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• <a href="#New">New NFT Initiatives Announced in Jewelry, Automobile and Liquor Industries</a> • <a href="#US">US Banking Agencies Publish Notices on Crypto Firms and Deposit Insurance</a> • <a href="#Multiple">Multiple Agencies Target Cryptocurrency Fraud and Regulatory Violations</a> • <a href="#Nomad">Nomad Bridge Hacked, Stolen Crypto Valued at Approximately $200 Million</a> • <a href="#Hacks">Multiple Hacks Reported Across Various Sectors of the Cryptocurrency Market</a>

New NFT Initiatives Announced in Jewelry, Automobile and Liquor Industries

By <a href="https://www.bakerlaw.com/LaurenBass">Lauren Bass</a>

A U.S. luxury jeweler has reportedly partnered with the popular NFT (non-fungible tokens) collection CryptoPunk to transform the digital collectibles into wearable works of art. According to reports, for 30 ETH (approximately $50,000), current CryptoPunk holders can purchase a unique “one-of-a-kind jewelry experience” NFT, which will allow their CryptoPunk digital avatar to be reimagined as a customized diamond-encrusted pendant necklace. Only 250 “experiences” will be available. Within 24 hours of the announcement of this exclusive collaboration, CryptoPunk sales reportedly increased 248 percent.

Following the debut of its premiere collection earlier this year, a South Korean motor company has reportedly launched a second NFT collection – a membership program for NFT holders that will provide access to exclusive “phygital (physical + digital) experiences that merge the real and the digital world.” According to reports, these experiences include access to digital metaverses, digital content giveaways and special physical consumptive items.

In similar news, a French cognac distillery has reportedly partnered with R&amp;B superstar Usher to launch a hybrid NFT collection that uses artificial intelligence technology to transform the artist’s lyrics into digital works of art. Offered exclusively on BlockBar.com, each NFT will be priced at $500 (fiat or ETH). According to reports, NFT holders will be given the option to (i) keep the NFT; (ii) resell it; or (iii) redeem the NFT for a limited-edition cognac bottle.

With more brands offering NFTs, researchers have been tracking how and on what collections consumers spend their money. According to a recent report, in the first half of 2022, users spent approximately $2.7 billion minting NFTs, with a majority of the activity occurring on OpenSea and more than 1 million unique wallet addresses participating. This research suggests that the NFT market remains strong.

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US Banking Agencies Publish Notices on Crypto Firms and Deposit Insurance

By <a href="https://www.bakerlaw.com/RobertAMusiala">Robert A. Musiala Jr.</a>

This week, the U.S. central bank and the federal agency that insures U.S. depository institutions issued a series of notices addressing the applicability of federal deposit insurance to the cryptocurrency industry. The agencies published a joint letter demanding that a certain “crypto brokerage firm … cease and desist from making false and misleading statements regarding its … deposit insurance status and take immediate action to correct any such prior statements.” According to a press release, the “crypto brokerage firm” made false and misleading statements suggesting that it was insured by federal deposit insurance and that customers of the crypto brokerage firm were insured against the firm’s failure.

In another press release, the same two federal agencies issued an advisory – “Advisory to … insured institutions Regarding Deposit Insurance and Dealings with Crypto Companies” – and published a related fact sheet. According to the press release, the federal deposit insurer “does not insure assets issued by non-bank entities, such as crypto companies.” The press release notes that the advisory “reminds insured banks that they need to be aware of how [federal deposit] insurance operates and need to assess, manage, and control risks arising from third-party relationships, including those with crypto companies.” The press release also advises U.S. banks that “[i]n dealings with crypto companies … banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance.” The advisory provides a list of risk management and governance considerations that banks should adhere to in their dealings with crypto companies. The advisory also makes clear that federal deposit insurance “does not protect a non-bank’s customers against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, or other entities that appear to mimic banks but are not.” The advisory and fact sheet also provide lists of additional resources for banks and crypto industry firms to consult on the topic of federal deposit insurance.

