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Blockchain Developments: Crypto Custody and Payments, Supply Chain Pilots, Regulation and Enforcement | BakerHostetler

Cryptocurrency Custody, Payments and Mining Initiatives Announced

By: Diana J. Stern

According to recent reports, the digital asset arm of a multinational financial services corporation was issued a trust company charter by the New York Department of Financial Services. As a designated New York Trust Company, the firm can now custody bitcoin for institutional investors in the United States.

Another recent report explained that holders of a major U.S. cryptocurrency exchange debit card can now use their BAT, REP, ZRX, XLM, and XRP to make purchases, and the exchange will instantly convert the tokens to fiat currency to pay out merchants. This development more than doubles the number of cryptocurrencies cardholders can spend.

This week, cryptocurrency exchange Binance made a play to enter the Indian market with its acquisition of WazirX, a local peer-to-peer exchange, for an undisclosed amount. According to reports, in April 2018, India’s central bank banned banking services for cryptocurrency companies, which forced many to shut down or to rely heavily on peer-to-peer or crypto-to-crypto trading.

Swiss startup and digital payments processor Utrust announced late last week that it signed up its first merchant in the travel industry. The online travel agency serves more than 650 airlines, and the deal with Utrust will allow its customers to book flights with cryptocurrency.

This month, distributed ledger startup Hashgraph and streaming music service announced a partnership to create a token that is specialized for the music industry. The token, Jam, can be used to make micropayments to artists for every second of music fans stream, reward listeners for trying music they have not heard before and promote artists through verifiable first-time streams.

Rockdale, Texas, is becoming a hotbed for massive cryptocurrency mining operations. When Bitmain announced its mining farm in Rockdale last month, it was the world’s largest at an expected potential capacity of 300 megawatts. But this week, a data center developer owned by Northern Bitcoin broke ground on a project that plans to start with 300 megawatts and scale up to 1 gigawatt by the end of 2020. Both projects are on a more than 33,000-acre plot of land that has been owned by a large American industrial corporation since the 1950s.

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Blockchain Provenance and Authentication Solutions Emerging in Food and Manufacturing Markets

By: Brian P. Bartish

Last week, the world’s largest food and beverage company and a French supermarket chain announced a blockchain pilot aimed at providing transparency to consumers on the supply chain of a leading brand of infant formula. Leveraging the Hyperledger-based Food Trust platform, consumers can scan a QR code with a smartphone to access information on the formula’s path from dairy to shelf. In related news, this week, one of the world’s leading fish farming operations announced a similar solution, also built on the Food Trust Platform, which allows consumers to pull up the CV of salmon, including information regarding the fish’s origin and health history, by scanning a QR code. And last week, an American logistics giant announced the successful delivery of a blockchain-verified beef shipment from Kansas to Tokyo, for a meal that was served to U.S. Embassy and Japanese officials.

The aerospace division of a U.S.-based conglomerate recently partnered with Hyperledger to develop an online marketplace for the highly regulated used airline parts industry that seeks to provide certainty to buyers that critical parts such as engines and landing gears meet FAA requirements. An Italian luxury sports car manufacturer is also turning to a blockchain solution for quickly and securely authenticating sales of its “heritage” vehicles, which require more than 800 certification checks conducted at company headquarters before they can be resold through a network of trusted partners.

In a final notable development, this week, HashCash announced its partnership with a consortium of global automobile manufacturers, a mining company and battery manufacturers to build a blockchain supply chain network to meet demands for authenticating the ethical sourcing of minerals such as cobalt, tungsten and lithium, which are often surrounded by allegations of child labor.

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Recent Global Regulatory Developments in Digital Assets

By: Jonathan D. Blattmachr

There were several interesting developments across the world this week in the digital asset arena. First, the UK Jurisdiction Taskforce (UKJT) published its Legal Statement on the Status of Cryptocurrencies and Smart Contracts. The UKJT hopes this statement will give the market “legal certainty and predictability” in this emerging space. In sum, the UKJT has determined that digital assets are “property” under UK law. It reasoned that such assets have the indicia of property, and simply because they have distinctive or innovative features does not disqualify them from being property. While digital assets cannot be physically possessed, therefore meaning they cannot be used as bailment, they can be used to grant security through other means.

As to smart contracts, the UKJT found they are capable of being a contract in the broader sense. This is because in a smart contract, the parties to it have intended to create a legal relationship and have each given something of value as consideration. Therefore, “a smart contract can be identified, interpreted, and enforced using ordinary and well-established legal principles.”

