund manages. France is also launching a task force to investigate how central banks can ensure cryptocurrencies are regulated, in its capacity as president of the Group of 7. European Central Bank policymaker Benoit Coeure will deliver preliminary comments on that matter at a meeting of G7 finance ministers in Chantilly later this week.
Germany: Crypto Businesses will Require a BaFin License Next Year- New Anti-Money Laundering (AML) regulations will come into effect next year in Germany. As reported by Cointelegraph Deutschland on July 24, cryptocurrency businesses will be required to hold a Federal Financial Supervisory Authority (BaFin)-issued license. Crypto assets are to be considered a financial instrument in Germany starting on January 1, 2020. Cointelegraph Deutschland reported that Frank Schäffler, the Free Democratic Party’s “crypto expert” and board member of BaFin, is critical of the regulation, as he clarified to the FAZ: "The government is now forcing the cryptocurrency trading platform providers to overrun the country and seek a new location in the EU."Meanwhile, a recent statement from the Bundesbank, “Crypto tokens in payment transactions and in securities settlement”, urged that Facebook’s Libra not be stifled by regulatory concerns.
Japanese Regulator Eyes Cryptocurrencies as It Toughens Money Laundering Laws- The Japanese Financial Services Authority (FSA) is looking to increase its money laundering countermeasures, including a review of cryptocurrency exchanges. The Financial Action Task Force (FATF), the inter-governmental body that sets global standards relating to anti-money laundering and combating the financing of terrorism, will go to Japan this fall to assess domestic money laundering laws. It is expected to look at cryptocurrency exchange operators, banks and credit unions, following regulatory guidance issued next month.
Japanese regulator seeks to bolster offline storage rules for cryptocurrency exchanges- Japan’s financial regulator, the Financial Services Agency (FSA), will require exchanges to improve oversight of “cold wallets,” or methods of cryptocurrency storage that are not connected to the internet. The agency will soon release the new set of rules. This move by the FSA bolsters Japan’s national interest in cryptocurrency and fintech. Japan was one of the first countries to regulate cryptocurrency on a national level. The country recognizes Bitcoin as a form of payment, and the FSA implemented AML and KYC principles in April 2017.
E-Commerce Giant Rakuten Wins License for New Crypto Exchange- Japan’s Financial Service Agency awarded coveted operating licenses, which are required for Japanese cryptocurrency businesses, to two applicants, bringing the total number of outstanding licenses to 19. One of the licensees, Rakuten Wallet, is a subsidiary of the multi-billion dollar Japanese e-commerce company Rakuten, who released a statement following the announcement. The other business was a cryptocurrency exchange called Decurrent, which says it will begin offering spot trading services next month
North Korea Used $2 Billion in Cyberattack Proceeds to Fund Weapons Program- North Korea used over $2 billion of cyberattack proceeds to fund its weapons program, according to a new, confidential United Nations report that Reuters obtained. North Korea “used cyberspace to launch increasingly sophisticated attacks to steal funds from financial institutions and cryptocurrency exchanges to generate income,” and laundered those funds online. The authors of the report are investigating “at least 35 reported instances of DPRK actors attacking financial institutions, cryptocurrency exchanges and mining activity designed to earn foreign currency” across 17 countries, and also allege that these attacks allow North Korea “to generate income in ways that are harder to trace and subject to less government oversight and regulation than the traditional banking sector.” The report was published before last week’s missile launch.
The newest line of smartphones from Samsung, the world’s most popular smartphone brand, will come equipped with Samsung Blockchain Wallet, according to an initial press release issued by the company. Galaxy S10 models will natively include storage for bitcoin and ether private keys, as well as support dApps and ERC-20 tokens. Promotional materials relating to these features have stirred rumors about which crypto-projects will be partnering with Samsung once the phones are released.
Singapore / Monetary Authority
Monetary Authority of Singapore halted an ongoing ICO which had intended on using an exemption from traditional registration. It was warned not to proceed after the issuer "failed to comply with the advertising restriction when its legal advisors put out a LinkedIn post accessible to the public calling attention to the offer."
Popular U.S. Retailers now Accept Bitcoin- Gemini, the cryptocurrency exchange, this week announced a partnership with Flexa, a payments processor. By downloading the Spedn app, consumers may use Bitcoin, Ether, Bitcoin Cash, and Gemini dollars for purchases at major retailers in the U.S. including Barnes & Noble, Nordstrom, Regal Cinemas, Whole Foods Market, and more. Many of the retailers have declined to comment on their involvement in this program, but Forbes has verified several from receipts. According to Flexa data, 89% of the beta users of Spedn spent cryptocurrency on the first day, with 81% spending more than once, and at more than one location. While still in early days, this is an exciting development for the spending use case for cryptocurrency. In related merchant services news, eBay billboards with messages like “virtual currency: happening on eBay” appeared at the Consensus conference.
