Crypto Research Published; USPTO Seeks NFT Input; SEC and FINRA Address Digital Assets; OFAC Settles with Exchange; DOJ Enforcement Continues – JD Supra

New Research and Surveys Address CBDCs, Institutional Crypto Investment
By Robert A. Musiala Jr.
Staff from the board of governors of the U.S. central bank recently published a research paper addressing central bank digital currencies (CBDCs). According to a press release, the paper “provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States.” Among other things, the paper discusses the potential for a CBDC to “improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy.” The paper also addresses “noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability.”
The Bank for International Settlements (BIS) recently published two sets of materials addressing CBDCs. The first is an announcement of the launch of Project Tourbillon, a new project by the BIS Innovation Hub’s Swiss Centre that aims to explore “how to improve cyber resiliency, scalability and privacy in a prototype Central Bank Digital Currency (CBDC).” The second is a paper addressing CBDCs in Africa that is based on a survey to central banks and that “analyses the development, motivations and concerns of … [CBDCs] in Africa relative to other emerging and developing regions.”
A major U.S. cryptocurrency exchange recently published its 2022 Institutional Investor Digital Assets Outlook Survey. The survey sought “to understand how decision makers at US institutions view digital assets,” and “[a] total of 140 institutional investors in the US participated in the survey, representing assets under management of about $2.6 trillion.” Among other things, the survey results indicate that (1) institutional investors increased their allocations during the crypto winter; (2) investors’ top motivation for investing in crypto is differentiated performance, including innovative technology; (3) digital assets were seen as offering one of the most attractive opportunities to generate alpha; (4) regulatory compliance is a top criteria for selecting a crypto partner; and (5) regulatory clarity is an important catalyst for future growth.
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NFTs: Government Agencies Seek Comments on NFT IP; New Marketplaces Open
By Lauren Bass
In connection with a joint study on intellectual property (IP) issues and non-fungible tokens (NFTs), the United States Patent and Trademark Office (USPTO) and the United States Copyright Office (USCO) published a notice in the Federal Register last week seeking public comments on 13 separate questions – each related to a different aspect of IP use in NFTs. The comment period closes on Jan. 9, 2023. Additionally, in mid-January 2023, the USPTO and USCO will hold three public roundtables focused on IP issues in the NFT space. Registration for these events closes on Dec. 21, 2022.
In related news, an American toy manufacturing and entertainment company reportedly launched its own NFT marketplace. According to reports, the marketplace, built on the Flow blockchain, will allow users to purchase NFTs without the use of cryptocurrency and will support peer-to-peer trading. The first series of digital collectibles – based on one of the company’s most recognizable properties – is reportedly set to drop in mid-December.
In other marketplace news, OpenSea reportedly released an “on-chain enforcement tool” to help NFT creators enforce royalty payments on the secondary sales of their work. According to reports, the tool would allow NFT artists to “specify which addresses can make token transfers on their behalf.” This would effectively allow artists to halt resale of their work on sites that refused to honor royalty fees.
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Crypto DEX and Wallet Providers Reveal User Data Collection Practices
By Sydney Park
According to reports, in a recently released privacy policy, Uniswap Labs revealed that it collects on-chain data from its users for the purpose of making improvements to its products. The company stated that this data includes “public on-chain data and limited off-chain data like device type, browser version, etc.” but does not include personal data like names, street addresses, email addresses or IP addresses. In a blog post, Uniswap stated that it “does not share [] data with any third parties for marketing purposes” but uses data “to make data-driven decisions that improve user experiences.”
Three days after Uniswap revealed its data collection policies, the developer of the MetaMask Ethereum wallet reportedly updated its privacy policy to begin tracking users’ IP addresses and other data when they send a transaction. According to the updated privacy policy, the update applies to users who use Infura, an affiliate of ConsenSys, that functions as the default Remote Procedure Call (RPC) provider in all Metamask wallets. The privacy policy states that “when you use Infura as your default RPC provider in MetaMask, Infura will collect your IP address and your Ethereum wallet address when you send a transaction.” According to reports, social media users reacted with displeasure at the privacy policy update, stating generally that the update “invade[s] a user’s privacy – one of the core ethos of the crypto space.”
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SEC Commissioner Addresses Digital Assets and Investor Protection Concerns
By Teresa Goody Guillén
U.S. Securities and Exchange Commission (SEC) Commissioner Jaime Lizárraga recently delivered a speech focused on “putting investors first” with regard to digital assets. He cited recent surveys for the propositions that low-income communities underserved in the traditional financial markets are increasingly investing in digital assets and that a “greater share of unbanked and underbanked individuals may own digital assets than those who are fully banked.” He raised concerns of increased fraud in the digital asset market and the concentration of wealth such that “whales” who hold large positions can exert pressure and impact the market. He expressed his views that the ecosystem is predominantly centralized despite the “narrative” of decentralization; platforms that offer numerous services such as trading, custody, maintaining order books, market-making, and borrowing and lending may have conflicts of interest and may commingle customer assets with those of the platform, which poses risks to customers; the market lacks transparency and uniformity of disclosures; and digital assets are volatile and risky.
