U.S. Government Seeks to Leverage Blockchain, Issues Reporting Guidance
Government agencies in the U.S. and abroad continue to announce initiatives that explore use cases for blockchain technology. According to a June 15 press release, the U.S. Department of Homeland Security recently awarded a $192,380 contract to Factom, Inc., a blockchain startup based in Austin, Texas. Under the contract, Factom will integrate blockchain technology with existing Internet of Things (IoT) sensor and camera devices to protect the integrity and authenticity of IoT data. Factom will test this capability in the challenging conditions under which U.S. Border Patrol agents operate to prove the potential for application in homeland security use cases. Separately, the U.S. Department of Veterans Affairs (VA) is evaluating the use of blockchain technology to track each step in its contracting process and verify completion. When combined with the VA’s routine and repetitive government contract procedures, blockchain technology has the potential to reduce the time and resources spent during its contract closing process. According to Bloomberg Government, since fiscal 2015, federal agencies have funded $8.4 million in blockchain contracts, more than half of which were awarded after July 2017.
This week also saw the release of new guidance for reporting virtual currency on financial disclosure reports. The U.S. Office of Government Ethics (OGE) released a legal advisory that clarified the government’s stance on virtual currencies − virtual currency qualifies as property under the Ethics in Government Act, and consequently is subject to the public disclosures required by law. The OGE further explained that virtual currency only qualifies as property and does not constitute real currency, but the agency reserved its right to issue further guidance on this issue as virtual currencies and their surrounding applications continue to evolve.
Outside of the United States, Brazil and the South Indian state of Kerala recently announced plans to implement blockchain solutions for their respective government systems. Brazil’s central bank developed a blockchain platform to manage the authorization and discipline of financial institutions regulated by the central bank. The new project in Kerala will integrate blockchain technology with IoT technology to improve the efficacy of the state’s supply network for dairy products, vegetables and fish. This system will reduce food waste and facilitate the state’s crop insurance scheme.
Cyberhacks and Enforcement Actions Continue Relentlessly
On Wednesday, South Korea-based exchange Bithumb, which ranks as the sixth-largest trading venue in the world, lost 35 billion Korean won (approximately $31.6 million) to malicious hackers. CoinDesk Korea reported that Bithumb spends about $9 million annually on security measures. The exchange has promised to cover customers’ losses. In contrast, when Italian cryptocurrency exchange BitGrail suffered a cyberattack resulting in approximately $187 million of stolen assets this February, it did not refund its users. Pursuant to an order by the Tribunal of Florence and pending further court decisions in pre-bankruptcy proceedings, Italian authorities recently seized bitcoin from BitGrail. According to Endpoint security firm Carbon Black, there have been at least $1.1 billion in cryptocurrency-related thefts since December 2017.
Meanwhile, the U.S. Department of Justice recently announced that Gal Vallerius, aka “Oxymonster,” an individual involved in a criminal online marketplace known as Dream Market, pleaded guilty to conspiracy to possess with the intent to distribute controlled substances, and conspiracy to launder money. Dream Market was a dark website that only accepted bitcoin and other cryptocurrencies as payment. According to the complaint filed with the Southern District of Florida last year, Vallerius’ bitcoin “tip jar” tipped off the authorities about his identity. The tip jar was linked to his wallets on localbitcoins.com; it was not configured to go through the tumbler that anonymized Dream Market’s internal payments.
In Japan, prosecutors recently arrested 16 suspects in an ongoing criminal case of cryptojacking. Cryptojacking is an attack in which hackers deploy malicious code onto computers so that they mine cryptocurrency for the hackers’ benefit. The suspects in the Japanese matter were allegedly mining Monero (XMR) on victims’ machines. Ukrainian authorities also made arrests this week, apprehending four suspects for operating up to six fake cryptocurrency exchanges.
On the regulatory front, AML/KYC compliance appears to be gaining renewed attention. New research on U.S. and E.U. wallets and exchanges from P.A.ID Strategies shows that “of 25 prominent custodian wallets and crypto exchanges examined, 68% are allowing users to trade crypto and fiat currency with no formal identification and no Know Your Customer (KYC) checks.” In Asia, Japan’s Financial Service Agency (FSA) is reportedly gearing up to send “business improvement orders” to at least five exchanges, as it did with other exchanges earlier this year. The FSA recently rejected an exchange’s application for a license for the first time, citing concerns related to AML/KYC compliance.
Consumer Products Firms Announce Blockchain Advertising Pilots
Earlier this week, Kiip, a mobile marketing and monetization platform, and AB InBev, the world’s largest brewing company, announced the launch of a blockchain mobile ad campaign that uses Kiip’s new “Single Ledger” blockchain to enable all players in the mobile ad sales chain to view and audit campaign data directly. Data such as impression, engagement, time stamps, and price will be written to the Ethereum blockchain for the brand to download and review. The intended result will be a clearer and simpler reconciliation of campaign performance data, reducing fraudulent reporting by third parties and ad servers, and streamlining the historically arduous reporting and payment process.
Along similar lines, Mediaocean, a New York-based advertising services and software company, and IBM iX, one of the world’s largest digital agencies, recently unveiled a pilot program that uses a custom blockchain built by IBM to record how digital dollars are being spent. The network will first focus on authorizing transactions between marketers and agencies, but will expand to include transactions by publishers and measurement companies. Featured participants in the program include Kellogg, Pfizer, Unilever and Kimberly-Clark.
These pilot programs seek to clarify how blockchain fits into the advertising space. The results of the programs will likely aid in determining whether the impact of blockchain technology on advertising sales is significant enough to compel others to follow suit.
Financial Firms Continue to Pursue Cryptocurrency Initiatives
Last Friday, the U.S. Securities and Exchange Commission (SEC) issued a notice that it was delaying any decision on a rule change submitted by a New York Stock Exchange venue seeking to list its first exchange-traded funds (ETFs) based on the value of bitcoin, claiming it needs more time to review the proposal. This comes on the heels of public comments made by the director of the SEC’s Division of Corporation Finance, William Hinman, which appear to confirm that, as with bitcoin, sales of Ether are not securities transactions.
While the SEC continues to take a cautious approach to cryptocurrencies and ETFs related to cryptocurrencies, the financial industry continues to pursue cryptocurrency initiatives. Cboe Global Markets President Chris Concannon responded to Hinman’s comments by stating, “[The] announcement clears a key stumbling block for Ether futures.” Separately, Metropolitan Commercial Bank (MCB) has publicly applauded cryptocurrency business “pioneers,” and has banking clients including cryptocurrency exchanges, as well as other hedge funds and cryptocurrency investors. MCB has experienced a 300 percent increase in its Q1 2018 non-interest income, in large part due to fees earned from its crypto initiatives.
Goldman Sachs has also announced that it is considering additional cryptocurrency trading beyond assisting clients with bitcoin futures. Industry leaders such as Peter Thiel and Coinbase are also investing in one of several “stabilized cryptocurrencies” or “stable coins” that would function like normal money and be pegged to other assets.
But the enthusiasm for cryptocurrency financial products continues to be met with regulatory criticism, specifically focused on initial coin offerings (ICOs) that pose serious risks for investors. Nasdaq CEO Adena Friedman recently denounced the insufficient public information, as well as a lack of transparency, regulation and accountability in the ICO market. Friedman is reportedly supportive of the SEC’s claims that ICOs are securities offerings.