New York Attorney General Issues Virtual Markets Integrity Initiative Report
On Sept. 18, 2018, the New York Attorney General’s Office released its Virtual Markets Integrity Initiative Report. The report addressed 10 major virtual currency trading platforms. Key takeaways include the following:
- Many of the trading platforms that participated in the report lack safeguards to effectively prevent conflicts between customer and insider interests. Items of particular concern include employee trading practices and the manner in which platform operators trade on their own venues.
- Only a minority of platforms have formal market manipulation policies and restrict, let alone monitor, automated algorithmic trading. There is no mechanism for analyzing suspicious trading strategies across platforms.
- Consumer funds are at risk because of data security vulnerabilities and an absence of industry standards for insurance and auditing virtual assets.
- The report concludes with a list of questions customers should ask before participating on virtual currency trading platforms.
Three platforms declined to participate in the report, claiming that they did not operate in New York. However, the Attorney General found otherwise and referred those entities to the New York State Department of Financial Services.
For more information on the report, please see the following:
Major Hack of Japanese Exchange, Multiple U.S. Enforcement Actions
On Sept. 20, 2018, various news outlets reported that Zaif, a licensed Japanese cryptocurrency exchange, had been hacked, with cyber-thieves stealing approximately $60 million of bitcoin, bitcoin cash and MonaCoin. This news came amid reports that in the first six months of 2018, hackers stole a total of approximately $540 million worth of cryptocurrency from Japanese exchanges and individual wallets. Additionally, according to a recently issued report by the Cyber Threat Alliance, thus far in 2018 there has been an “enormous increase” in illicit cryptocurrency mining activity, with “a 459 percent increase in illicit cryptocurrency mining malware detections since 2017.” And earlier this week, it was reported that a hacker stole approximately $24,250 by manipulating smart contracts run by a betting company that operated on the EOS blockchain.
In enforcement actions, the U.S. District Court for the Eastern District of California ruled in favor of the government to seize the late operator of AlphaBay’s assets, which included a Lamborghini, bitcoin and several beachfront vacation resorts. Also, the founder of cryptocurrency mining companies GAW Miners and ZenMiner was sentenced to 21 months in prison after pleading guilty to charges of wire fraud brought by the U.S. Attorney for the District of Connecticut. And the Texas Securities Commission entered emergency cease and desist orders against three cryptocurrency schemes. One of the targets was a cryptocurrency investment promotor based in Russia that was targeting Texas residents by masquerading as an established U.S. platform. Another offered investors both shares of the company and units of its token in order to fund what the company claimed to be an unhackable cryptocurrency wallet for anonymous, untraceable transactions. Per the order, such investments are securities regulated by Texas law. The company is based in Belize.
In other recent news, the FinCEN Improvement Act (H.R. 6411) recently passed in the House. The bill proposes new language to FinCEN’s authorizing statute that requires the regulator to work with international financial intelligence bodies and tribal law enforcement groups on cryptocurrency matters. While some see the bill as superfluous, reasoning that there was no question as to FinCEN’s authority, it nevertheless underscores FinCEN’s role in regulating virtual currencies and the importance of enforcement coordination worldwide.
To read more about the topics covered in this week’s post, please see the following:
Blockchain Capital Markets Solutions Advance, Global Regulations Diverge
Global banks and traders recently announced plans to launch the first blockchain-based platform to finance commodity trading. According to reports, a Switzerland-based venture will run the platform and develop it in partnership with a leading blockchain technology company. The platform is set to go live later this year for the energy industry and then expand into agriculture and metals by early next year. Also this week, one of Wall Street’s largest banks announced that it is moving forward with plans to offer a trading desk that will support various derivatives tied to digital assets, while another major Wall Street bank said it is exploring bitcoin derivatives products.
On Sept. 19, 2018, a top 10 national bank joined a blockchain network that offers real-time cross-border payments. The network includes some of the world’s leading financial institutions and now has more than 100 clients across the globe, and is currently operating in 40 countries. And the South Dakota Division of Banking has approved the world’s largest processor of on-chain bitcoin transactions, as a public South Dakota Trust Company − thus allowing the company to offer digital asset custodial services to institutional investors in the United States. The California-based company processes 15 percent of all global bitcoin transactions and processes $15 billion per month across all digital assets. As a qualified custodian, the company can deliver the highest levels of security and regulatory compliance for institutional investors.
On the regulatory front, the chief accountant for the U.S. Securities and Exchange Commission made a statement earlier this week that the emergence of blockchain technology does not erase the fundamental responsibility of firms to maintain appropriate books and records. Overseas, the U.K.’s Treasury Committee published a substantive report promoting thoughtful regulation of the blockchain industry to improve consumer outcomes, promote sustainable growth and position the U.K. to become the global center for digital asset activity. On the other hand, a recent EU report found no rush to regulate the market, citing concerns related to stifling innovation, with one policymaker commenting that the EU may decide to test different national solutions before implementing a more harmonized approach for the collective EU nations. Coincidentally, earlier this week, France announced that it will now issue licenses to companies that want to raise funds through ICOs in an attempt to attract more digital asset investors into the country.
To read more about the topics covered in this week’s post, see the following:
Blockchain Use Cases for the Environment, Digital Identity and State Initiatives
In collaboration with a “Big Four” accounting firm and Stanford Woods Institute for the Environment, the World Economic Forum (WEF) recently issued a press release reporting on 65 blockchain use cases for solving the world’s “most pressing” environmental challenges. The nonprofit organization, built on shaping policy for the public good, stated its belief that blockchain will advance environmental protection efforts by offering new financing models for environmental outcomes, realizing nonfinancial assets (such as natural capital), and enabling clean, decentralized and efficient systems. The WEF identified eight categories of blockchain use cases that it deems “game changers” for environmental protection, among them a “see-through” supply chain that promotes transparency and traceability.
Several new pilots also took flight this week focusing on digital identity. Blokusign has developed an app for Gmail that allows users to easily maintain, manage and authenticate documents digitally signed by them without any reliance on third parties. Gemalto, a digital security leader, has partnered with R3, using its Corda platform, to create a blockchain-powered mobile app to protect digital identifiers. Users download the app, control personal data shared therein and then manage information shared with service providers via a consent function.
Poland’s largest bank has also adopted a blockchain-backed system for managing bank records for nearly 5 million of its account holders. In this new initiative, bank documents will utilize a 64-character hash code to permit users to easily verify the documents’ authenticity and to create a decentralized log of activity − even after accounts are closed. And in Austin, Texas, the city and local medical service providers have teamed up to create a blockchain-powered ID system to track services provided to those without conventional forms of identification, such as homeless persons. The pilot links digital copies of records to cellphone numbers and email addresses, which permits a traceable record for those served in the community that could not be established through the paper ID that many lack.
In other developments, South Korea recently announced a blockchain initiative for its customs authority, built on Nexledger. A memorandum of understanding that details the new customs platform includes the signatures of 48 domestic entities and public agencies that look to blockchain technology to curtail forgery and increase export efficiency. Meanwhile, across the Pacific, Oregon Blockchain Venture Studio has launched a campaign to make Oregon the center of the blockchain universe. The incubator-like program, with the backing of at least two U.S.-based multinational corporations and support from the state of Oregon, hopes to accomplish this goal by offering investment capital to promising blockchain startups if they agree to set up shop in the Beaver State.