U.S. Bank Acquires Blockchain Infrastructure; SEC Approves Blockchain-Based Exchange; FTC Warns on Crypto Scams; NFT Threats, Crypto Hacks Reported – Lexology

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In this issue:
• U.S. Bank Seeks to Launch Stablecoin; New Crypto Payments Data Released
• U.S. Bank Seeks to Launch Stablecoin; New Crypto Payments Data Released
• FTC Warns of Crypto Scams, IRS Offers Staking Settlement; MAS Bans ATMs
• Reports Address NFT Platform Exploits, Wash Trading and Money Laundering
• SEC Scrutinizes Crypto Interest Accounts and Bitcoin GAAP Reporting
U.S. Bank Seeks to Launch Stablecoin; New Crypto Payments Data Released
A well-known digital payments consortium sold its technology platform this week to a U.S.-based bank known for its cryptocurrency-related offerings. The bank reportedly plans to use the platform to launch its own regulated stablecoin in 2022 enabled, in part, by the acquired assets. According to a press release from the acquiring bank, the acquired assets were developed by “a world-class group of engineers over a two-year development cycle” and include “development, deployment and operations infrastructure and tools for running a blockchain-based payment network designed to facilitate payments for commerce and cross-border remittances.” A press release from the seller firm addressed issues the firm had encountered with regulators, noting that “despite giving us positive substantive feedback on the design of the network, it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead. As a result, the best path forward was to sell the…assets.”
In other payments news, according to reports, users of one of the world’s major credit cards made $2.5 billion in payments with “crypto-connected cards” during the last fiscal quarter (ending December 2021), which was 70 percent of the payment company’s cryptocurrency volume for the entirety of its 2021 fiscal year (ending September 2021). Another recent report noted that in 2021, Bitcoin transaction volume surpassed the individual annual volumes reported by two other major credit card payment platforms.
A recently released report by a crypto-focused philanthropy platform highlights the increase in donations the platform experienced between 2020 and 2021. The report notes that cryptocurrency donations on its platform increased 1,558 percent from 2020 to 2021, with NFT projects alone responsible for $12.3 million in charity donations via the platform.
A final recent report of note addresses Bitcoin’s environmental impact. Among other things, the report finds that approximately 0.08 percent of the world’s CO2 production is generated from Bitcoin mining networks, and 60 percent of all Bitcoin mining uses fossil fuel as its energy source.
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SEC Approves Blockchain-Based Exchange, Seeks Comments on Bitcoin ETF
According to a press release, the SEC recently issued an order (the “Order”) approving “the first fully-automated, price/time priority execution exchange for trading securities that is both regulated by the SEC and leverages private blockchain technologies.” According to the press release, the recently approved exchange, BSTX, “will use a secure, private-permissioned blockchain that it controls to make participant market data available to them and to make general market data available to industry participants.” According to the SEC’s Order, the approval is conditioned on the exchange’s joining relevant national market system plans, which are structures set up for the dissemination of real-time market information. The exchange will reportedly be open to both institutional and retail investors.
In related news, the SEC recently filed a notice related to a spot Bitcoin exchange-traded fund (ETF) application to request comments on whether the ETF is adequately designed to “prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” Among other things, the notice seeks comments on whether the proposed ETF’s shares would be susceptible to manipulation, whether the underlying Bitcoin markets are susceptible to manipulation, the suitability of Bitcoin as an underlying asset for an exchange-traded product and the adequacy of the methodologies proposed by the ETF applicant to address these issues. According to the notice, the SEC has requested “that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified…as well as any other concerns they may have” with the proposed ETF.
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FTC Warns of Crypto Scams, IRS Offers Staking Settlement; MAS Bans ATMs
A new consumer protection data report from the FTC finds that social media platforms are a “gold mine” for scammers. Investment scams are the most profitable type, the report finds, particularly those involving bogus cryptocurrency investments — an area the FTC cites as experiencing a “massive surge.” According to the report, more than half of people who reported losses to investment scams last year said the scams began on social media, where scammers lured them into sending funds — often in the form of cryptocurrency — on false promises of huge returns. Other major social media frauds addressed by the report include romance-type scams and scams involving bogus online retailers.