DOJ Announces Arrest in Thailand of Swedish Man for Alleged Multi-Million Fraud- The Department of Justice has announced the arrest of a Swedish citizen charged with securities fraud, wire fraud, and money laundering in an investment scheme totaling over $11 million USD and affecting over 3,500 victims. Since September 2006, Roger Nils-Jonas Karlsson and his company, Eastern Metal Securities (EMS), have allegedly operated a series of websites offering investors shares in fictitious metals instruments. Investors were often asked to make payments in cryptocurrency which were then transferred to Karlsson’s personal accounts. Funds appear to be tied up in Thai real estate. When his investors inquired after their promised payouts, Karlsson would make extreme excuses, including, allegedly, that transferring the funds owed would cause a disruption to the global financial system. The United States is seeking extradition to California for a trial. The DOJ was assisted by the FBI Legal Attaché Office in Thailand, the IRS Criminal Investigation Attaché Office in Hong Kong, and the Royal Thai Police Crime Suppression Division.
UK / FCA:
UK FCA Issues Full Guidance on Crypto-assets- The UK’s Financial Conduct Authority finalized its guidance on crypto-assets, as confirmed this morning, after receiving responses to its consultation paper published earlier this year. Christopher Wollard, executive director of Strategy and Competition at the FCA said, “The majority of respondents supported the proposals outlined in the consultation. The FCA is, therefore, publishing the Final Guidance as consulted on with some amendments to provide greater clarity on what is and isn’t regulated. This includes making the important distinction as to which crypto-assets fall inside the regulatory perimeter clearer.” Exchange tokens will fall outside of the FCA’s regulatory perimeter: “Unregulated crypto-assets (e.g. Bitcoin, Ether, XRP, etc.) are not covered by the Financial Services Compensation Scheme and consumers do not have recourse to the Financial Ombudsman Service.” However, the paper noted that the “5AMLD” will add certain AML requirements to crypto-assets on January 10, 2020, and that a list of other activities will also be subject to AML scrutiny by the UK government.
UK Government's Economic Crime Plan Takes Action on Crypto-assets- The UK government last Friday announced a new Economic Crime Plan from H.M. Treasury and the Home Office to “tackle fraud, money laundering, bribery and corruption” in the UK and elsewhere. The plan, which emphasizes greater cooperation on matters of economic crime, was agreed between Chancellor Philip Hammond, Home Secretary Sajid Javid, heads of law enforcement, major financial institutions, and legal, accountancy and property firms. “The agencies also intend to take action to ensure cryptocurrencies are not used for money laundering and other illicit activity,” read the announcement. The Financial Conduct Authority (FCA) will establish a new crypto-assets regime “to create one of the most comprehensive global responses to the use of crypto-assets in illicit activity.” The plan encourages the private sector “to take advantage of pioneering technologies to combat economic crime, as well as reduce their compliance costs,” and will also establish a new Asset Recovery Action Plan designed to recover stolen funds. The plan is backed by £6.5 million from Barclays, HSBC UK, Lloyds Banking Group, Nationwide, RBS, and Santander UK to reform the Suspicious Activity Reporting regime.
UK Regulator Proposes Ban on Crypto-Based Derivatives- UK market regulators are planning a retail investor ban on cryptocurrency derivatives, arguing that trading them is “akin to gambling” and that they are “impossible” to value reliably. A paper by the Financial Conduct Authority (FCA) released last Wednesday contained an 18-month study of the market, concluding that cryptocurrencies could not be valued as reliably as other volatile assets. The cryptocurrency derivatives “are complex contracts built on top of complex assets,” said Christopher Woolard, the FCA’s executive director of strategy and competition. Concerns highlighted by the FCA include high fees charged by the cryptocurrency industry, “widespread” financial crime and market abuse, and hard forks. The contemplated ban would cover futures, options, and exchange-traded notes, as well as contracts for difference, which were just banned in France. There are likely well over ten thousand retail investors in the UK who are clients of cryptocurrency derivative firms.
