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Crypto Market Data Published; Digital Assets RFI Issued; BIS Addresses DeFi; NY DFS Issues Crypto Guidance; SEC Brings Crypto Actions; FBI Addresses Hacks

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In this issue:

Reports Address Crypto Ownership, Stablecoins and Dapp Adoption

By Amos Kim

Recent reports provide new data on various areas of the digital asset market. In one report, a survey published by a cryptocurrency trading platform found “a significant rise in crypto ownership among young women.” Among other things, the survey found that cryptocurrency ownership “increased from 29% in the third quarter of 2022 to 34% for women aged 18-34 in the last quarter.” More generally, the survey found “investors owning crypto rose from 36% to 39% on a quarter-on-quarter basis.” The survey also found that “when asked what impact the bear market has had on their mindset, two- thirds [of respondents] (67%) are either positive or ambivalent, while the remainder (33%) say their investing appetite has been dented to some extent.”

In another recent report, a global cryptocurrency market data provider addressed the crash of Terra USD (UST) and the resulting drop in market share of algorithmic stablecoins. According to the report, “[The market capitalisation of algorithmic stablecoin is currently at $2.33bn, recording a market share of 1.71% from an all-time high of 12.4% in April 2022 with TerraUSD accounting for 79.8% of the market share.” Among other things, the report found that currently, “Tether, USD Coin, and Binance USD remain the leaders in the stablecoin market, with USDT accounting for 48.7% of the market share[.]”

A third report by DappRadar addressed “Dapp Adoption” in 2022. Among other things, the report provided the following key takeaways: (1) BNB Chain led all blockchains for dapps integrated into DappRadar in 2022 with 2,163, decreasing by 7 percent from the previous year, and Polygon and Ethereum followed; (2) a new trend in developer activity might be emerging as modular blockchains, including Polkadot and Cosmos, saw their developer activity grow by 16 percent and 131.7 percent, respectively, year-over-year; (3) Ethereum surpassed 21.2 million NFT sales in 2022, processing the most trades across all networks, while Wax and Flow followed with 14.5 and 11.9 million sales, respectively; (4) Ethereum stands out as the network with the highest intrinsic NFT value, surpassing $300 per NFT transaction, while Polygon and Solana come next with average NFT transactions of $104 and $88; and (5) Optimism and Arbitrum processed 18 million and 6 million transactions, respectively, while IMX surpassed 9.7 million NFT trades.

For more information, please refer to the following links:

RFI Seeks Comment on Digital Assets Research and Development Agenda

By Veronica Reynolds

This week, in a furtherance of President Joe Biden’s National Digital Assets Research and Development Agenda (Agenda), the White House Office of Science and Technology Policy issued a request for information (RFI) seeking “public comments to help identify priorities for research and development related to digital assets, including various underlying technologies such as blockchain, distributed ledgers, decentralized finance, smart contracts, and related issues such as cybersecurity and privacy (e.g., cryptographic foundations and quantum resistance), programmability, and sustainability.” The Agenda is considered one of the results of the President’s March 2022 Executive Order on Ensuring Responsible Development of Digital Assets, and its goal is to prioritize research that explores both the risks and benefits associated with the burgeoning asset class.

The RFI seeks information “on specific R&D opportunities related to the following topics”: (1) goals, sectors or applications that could be improved with digital assets and related technologies; (2) goals, sectors or applications where digital assets introduce risks or harms; (3) federal research opportunities that could be introduced or modified to support efforts to mitigate risks from digital assets; (4) R&D that should be prioritized for digital assets; (5) opportunities to advance responsible innovation in the broader digital assets ecosystem; and (6) other information that should inform the R&D Agenda. Comments are due on or before 5 p.m. ET on March 3.