Multiple Agencies Target Cryptocurrency Fraud and Regulatory Violations

By <a href="https://www.bakerlaw.com/JoannaFWasick">Joanna F. Wasick</a>

Early this week, the Securities and Exchange Commission (SEC) announced that it charged 11 individuals for their roles in creating and promoting Forsage, a purported fraudulent crypto pyramid and Ponzi scheme, which raised more than $300 million from millions of retail investors worldwide, including in the United States. Those charged include Forage’s four founders (last known to be living in Russia, the Republic of Georgia and Indonesia) as well as three U.S.-based promoters engaged by the founders to endorse Forsage, and several members of “Crypto Crusaders,” a promotional group. “As the complaint alleges, Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors,” said Carolyn Welshhans, acting chief of the SEC’s Crypto Assets and Cyber Unit. “Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains,” said Welshhans.

The U.S. Department of Justice (DOJ) also made an announcement this week, stating that two Californians were sentenced to more than a year in federal prison for conning more than 2,000 investors into purchasing DROPS, a cryptocurrency that purportedly provided exclusive access to a profitable trading program. According to a DOJ press release, most of the $1.9 million raised was used for the defendants’ personal gain. In sentencing memoranda, prosecutors argued that the defendants “caused significant financial harm to an extremely large number of victims and entailed efforts to derail law enforcement’s attempts to root out and address wrongdoing.”

On Monday, the New York State Department of Financial Services (DFS) issued a consent order imposing a $30 million fine on a major U.S. cryptocurrency exchange and trading platform for allegedly failing to comply with New York anti-money laundering and cybersecurity laws and regulations. The case marks the DFS’s first enforcement action in the cryptocurrency sector. On the same day, the New York attorney general issued an investor alert urging any New Yorker deceived or affected by the cryptocurrency crash to contact the Office of the Attorney General (OAG). The alert warns that many high-profile cryptocurrency businesses have frozen customer withdrawals, announced mass layoffs or filed for bankruptcy, while investors have been left in financial ruin. The alert also encourages workers in the cryptocurrency industry who may have witnessed misconduct or fraud to file a whistleblower complaint with the OAG.

Nomad Bridge Hacked, Stolen Crypto Valued at Approximately $200 Million

By <a href="https://www.bakerlaw.com/JordanRSilversmith">Jordan R. Silversmith</a>

According to reports, on Monday, cryptocurrency valued at nearly $200 million was drained from Nomad Bridge, a major cross-chain token bridge. The attackers reportedly drained the protocol of most of its funds, drawing more scrutiny on the security of cross-chain bridges, which allow users to send and receive tokens between different blockchains. White-hat hackers and others reportedly returned $9 million of the lost funds to the bridge, mostly in the form of stablecoins, but most of the funds remain missing. Bridges usually work by locking tokens in a smart contract on one chain and then reissuing those tokens in wrapped form on another chain. But if the smart contract where tokens are deposited gets sabotaged – as happened in this attack – the wrapped tokens will no longer have backing, which can make them worthless. In a recent report, blockchain analytics firm Chainalysis estimated that around $2 billion in cryptocurrency has been stolen from cross-chain bridges in 13 separate hacks so far this year, with attacks on cross-chain bridges accounting for 69 percent of funds stolen this year.

Multiple Hacks Reported Across Various Sectors of the Cryptocurrency Market

Multiple hacks were reported in the crypto market this week. According to reports, more than 8,000 Solana Network wallets have been hacked, with approximately $8 million in cryptocurrency value stolen. The hackers reportedly obtained the private keys needed to initiate and approve transactions on behalf of the wallet users, which potentially indicates that a third-party service holding the private keys for multiple wallets may have been compromised. According to reports, Slope wallets and Slope-tied Phantom wallets may have been the target of the hackers.

In a separate incident, the ZB cryptocurrency exchange was reportedly hacked this week, with the hackers stealing approximately $5 million in crypto. According to reports, the stolen crypto was later sold on decentralized exchanges.

And in a third incident, a blockchain security firm reported a new phishing campaign targeting MetaMask wallets, which are among the most popular Ethereum Network wallets. The phishing campaign reportedly uses emails to trick MetaMask users into providing the attackers with their MetaMask wallet passphrase. Among other things, the phishing emails reportedly contain MetaMask logos, use a fake domain (metamaks.auction) and ask users to verify their wallets to comply with know-your-customer regulations.

New York

Partner

Joanna F. Wasick

Associate

Lauren Bass

Chicago

Robert A. Musiala Jr.

New NFT Initiatives Launch Across Industries; Banking Agencies Publish Crypto Guidance; Enforcement Agencies Bring Crypto Actions; Crypto Hacks Reported