British FCA Sees 3x Increase in Crypto, Forex Scams- The British financial watchdog, the FCA, has found a significant increase in cryptocurrency and foreign exchange fraud claims, from 530 to 1,834 2019/2018 YTD (April). More than eighty percent of the scams were cryptocurrency scams. While the volume of reported scams increased, the average individual losses were significantly less, owing to an increase in small online “phishing’ scams. Total losses also fell, from about £38m to £27m. The FCA and the Treasury are looking to crack down on cryptocurrency crime and exploitation, and have collaborated on the government-led Cryptoasset Taskforce. The FCA is also considering a ban on cryptocurrency derivatives, while the Treasury is considering expanding the FCA’s mandate to include a greater part of the cryptocurrency industry.
The U.K.’s Financial Conduct Authority (FCA) is seeking public comment on their newest consultation paper titled "Guidance on Cryptoassets," which expresses the FCA’s opinion on the applicable regulations for different categories of cryptoassets such as security tokens and can be read about here.
UK / HMRC (Her Majesty Revenue & Customs)
British Tax Authority Seeks Customer Data from Crypto Exchanges- The British tax authority, HM Revenue & Customs, sent letters to cryptocurrency exchanges that do business in the U.K. to request lists of customers and transaction data. At least three exchanges received letters within the last week. In response to a Freedom of Information (FOI) request submitted by Coindesk, HMRC said it was “withholding details about its demands for information since disclosing them could jeopardize the assessment or collection of tax,” but confirmed that such demands are in its scope, citing the similar letters which the U.S. Internal Revenue Service (IRS) is sending to cryptocurrency holders this summer.
USA / Attorney’s Office
May 2019- New York
New York A.G. James announces court order against Bitfinex and Tether- Last Friday, New York Attorney General Letitia James filed a preliminary injunction against iFinex Inc., the operator of the Bitfinex virtual asset trading platform, and Tether Limited, the issuer of the Tether virtual currency, the eighth most popular cryptocurrency by market capitalization. “Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of commingled client and corporate funds,” said Attorney General James. The alleged loss involves a transfer to Crypto Capital, the Panamanian payments processor employed by Bitfinex. Tether and Bitfinex responded with the following statement: “[The] court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million ‘loss’ at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released.”
May 2019- Oregon
U.S. Attorney indicts two Nigerian nationals in Bitcoin fraud- The U.S. Attorney Billy J. Williams announced that two Nigerian nationals were indicted in Portland, OR on 13 counts; one count each of conspiracy to commit wire fraud and money laundering, and 11 counts of wire fraud. The alleged fraudsters operated websites such as www.wealthcurrency.com, which promised Bitcoin returns of 20-50 percent with “zero risk” and “instant withdrawals,” starting in 2017. Through June 2018, the two are alleged to have actively conspired to defraud three victims in Oregon and California, and they created an online persona using an image of a fourth victim. The pair stole 10 Bitcoins worth $59,000, eventually exchanging them for Nigerian currency. The SEC this week issued an investor alert, warning of sites such as those used in this scam.
A case brought by the U.S. Attorney’s Office of the Eastern District of California in conjunction with the Joint Criminal Opioid Darknet Enforcement (J-CODE), a federal grand jury indicted a California nurse who allegedly sold over 20,000 prescription opioid pills on darknet markets. Federal agents found about $1.8 million in Bitcoin and about $234,000 in cash at her residence.
CFTC Charges British Company and Principal with $147 million Bitcoin Fraud- The Commodity Futures Trading Commission (CFTC) announced the filing of a complaint against a purported a UK-based bitcoin trading and investment company and its principal, Benjamin Reynolds, a British national. The action charges that the defendants allegedly misappropriated at least 22,858.8 bitcoin– worth approximately $147 million at the time of the fraud– from more than 1,000 customers during high public enthusiasm for bitcoin in the first half of 2017. The firm operated websites and social media accounts to convince customers to transfer bitcoin to them, promising daily trading profits on all deposits of up to 1.5% per day. The deposits were sent to pooled wallets through transactions that lacked any valid business purpose. Director of Enforcement James McDonald stated: “Fraud in these markets not only harms customers, but if left unchecked, it could also hinder innovation. We caution potential virtual currency customers, once again, that they should engage in appropriate diligence before purchasing or trading virtual currencies.”