The Commissioner stated that “not every issued digital token necessarily represents a securities offering, and not every digital asset intermediary is necessarily operating as an unregistered market participant,” but he noted his agreement with Chair Gary Gensler that most digital assets are likely securities. He rebutted that the SEC is engaged in regulation by enforcement and cited well-established laws and guidance comprised of the distributed autonomous organization report, the SEC Staff Framework for an Investment Contract, multiple no-action letters, and decades of legal precedent on investment contracts and notes.
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SEC Institutes Proceedings Against DAO; FINRA Examines Crypto Advertising
By Teresa Goody Guillén
The SEC recently instituted administrative proceedings against a Wyoming-based distributed autonomous organization (DAO) seeking to stop the registration of crypto asset offerings. The Order alleges that the Form S-1 registration statement failed to include required information and contained materially misleading statements and omissions in violation of the federal securities laws, including inconsistent statements as to the status of the tokens as securities. The Order further alleges that the company failed to cooperate with the SEC’s examination of the registration statement.
This month, the Financial Industry Regulatory Authority (FINRA) announced that it is conducting a “targeted exam of firm practices regarding retail communications concerning [c]rypto [a]sset products and services.” This sweep is reportedly examining approximately 20 brokerage firms regarding potential advertising of crypto to retail investors without properly communicating the risks associated with the assets. Specifically, the request is for the period July 1, 2022, through Sept. 30, 2022, and seeks, among other things, retail communications, whether the communications were filed with FINRA, whether a registered principal of the firm approved the communications, the firm’s written supervisory procedures related to the approval and dissemination of the communications, and compliance materials relevant to the communications.
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New York State and Canadian Province Set Limits on Crypto Mining
By Joanna F. Wasick
Last week, New York Gov. Kathy Hochul signed a two-year moratorium on new and renewed permits for proof-of-work cryptocurrency mining operators that rely on carbon-based fuel to power their activities. The legislation makes New York the first state to enact a temporary ban on new fossil fuel-powered cryptocurrency mining operations. Issuance of permits for electric energy facilities that use alternatives to carbon-based fuel, such as hydropower, are still allowed. “I will ensure that New York continues to be the center of financial innovation, while also taking important steps to prioritize the protection of our environment,” Gov. Hochul said in a message after signing the legislation into law on Nov. 22.
In similar news, Canada’s Manitoba province recently set an 18-month moratorium on new crypto mining operations, citing the possibility of the local grid being overwhelmed by new projects, according to local media reports. The government will stop new crypto mining operations from connecting to the grid during this time; the existing 37 mining facilities will not be affected.
For more information, please refer to the following links:
OFAC Settles with US Crypto Exchange Related to Alleged Sanctions Violations
By Amos Kim
This week the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it had reached a settlement with Kraken, a U.S.-based cryptocurrency exchange. The settlement is related to apparent violations of the Iranian Transactions and Sanctions Regulations. The settlement includes an agreement by Kraken “to invest an additional $100,000 in certain sanctions compliance controls.” According to an OFAC enforcement release, the apparent violations were “due to Kraken’s failure to timely implement appropriate geolocation tools,” which permitted “users who appeared to be in Iran [to engage] in virtual currency transactions on Kraken’s platform.” OFAC’s enforcement release provides further details on the apparent violations and OFAC’s considerations and analysis.
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Multiple DOJ Enforcement Actions Target Crypto Fraud and Money Laundering
By Christopher Lamb
According to a recent press release from the U.S. Department of Justice (DOJ), two Estonian citizens were arrested in Tallinn, Estonia, for their alleged involvement in a $575 million cryptocurrency fraud and money laundering scheme. The defendants allegedly defrauded hundreds of thousands of victims through a multifaceted scheme involving a fraudulent cryptocurrency mining operation and cryptocurrency bank.
According to another recent DOJ press release, an Ohio man was arrested on criminal charges related to his alleged involvement in a cryptocurrency fraud scheme that raised at least $10 million from investors. The Ohio man allegedly misled investors by fraudulently promoting himself as a cryptocurrency trader with a specialty in derivatives and promised to make lucrative returns.
A recent press release by the U.S. Attorney’s Office for the Eastern District of Texas reported that 21 individuals have been charged for their roles in transnational cryptocurrency money laundering networks, including laundering millions of dollars stolen from U.S. fraud victims through various scams. According to the press release, the cases stemmed from a multiyear operation initiated by the U.S. Attorney’s Office for the Eastern District of Texas called “Operation Crypto Runner” that has to date disrupted over $300 million in annual money laundering transactions.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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