The IRS has reportedly offered to refund a Nashville couple’s payment of taxes on unsold Tezos staking rewards, thereby settling the lawsuit pending between the couple and the U.S. government. The couple filed a complaint in May 2021, arguing that the tokens they received through proof-of-stake protocols in 2019 were taxpayer-created property, not income, and therefore should only be taxed when sold or exchanged — not when the tokens were received. It is unclear whether the couple has accepted or will accept a settlement at this time. Notably, the IRS has not published any new formal policy statements related to the case, and because settlement offers lack precedential power, a settlement here would not mean that the IRS has officially agreed that staking rewards are not taxable income.
The Monetary Authority of Singapore (MAS), the country’s central bank, has reportedly called for the shutdown of all cryptocurrency ATMs in the city-state. On Monday, MAS issued “Guidelines to Discourage Cryptocurrency Trading by [the] General Public,” which cautioned that certain crypto service providers were unlawfully promoting their services through the provision of physical crypto ATMs in public areas. “To comply with the sudden announcement, we have ceased to offer buy or sell services via our five ATMs while seeking further clarification from the MAS,” said Daenerys & Co, the biggest Singaporean crypto ATM operator. Another operator, Deodi Pte., announced it had also shut down its sole ATM in compliance with the MAS guidelines.
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Reports Address NFT Platform Exploits, Wash Trading and Money Laundering
According to recent reports, a leading NFT marketplace has provided reimbursements to users who inadvertently sold NFTs at a discount due to a user interface issue. The issue arose when users transferred previously listed NFTs to different wallets without canceling the old listings, which allowed others to exploit the “inactive listings” to purchase the NFTs from the unaware sellers at the prior, less expensive price and then offer and sell them for a significant profit, according to reports. The platform is reportedly taking steps to address the issue.
Another report this week reveals that a new NFT marketplace that began operations in early January is also experiencing effects from users seeking to exploit its platform, in this instance through wash trading. The report notes that the volume of wash trading on the platform, which creates an artificially high market volume and manipulated asset price for an asset, has resulted in apparent trades three to four times higher compared to trade prices in one of the leading NFT marketplaces, despite the fact that daily users and daily transactions on the site are only a fraction of competitors’. The wash traders appear to be seeking to benefit through trading rewards, earning a portion of the platform fees, and staking and liquidity provider rewards, according to the report.
In related news, blockchain data platform Chainalysis posted a blog this week noting its observations on two types of illicit NFT activity: wash trading and money laundering. The blog provides insight into the mechanics of NFT wash trading, as well as the winners and losers in the wash trading process. The blog also highlights the existence of increasing NFT-related money laundering activity, which, though limited at the moment, experienced a substantial jump in the third quarter of 2021 and additional increased activity in the fourth quarter. The blog suggests that these issues warrant closer monitoring by the marketplace, regulators and law enforcement.
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Hacks, Attacks and Scams: Blockchains and DeFi Protocols Exploited
Earlier this week, hackers reportedly exploited a vulnerability on one side of a cryptocurrency token bridge that allowed them to steal $321 million in Wrapped Ether (wETH) tokens. According to reports, the parent company of the bridge’s development firm responded to the hack by depositing 120,000 Ether (ETH) into the Solana-Ethereum bridge that had suffered the exploit. The bridge development firm has reportedly offered the hacker a $10 million reward for return of the stolen tokens.
Last week, a decentralized finance (DeFi) protocol, which operates on the Binance Smart Chain, reportedly experienced a similar type of exploit with its internal crypto bridge. According to reports, attackers hacked a smart contract and tricked it into thinking funds had been deposited as collateral, which then allowed the thieves to “borrow” $80 million in Binance Coin.
In related news, as interest in the cryptocurrency market and NFTs continues to rise, grifters have reportedly been leveraging consumer FOMO to swindle unsuspecting buyers out of millions of dollars — approximately $14 billion in 2021. According to reports, one of the latest fraudulent operations (mis)uses a well-known tech company’s moniker to suggest the entity will be imminently releasing a new token. Scammers then engineer a targeted social media campaign that tricks individuals into transferring real crypto in exchange for a fake token.
Lastly, according to reports, this week Bitcoin funds from a 2016 cryptocurrency exchange hack were observed moving on the Bitcoin blockchain. Crypto watchdogs reported spotting the movement of 94,643 Bitcoin (worth approximately $3.6 billion) from the hackers’ account to other wallets. According to reports, most of the stolen assets have been blacklisted, which makes liquidating them on a centralized exchange virtually impossible. However, the hackers have reportedly been moving the currency between asset addresses and slowly laundering the funds over the past five years in small amounts.
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