CFTC Approves LedgerX to Settle Futures in Bitcoin- The Commodity Futures Trading Commission (CFTC) announced that it has approved the application of LedgerX for designation as a contract market. Effectively, this means that LedgerX can offer physically settled futures contracts in bitcoin and offer these products to retail clients, not just to institutional investors. Unlike other cash-settled bitcoin futures, when a contract expires, the buyer receives the underlying commodity, in this case bitcoin. LedgerX has been registered as a swap execution facility and derivatives clearing organization (DCO) since July 17. LedgerX is now registered as a designated contract market (DCM) pursuant to the CFTC regulations, to which it must demonstrate continued compliance. No timeline was given for the LedgerX launch. Intercontinental Exchange’s Bakkt will be testing its physically-settled bitcoin in July.
US CFTC Chair Remarks in Rome: Blockchain Would Have Improved Regulatory Response in 2008-cIn his speech, “The New Futurism: 21st Century Financial Markets, Technology and Regulation,” delivered at the CONSOB conference in Rome, CFTC Chairman J. Christopher Giancarlo said that blockchain technology would have enabled “far faster, better-informed, and more calibrated regulatory intervention” to the 2008 financial crisis, particularly related to the collapse in derivatives markets, than the response that was made at the time. Giancarlo emphasized the significance of distributed ledger technology (DLT) and its applications both inside and outside of the financial system, as part of his speech which used the Italian Futurist art and social movement of the early 20th century as a metaphor.
Commodity Futures Trading Commission seeks to become “21st Century Regulator,” discusses cryptocurrency clearinghouses- In his testimony on the state of the Commodity Futures Trading Commission (CFTC) before the House Committee on Agriculture Subcommittee on Commodity Exchanges, Energy and Credit, CFTC Chairman J. Christopher Giancarlo emphasized the need to have a “rapid response” to technological innovation and “conduct independent market data analysis” while “embracing market-based solutions.” Giancarlo also identified the LabCFTC, founded in 2017, as an internal “FinTech stakeholder” based in New York City that monitors emerging financial technologies, especially in cryptocurrency. Giancarlo added that he expects to see more applications from cryptocurrency firms wishing to register as clearinghouses (financial institutions which validate transactions and to reduce counterparty risk). LedgerX operates as such, and applications from Bakkt and from ErisX await CFTC approval.
U.S. Charges "My Big Coin" Virtual Currency Firm Founder With Fraud- Randall Crater, the founder of My Big Coin, wasindicted in a Massachusetts court and subsequently arrested in Florida on seven counts of wire fraud and unlawful monetary transactions. The charges stem from the misappropriation of $6MM of investor funds, which were raised by falsely claiming that a proprietary virtual currency was transferable to anyone and had $300MM in gold bullion backing its value. The CFTC brought a civil suit against the company in January 2018 for violating federal commodities laws, which is still ongoing. However, in the course of the CFTC lawsuit the court made one of its firstdeterminations that certain virtual currencies can be commodities for regulatory purposes.
Brookings Has Published a Report By Former CFTC Chairman Timothy Massad On Cryptocurrency Regulation- The former Chairman of the CFTC called for expanding the scope of U.S. crypto oversight in a recent report out of the Brookings Institution titled “It’s Time to Strengthen the Regulation of Crypto-Assets.” Citing the Chainalysis Crypto Crime Report, the Brookings report highlights the industry’s unaddressed risks and recommends enlarging the purview of the SEC or CFTC to fully encompass the sector. In order to facilitate these responsibilities, the report argues for increasing the resources of both agencies and emphasizes the importance of self-regulatory initiatives.
The previously celebrated Token Taxonomy Act has been reintroduced in the House after dying in committee at the conclusion of the 115th Congress. The Token Taxonomy Act would implement multiple favorable regulatory shifts for the cryptocurrency industry. Notable changes include excluding “digital tokens” from the statutory definition of a security, granting exchanges between virtual currencies the coveted tax exempt “like-kind exchange” status that real property enjoys, and exempting from gross income up to $600 per transaction of capital gains resulting from the sale of virtual currencies.
The FIND Trafficking Act and Financial Technology Protection Act, which were introduced earlier this month, have both passed the House and now move on to the Senate. The FIND Trafficking Act would require the Comptroller General to conduct a study into the use of virtual currency for illicit sex and drug trafficking, but the Financial Technology Protection Act would go much further by creating an interagency task force and a bounty program aimed at combating virtual currency use in terror financing.