The Monetary Authority of Singapore (MAS) issued a consultation paper that proposes allowing payment token derivatives to be traded on approved exchanges and to regulate their activity. MAS states there is significant interest in payment tokens such as bitcoin and ether, and the interested institutional investors need a regulated product to be able to hedge their exposure to them. It warned, however, that such tokens are not suitable for most retail investors, who should use “extreme caution” when trading in them or their related derivatives.

Back in the United States, CFTC Chair Heath Tarbert penned an op-ed piece in which he advocated for principles-based regulation in the fintech space. Tarbert stated that the regulators should avoid “detailed prescriptive rules” and focus on “high-level, broadly stated principles” for the industry. The piece points out that the U.S. code covering banking, securities and derivatives regulation totals more than 13,000 pages, which he finds to be inefficient and inflexible. While he acknowledged certain rules must be in place, especially those covering customer protection, he indicated that because of the rapidly evolving nature of the space, a principles-based system is more appropriate.

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U.S. and International Enforcement Agencies Take Action Against Crypto Crimes

By: Joanna F. Wasick

Earlier this week, the U.S. Department of Justice (DOJ) issued a press release about the extradition of a Swedish citizen, Roger Nils-Jonas Karlsson, from Thailand to the United States for alleged securities fraud, wire fraud and money laundering. The complaint alleges that he and his company, Eastern Metal Securities, defrauded victims of more than $11 million through an investment scheme in which Karlsson convinced individuals to invest cryptocurrencies into a product called a “Pre Funded Reversed Pension Plan.” Instead of making any investments, Karlsson directed the funds into his personal bank account, and the funds are apparently now tied up in Thai real estate.

A DOJ press release issued last week detailed the arrest of two men in Massachusetts for crimes including aggravated identity theft and computer fraud. According to the DOJ, the men targeted people who likely had significant amounts of cryptocurrency, such as executives of cryptocurrency companies, and conspired to take over their social media accounts and steal their cryptocurrency using techniques including “SIM swapping,” whereby a victim’s cellphone carrier is convinced to reassign the victim’s cellphone SIM card to the criminal, who then uses it to hack into the victim’s various accounts.

The court-appointed receiver of Einstein Exchange, a Canadian cryptocurrency exchange, recently stated that the exchange has only $45,000 remaining of the reported $16 million in customer funds. The exchange was seized by Canadian officials earlier this month after receiving complaints from Einstein customers that they could not access their accounts.

Karatbars, a German company, was recently ordered by German officials to wind up its blockchain-based business in Germany after allegations it was luring investors into a pyramid scheme. Around the same time, South African officials issued their own warning, telling consumers to avoid investments offered by the company. Karatbars issues KaratGold Coin, a supposedly gold-backed cryptocurrency that runs on the Ethereum network and is listed on approximately 30 exchanges. And reports out earlier this week describe a hack into the Monero website, with currency-stealing malware allegedly delivered to users who were downloading Monero wallet software. Representatives from the company issued a statement strongly recommending anyone who downloaded the wallet during certain times on Monday, Nov. 18, to check whether they might have contaminated files.

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Crypto Tax Update: Foreign Accounts, Like-Kind Exchanges, Software Uptick

By: Nicholas C. Mowbray

An official from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that specializes in cybersecurity policies stated last week at the American Institute of CPAs National Tax Conference in Washington, D.C., that a U.S. holder of cryptocurrency on a foreign exchange is not required to disclose the information on a foreign bank account report. At the same conference, however, officials for the IRS Office of Associate Chief Counsel indicated that the IRS has still not decided whether cryptocurrency held in a foreign exchange must be reported on IRS Form 8938, which is a disclosure statement that is separate and apart from a foreign bank account report. The news is not a surprise to taxpayers given that FinCEN responded to a previous request over the summer that virtual currency held in an offshore account was not a reportable account on a foreign bank account report.

At the same conference, a different official from the IRS Office of the Associate Chief Counsel confirmed that certain like-kind exchange rules that allow taxpayers to postpone paying tax on gain where property is exchanged for like-kind property do not apply to cryptocurrencies. The rules with respect to like-kind exchanges were changed in 2018 as part of tax reform. Accordingly, the comment addresses any like-kind exchanges occurring prior to 2018 and taxpayers who took the position that the exchange of a token for another qualified as a tax-free exchange.

In other news, according to a recent report, startups providing crypto tax software have seen a significant increase in users. The report indicates this may be related to the IRS’s guidance issued this fall addressing airdrops and hard forks, and the IRS enforcement letters that were sent during the summer to thousands of virtual currency traders warning them about the failure to properly report crypto transactions.

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