For more information, please refer to the following links:

Bank for International Settlements Releases Paper on DeFi Technology

By Lauren Bass

This week, the Bank for International Settlements (BIS) released a working paper titled The Technology of Decentralized Finance, which, according to a press release, aims to “provide a comprehensive overview and classification” of decentralized finance (DeFi). The paper dissects the technology upon which the DeFi system is built, explains the architectural structure of the DeFi system, and explores the functionalities of its various protocols, including the deployment of smart contracts to offer services such as trading, lending, investing and exchanging of crypto assets. The paper further discusses the applicability of DeFi within the traditional financial industry and potential sources of systemic risk, and proposes an agenda for additional research on the topic.

For more information, please refer to the following links:

NY DFS Issues Crypto Custody Guidance; Digital Assets on CFTC Meeting Agenda

By Christopher Lamb

This week, the New York Department of Financial Services (NY DFS) issued an industry letter titled Guidance on Custodial Structures for Consumer Protection in the Event of Insolvency (Guidance). The purpose of the Guidance is to “emphasize sound custody and disclosure practices to better protect customers in the event of an insolvency or similar proceeding.” The Guidance notes that as “stewards of others’ assets, virtual currency entities (‘VCEs’) that act as custodians (‘VCE Custodians’) play an important role in the financial system” and a robust framework that protects consumers is necessary. The Guidance focuses on four important consumer protection goals, including (1) segregation of and separate accounting for customer virtual currency, (2) VCE Custodians’ limited interest in and use of customer virtual currency; (3) sub-custody agreements, and (4) customer disclosure.

In a recent press release, the Commodity Futures Trading Commission (CFTC) announced that the Global Markets Advisory Committee (GMAC) will hold a public meeting on Feb. 13 from 9:30 a.m. to 3 p.m. at the CFTC’s Washington, D.C., headquarters to discuss GMAC’s structure, formation of subcommittees, and topics related to global market structure and digital asset markets. According to a blog post by the Stellar Foundation, with the inclusion of digital asset markets in GMAC’s discussion, the Stellar Development Foundation will be included as one of the only “crypto-focused organizations – and the only one representing blockchain.” The meeting is open to the public with first-come first-served seating and will be broadcast for remote viewing. Members of the public can submit written statements in connection with the meeting by Feb. 20. Comments can be submitted at cftc.gov.

For more information, please refer to the following links:

SEC Commissioner Offers “Lessons” and “Guiding Principles” for Digital Assets

By Robert A. Musiala Jr.

On Jan. 20, U.S. Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce delivered a speech addressing digital assets. In her speech, Commissioner Peirce offered the following six “lessons for the industry”: (1) “[P]eople who believe in crypto’s future … should not wait for regulators” to fix the industry’s problems and “can act themselves to root out harmful practices”; (2) “[D]igital assets need to trade … but trading markets are not the ultimate point” and “at its core, crypto is about solving a trust problem”; (3) “[E]ach crypto asset, blockchain, and project needs to be assessed on its own merits; (4) “[P]roblems in the design of a protocol or at a centralized infrastructure provider can have sweeping, disastrous consequences”; (5) “[A]lthough crypto enables reduced reliance on centralized intermediaries, as long as companies are actively involved in crypto, people should take the same precautions as they would when dealing with any other company”; and (6) “[M]any other lessons from traditional finance are equally applicable in crypto,” including risks related to risk/return correlation, counterparty exposure, collateral, leverage, conflicts of interest, buying motives, trade controls and market concentration.

Among other things, Commissioner Peirce noted that “the SEC should conduct some form of notice and comment process to resolve the thorniest crypto-related policy issues.” According to Commissioner Peirce, “[d]isclosure under current regulations … is not well-suited to elicit the most useful and appropriate information for token purchasers” and “a more tailored crypto disclosure regime would be good for investors and crypto companies.” Commissioner Peirce added that “decisions about allocating regulatory authority belong to Congress, but regulators can lay the groundwork for Congress to craft a workable approach.” According to Commissioner Peirce, “[t]he ideal framework would reduce regulatory anxiety for would-be innovators and increase the difficulty for would-be fraudsters.”