USA / DA
Manhattan D.A. Vance busts $2.8m internet drug ring- Two individuals have pled guilty to running a steroid and controlled substance business which accepted cryptocurrency and Western Union payments. From 2013 to 2018, the pair shipped over 10,000 packages of steroids and other drugs including Valium, Xanax, and Viagra. The drugs were sold via various dark web outlets and the site “NextDayGear,” which the defendants operated. The defendants purchased wholesale drugs from China, mixed, pressed, and packaged the drugs with counterfeit brand names, and shipped them to customers in all fifty states. This is the first conviction involving cryptocurrency by New York State prosecutors. Said D.A. Vance, “Online drug sellers who do business in New York should take note: whether you’re operating in plain sight or in hidden corners of the dark web, my Office has the skills and resources to follow the money, shut down your business, and hold you accountable.” This operation is unrelated to the sting we mentioned in last week’s update.
Manhattan D.A. Vance indicts major dark web drug sellers: “We have a cybercrime crisis that’s not yet fully appreciated.”- The Manhattan District Attorney has concluded a two-year investigation into a major dark web drug seller. The investigation began in 2017 when the office received a tip that large amounts of cash were being withdrawn from city ATMs, one of which converted cryptocurrency to cash. Three New Jersey men were indicted for multiple counts related to money laundering, sale of controlled substances, identity theft, and conspiracy to commit fraud. The sellers converted at least $2.3M in cryptocurrency, which they loaded onto prepaid cards to make local ATM withdrawals, and fulfilled orders for various controlled substances as well as counterfeiting pills like Xanax at a lab they set up in New Jersey. The DA made several purchases of illegal drugs from ads they had listed on the Dream Market, one of the largest darknet marketplaces that recently announced it is shutting down.
USA / DOT
Law enforcement announced activity around multiple cryptocurrency-related cases this week, beginning with an NJ man charged with operating an unlicensed Bitcoin exchange last Wednesday. William Green of New Jersey was charged with one count of operating an unlicensed money transmitting business. Green maintained a website called “Destination Bitcoin” where he received over $2 million in cash from customers, which he converted to Bitcoin for a fee. Green failed to register his business with the Treasury. The charge carries a maximum penalty of 5 years and a $250,000 fine.
Treasury Secretary: Bad Actors with Crypto is a National Security Issue- Treasury Secretary Steve Mnuchin referred to crypto concerns as a “national security issue” in a news briefing on cryptocurrencies this Monday. The Treasury Secretary’s comments were focused on exploitation in the cryptocurrency market for cybercrime, tax evasion, extortion, ransomware, illicit drugs, human trafficking. “We will not allow digital asset service providers to operate in the shadows,” he said, adding that FinCEN “will hold any entity that transacts in Bitcoin, Libra or any other cryptocurrency to its highest standards.” Mnuchin also called for regulatory caution. The conference follows President Donald Trump’s tweets last week that he is “not a fan of” cryptocurrencies, and that they “are not money.”
Deep Dot Web Shut down by FBI and Europol- The FBI, with help from Europol and others, shut down Deep Dot Web, a website for facilitating access to dark web sites and marketplaces, and arrested its administrators. Deep Dot Web is said to have made millions of dollars through their referral business, sending traffic via .onion domains over the Tor Network. The .onion site was seized by the FBI, citing U.S. money laundering laws. Suspects were arrested in Israel by the Tel Aviv police, who first confirmed the arrests in a local statement, with further arrests made in France, Germany, the Netherlands, and, according to one source, Brazil. Visitors to the Deep Dot Web site are greeted by a seizure notice from the FBI and its law enforcement partners.March 2019
On Friday, U.S. Attorney David L. Anderson and FinCEN Director Kenneth A. Blanco announced a civil complaint against BTC-e, also known as the Canton Business Corporation, and one of its chief owners and operators, Alexander Vinnik. BTC-e was a virtual currency exchange incorporated in Cyprus and/or the Seychelles Islands, and operated in Bulgaria, Seychelles, and other jurisdictions including Northern California, where users could buy and sell bitcoin on its website. The civil complaint alleges that Vinnik operated several BTC-e accounts, including some tied to thefts from Mt. Gox and other exchanges. Vinnik is currently incarcerated in Greece. An extradition request has been issued. FinCEN has assessed $12 million in penalties against Vinnick and $88.5 million in penalties against BTC-e for the alleged willful violations of the Bank Secrecy Act (BSA). BTC-e failed to register as a Money Services Business (MSB), failed to establish AML programs and procedures, and failed to file suspicious activity reports (SARs).
FinCEN Exchange Forum Announce Business Email Compromise Efforts- The Financial Crimes Enforcement Network (FinCEN) on Tuesday announced new efforts to curtail and impede Business Email Compromise (BEC) scammers and their networks. BEC scams generated more than $300 million per month in 2018, according to FinCEN’s Suspicious Activity Reports (SARs), with volume more than doubling from 2016 to 1,100 per month in 2018. The in-depth Financial Trend Analysis of BSA data, published with the announcement, reported that fraudulent vendor invoices were the most common methodology at 39% while impersonating an executive fell from 33% in 2017 to 12% in 2018. A series of meetings on the subject followed the announcement at the ongoing FinCEN Exchange forum for law enforcement and financial institutions. FinCEN also issued today an update to its “Advisory to Financial Institutions on E-mail Compromise Fraud Schemes,” first published in 2016. The advisory offers updated definitions, details the targeting of non-business entities by email compromise, general trends, and advice, and encourages financial institutions to share information on accounts affiliated with BEC schemes. FinCEN also reported that its Rapid Response Program has surpassed $500 Million in recovered funds.
FINCEN Fines Man for Operating Illegal Virtual Currency Exchange- FinCEN has penalized a man for operating a peer-to-peer virtual currency exchange without a license. California-based cryptocurrency trader Eric Powers received a civil money penalty for failing to register as a money services business (MSB) with FinCEN, adopt AML standards, and file suspicious activity reports (SARs) and currency transaction reports (CTRs). “Obligations under the Bank Secrecy Act (BSA) apply to money transmitters regardless of their size,” said FinCEN Director Kenneth A. Blanco, who noted that this is the first time that these penalties have been issued under the March 2013 guidance provided by the agency, and they will continue to be enforced by FinCEN. Mr. Powers conducted over 200 transactions each involving more than $10,000 in currency, some with darknet entities, but did not file a single CTR. Eric Powers has been fined $35,000 and is permanently barred from the MSB industry.
IRS Sending Letters to Virtual Currency Holders- The Internal Revenue Service is sending letters to taxpayers with virtual currency transactions that may have failed to disclose income and pay taxes in accordance with the 2014 guidanceon virtual currency. "Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest, and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations." By the end of August, more than 10,000 taxpayers will receive a version of this letter.
IRS to issue first cryptocurrency guidance since 2014 "soon"- The IRS stated it will soon issue cryptocurrency tax guidance, having only done so in a limited way in 2014. Responding to a letter from Rep. Tom Emmert, member of the congressional blockchain office, sent 11 April, Commissioner Charles P. Rettig outlined the ways in which the IRS would address issues related to the handling of cryptocurrency, including 1) cost basis, 2) methods of cost basis assignment and 3) the treatment of forks, adding “I share your belief that taxpayers deserve clarity” and that the updates on these issues would come “soon.” Responded Rep. Emmer, “Taxpayers deserve clarity on several basic questions regarding federal taxation of these emerging exchanges of value. I look forward to seeing their forthcoming proposal, and working together to serve the American taxpayers.”
Tax Day: Bipartisan Members of Congress urge IRS for tax and accounting guidance on crypto assets- In recognition of Monday’s tax deadline, twenty-one Members of Congress sent a letter last week to the IRS urging more “robust guidance” around accounting and tax handling of cryptocurrency.The bipartisan letter focused on three core elements: 1) reasonable standards for calculating the cost basis of crypto assets, 2) methods of determining capital gains, and 3) the tax treatment of forks. The letter asked for a response outlining next steps by May 15th, one month from tax day. The IRS did not respond to a similar letter last year, and they have not updated their cryptocurrency guidance since 2014.
Two more companies received the coveted NYDFS BitLicense, which is required for cryptocurrency exchanges to operate in the state of New York. One is the retail brokerage firm Robinhood, which offers services for buying, selling, and storing seven different virtual currencies. The other is LibertyX, which "is the first DFS virtual currency licensee to allow customers to use debit cards to purchase Bitcoin from traditional ATMs."
US Treasury Sanctions Russian Bank Over Links to Venezuela’s Petro- The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has sanctioned Evrofinance Mosnarbank, a Russian bank, for supporting a Venezuelan state-owned oil company and financing Venezuela’s “Petro” cryptocurrency project. According to the Treasury’spress release, “early investors in the Petro were invited to buy the cryptocurrency by wiring funds to a Venezuelan government account at Evrofinance.”