Commissioner Peirce offered the following five “guiding principles” for developing a digital assets framework: (1) “[T]ake a nuanced approach that recognizes differences across blockchains, distinctions between Layer 1 blockchains and the chains and applications built on top of them, and differences among crypto assets”; (2) “[B]e extremely careful when deciding what areas of crypto to regulate on a federal level”; (3) “[B]e clear that government regulation is not the same as government endorsement”; (4) “[S]caring traditional entities away from crypto is neither realistic nor protective of investors”; and (5) “[E]ven though driving regulated entities away from crypto is not wise, preserving the core of crypto—decentralization—is so important” and “[d]ecentralization can help support the resilience of the financial system.”

For more information, please refer to the following links:

SEC Brings Charges For Crypto Market Manipulation and Unregistered Securities

By Teresa Goody Guillén

The U.S. Securities and Exchange Commission (SEC) recently charged Avraham Eisenberg with securities fraud and market manipulation for an alleged scheme of manipulating the price of MNGO tokens. According to an SEC press release, Eisenberg sold futures of MNGO tokens and used a separate account to buy those same futures, thereby artificially increasing the price. He then used this position of increased value of his MNGO futures to borrow and withdraw approximately $116 million worth of crypto assets from the Mango Markets crypto asset trading platform. Eisenberg is also facing parallel criminal and civil charges brought by the U.S. Department of Justice and the Commodity Futures Trading Commission.

The SEC also recently charged Nexo Capital Inc. for failing to register the offer and sale of its retail crypto asset lending product, the Earn Interest Product (EIP), which the SEC alleges is a security. According to the SEC’s order, Nexo offered EIP, which allowed investors to tender their crypto assets to Nexo in exchange for Nexo’s agreement to pay interest. The order further alleges that Nexo exercised its discretion to use investors’ crypto assets in a variety of ways to generate income for its business and to pay interest to investors. Nexo settled the SEC’s charges without admitting or denying wrongdoing and agreed to pay a $22.5 million penalty and not conduct any unregistered offer and sale of EIP to U.S. investors. Nexo also reportedly agreed to pay an additional $22.5 million in fines to settle similar charges by state regulators.

For more information, please refer to the following links:

FBI Provides Details on Harmony Bridge Hack; Bitzlato Management Arrested

By Joanna F. Wasick

On Monday, the U.S. Federal Bureau of Investigation (FBI) issued a statement confirming that the Lazarus Group, cyber criminals associated with North Korea (officially, the Democratic People’s Republic of Korea (DPRK)), was responsible for the June 2022 attack on Harmony’s Horizon Bridge, a service enabling crypto assets to be traded between the Harmony blockchain and other blockchains, which was drained of $100 million in ether (ETH), tether (USDT) and wrapped bitcoin. The FBI statement noted that the hackers relied on a malware campaign known as “TraderTraitor” in the attack. The statement further details that two weeks ago, Railgun, a privacy protocol, was used to launder more than $60 million in ETH stolen during last year’s theft. A portion of it was sent to other service providers and converted to bitcoin. Some of the funds were frozen, and others were moved to addresses identified in the FBI’s statement. The FBI also stated that it will “continue to identify and disrupt North Korea’s theft and laundering of virtual currency, which is used to support North Korea’s ballistic missile and Weapons of Mass Destruction programs.”

This week, the European Union Agency for Law Enforcement Cooperation (Europol) announced that European law enforcement authorities had detained four senior managers of Bitzlato, the Hong Kong-registered crypto exchange that U.S. authorities recently identified as a “primary money laundering concern” in connection with Russian illicit finance. U.S. authorities had also announced the arrest in Miami of Bitzlato’s co-founder and majority owner, Anatoly Legkodymov, a Russian national residing in China, believed to be Bitzlato’s main administrator. According to the Europol announcement, those involved in the European arrests include Bitzlato’s CEO, financial director and marketing director, who were arrested in Spain, and another individual who was arrested in Cyprus. 

For more information, please refer to the following links:

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