Crypto Mom Addresses SEC Regulation- Securities and Exchange Commissioner and “Crypto Mom” Hester Pierce commented on the SEC’s handling of cryptocurrency at Fortune’s Brainstorm Tech conference. “As you can see with the way our guidance is trickling out, it takes us a really long time to make decisions. Regulators tend not to be that nimble,” she said, addressing a question on whether the U.S. is “forfeiting innovation” to countries with a more progressive regulatory regime. Pierce commented that last week’s staff statement “gave us an idea of some of the things that are troubling us in this space,” but lacked “clarity” and “a road forward” for regulating security tokens. Addressing fraud, Pierce said, “People who want to steal money from other people craft their fraud around what’s popular today, and crypto happens to be pretty popular.”
SEC, FINRA Issue Explanation of Cryptocurrency Custodian Approval Delay- Last Monday, the SEC and FINRA issued a joint statement addressing pending applications by cryptocurrency firms wishing to register as broker-dealers. The statement, authored by the SEC’s division of trading and markets and FINRA’s office of the general counsel, enumerated the key scenarios, questions, and concerns that the committee must address before approving applications, including:
The Customer Protection Rule: The Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep them separate from the firm’s assets, to increase the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.
Book- and record-keeping rules: The nature of distributed ledger technology and digital asset securities may make it difficult for a broker-dealer to evidence the existence of digital asset securities for regulatory books, records, and financial statements, including supporting schedules.
Securities Investor Protection Act of 1970: Uncertainty regarding when and whether a broker-dealer holds a digital asset security creates greater risk for customers that their securities will not be able to be returned in the event of a broker-dealer failure.
SEC Sues Alleged Cryptocurrency Pyramid Scheme Operator- The SEC filed a civil injunctive action against a California man accused of running a pyramid scheme from January 2017 through March 2018. During that time, Mr. Pacheco, a resident of San Clemente California, raised $26m USD from investors to sell instructional packages that included e-commerce training through his iPro brand. Investors who contributed additional funds could earn cash commissions and additional convertible “points,” which could be converted into a nonexistent “PRO” cryptocurrency by recruiting new investors. The collapse was hastened by the fraudulent use of funds by Pacheco, who purchased a $2.5m house in cash and a Rolls Royce. The SEC alleges that Pacheco operated a pyramid scheme and failed to register with the SEC as a seller of securities in his offer of financial products to investors.
SEC delays awaited decision on VanEck Bitcoin ETF- The SEC has delayed its decision on Bitcoin ETFs, in this case asking for more comments on a plan by Cboe to list an ETF from VanEck Associates and SolidX Partners. To date, no Bitcoin ETFs have been approved. The delay does not “indicate that the Commission has reached any conclusions with respect to any of the issues involved,” the regulator said. The SEC previously postponed making a decision on the fund and rejected a request last year from an exchange seeking to list a Bitcoin ETF. Public comments from SEC Commissioner Hester Peirce last week were seen to indicate positive developments for these kinds of regulated products.
Blockstack Files With SEC to Raise $50 Million in Reg-A+ Crypto Token Sale- Blockstack, the company founded in 2017 to create the infrastructure for a decentralized internet, announced its intent to use the Regulation A+ exemption to raise $50m USD in a token sale. This is the first time a prospective token issuer has opted for this particular exemption from registration, which would allow tokens to be sold to the public. If approved, Blockstack would not be required to only seek funds exclusively from accredited investors, which is the case in other types of exemptions such as private placements. Additionally, Blockstack’s regulatory filing named Harvard University’s Endowment as an early investor.
SEC Chairman Clayton Just Confirmed Commission Staff Analysis That Found Ethereum (And Cryptos Like It) Are Not Securities- The Chairman of the Securities and Exchange Commission has responded to a bipartisan letter sent by U.S. Representative Ted Budd (R-NC) last September that concerned the applicability of federal security laws to ICOs. The Chairman’s response elaborated upon contemporary guidance on the subject, such as the SEC’s fake ICO promotional webpage www.howeycoins.com, the DAO Report, and recent speeches made by Commissioners. Most notably the Chairman’s letter confirmed the remarks made by SEC Director Hinman that ETH no longer meets the Howey test and thus does not constitute a security.
The SEC recently announced that an ICO issuer, Gladius Network, settled charges of running an unregistered securities offering after receiving a cease-and-desist order to halt further violations and return investor funds. This was the first instance of an ICO issuer receiving an enforcement action of this type that did not result in a civil penalty because Gladius self-reported to the SEC, expressed an interest in taking prompt remedial steps, and cooperated with the investigation. This also exemplifies the SEC’s public stance that "there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities."
The Economic Impact of Ether Whales on the Market- Chainalysis’s latest economic research examines large Ethereum holders and their impact on price and volatility. As covered in Bloomberg both Ethereum and Bitcoin are characterized by ownership concentration; 20% of Bitcoin is held by 488 whales, and 30% of Ethereum held by 376 whales. However, these whales aren’t making big splashes: trading volume is weak compared to the size of these positions, indicating that their price effects are minimal, to date. Generally, whales are in fact long-term holders of the cryptocurrencies, with 60% of whales often not engaging with exchanges at all. When they do transact with exchanges, some knock-on effects on volatility may be felt for a day or two.
On Thursday, "prolific" dark web fentanyl dealer, Richard Castro (aka “Chemsusa”), pled guilty to money laundering and participating in a conspiracy to distribute fentanyl, carfentanil and other drugs over the dark web, including on AlphaBay and Dream Market. Castro will also forfeit over $4 million in criminal proceeds. Manhattan U.S. Attorney Geoffrey S. Berman said: “As he admitted today, for years, Richard Castro used the dark web to distribute prolific quantities of powerful opioids.” Castro had boasted on the Dream Market that he had completed more than 3,200 transactions on other dark web markets, including more than 1,800 on AlphaBay. “Extremely potent and definitely the real Carf,” “The Carfent is unbelievably well synthesized, keep up the amazing work,” read some customer feedback. Castro laundered his proceeds, which he received in Bitcoin, through wallets, and bought approximately 100 quadrillion Zimbabwe bank notes, and other stores of value.
Fiat Money Outpaces Bitcoin 800-to-1 for Darknet Activity- In response to Treasury Secretary Steven Mnuchin’s comments last week regarding the scale of cryptocurrency fraud, crypto site Messari published data aggregated from Chainalysis and the United Nations Office on Drugs & Crime showing that for every $1 in BTC spent on the black market, $800 USD is laundered. The data also highlighted the rate of Bitcoin issuance at 1/14,000th the rate of the Federal Reserve’s Balance Sheet expansion and quantified the stock of narrow money held in BTC internationally.
Man Arrested in $19m Crypto Laundering Drug Scheme- Ohio man Hugh Haney was arrested and charged with money laundering and engaging in a transaction with criminally derived money, Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and Angel M. Melendez, the Special Agent-in-Charge of the New York Field Office of the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (“HSI”) announced last Thursday. Haney allegedly was an administrator of the Pharmville illicit drugs network on the infamous Silk Road site. “Today’s arrest should be a warning to dealers peddling their drugs on the dark web that they cannot remain anonymous forever, especially when attempting to legitimize their illicit proceeds,” said Berman. Melendez added, “In 2013, Silk Road was put out of business, and as a result of that, cyber criminals sought ways to continue their criminal activities and more importantly launder their illicit digital currency. Haney was allegedly one of those criminals who was still holding on to a stash of cyber gold.” HSI agents used blockchain analytics to uncover and seize the bitcoin stash valued at $19m so that Haney could face justice in New York.
Europol and others deliver double-blow to dark web marketplaces- Last week we covered the chaos over at Wall Street Marketplace, the preeminent dark web marketplace which had just shut down. Later in the week, Europol announced they helped the German Federal Crime Police shut down the marketplace, along with the help of other agencies, including various US government agencies. The Silkkitie, or Valhalla Marketplace, was also shut down with its contents seized by Finnish customs in close cooperation with French National Police and Europol. Europol’s Executive Director, Catherine De Bolle, commented: “These two investigations show the importance of law enforcement cooperation at an international level and demonstrate that illegal activity on the dark web is not as anonymous as criminals may think.” Europol has assembled a “dark web team” to monitor illicit activity on the dark web.
Two major darknet marketplaces shut down this month- Last month, the operators of the prolific darknet marketplace, the Dream Market, announced the site would be shuttered at the end of April due to a law enforcement leak, and that same day, the DEA, FBI, Europol and others announced over ten related arrests. This week, another darknet marketplace, Wall Street Market (WSM), launched an exit scam, stealing $14.2M USD of user funds from the criminals who do illicit business on the site. It is likely that the influx of Dream Market users seeking another marketplace brought additional unwanted attention to WSM and thus the operators decided to steal $14.2m USD of the illicit funds on their site and shut down, rather than welcome the exposure to law enforcement. The WSM admins took the funds, which were kept in escrow to guarantee site transactions, and moved them to private wallets. The situation has devolved into chaos with WSM support agents publishing private addresses and demanding additional ransoms.