The Blockchain Monitor

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In this issue: • <a href="#White">White House Addresses Crypto Risks; Blockchain Firm Wins Air Force Contract</a> • <a href="#SEC">SEC Issues Order Disapproving Spot Bitcoin ETF Application</a> • <a href="#OFAC">OFAC Adds Bitcoin and Ethereum Public Keys to OFAC’s SDN List</a> • <a href="#UK">UK and Hong Kong Financial Regulators Address Digital Assets</a> • <a href="#Founder">Founder of Crypto Fraud Sentenced; South Korea Prosecutors Raid Exchange</a>

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White House Addresses Crypto Risks; Blockchain Firm Wins Air Force Contract

By <a href="https://www.bakerlaw.com/KeithRMurphy">Keith R. Murphy</a>

The White House issued a statement last week briefly outlining the Biden administration’s road map to mitigate the risks of cryptocurrencies, which relates to last year’s March 9, 2022 <a href="https://www.bakerlaw.com/Digital-Assets-Executive-Order-Resource-Center">Executive Order on Ensuring Responsible Development of Digital Assets</a>. According to the statement, the Administration is focused on “continuing to ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable.” The statement notes that “experts across the administration have laid out the first-ever framework for developing digital assets in a safe, responsible way while addressing the risks they pose.” The statement also notes examples of risk, including cryptocurrency entities that ignore financial regulations and risk controls, cryptocurrency platforms and promoters that mislead consumers or commit outright fraud, and poor cybersecurity that leads to significant theft of assets.&nbsp;

Among other things, the statement highlights the increase in enforcement by multiple agencies and the issuance of guidance where more is needed, such as advising of the need to separate risky digital assets from the banking system and helping consumers understand the risks of buying cryptocurrencies. The statement notes that the Administration plans to unveil priorities for digital assets research and development, and it further calls on Congress to take affirmative steps to provide assistance with these goals, including the expansion of regulators’ powers to prevent misuse of customers’ assets and the strengthening of transparency and disclosure requirements for cryptocurrency companies to enable investors to make more-informed decisions.

In other news, according to a press release, an enterprise blockchain solutions provider recently won a $30 million contract with the U.S. Air Force (USAF) to provide development and deployment of blockchain solutions in supply chain management. Previously, the company developed blockchain applications to improve crucial activities for the USAF, including tokenization of the organization’s budget to enhance accounting as well as the tracking of critical components to the USAF, as noted in the release.

For more information, please refer to the following links:

<a href="https://www.whitehouse.gov/nec/briefing-room/2023/01/27/the-administrations-roadmap-to-mitigate-cryptocurrencies-risks/">The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks</a>

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<a href="https://www.businesswire.com/news/home/20230131005262/en/SIMBA-Chain-Awarded-30M-U.S.-Air-Force-STRATFI">SIMBA Chain Awarded $30M U.S. Air Force STRATFI</a>

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SEC Issues Order Disapproving Spot Bitcoin ETF Application

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

Late last week, the U.S. Securities and Exchange Commission (SEC) issued “Order Disapproving a Proposed Rule Change to List and Trade Shares of the ARK 21Shares Bitcoin ETF.” The SEC’s order (Order), which is the latest in a series of rejections by the SEC of attempts to obtain approval for a bitcoin exchange-traded fund (Bitcoin ETF), which would seek to allow retail investors to purchase shares in a publicly traded fund that invests in the spot bitcoin market. According to the Order, the Bitcoin ETF applicant “has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’”

The Order cited prior SEC orders rejecting bitcoin exchange-traded products (ETPs) and noted that “an exchange that lists bitcoin-based ETPs can meet its obligations under Exchange Act Section 6(b)(5) by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.” According to the Order, “In this context, the terms ‘significant market’ and ‘market of significant size’ include a market (or group of markets) as to which (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.”

The Order further noted, “A surveillance-sharing agreement entered into with a ‘significant market’ assists in detecting and deterring manipulation of the ETP, because a person attempting to manipulate the ETP is reasonably likely to also engage in trading activity on that ‘significant market.’” The Order went on to further explain these standards and concluded that the current Bitcoin ETF application failed to meet the standards and failed “to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient.”<a href="https://www.bakerlaw.com/VeronicaReynolds"></a>

<a href="https://www.law360.com/fintech/articles/1569847?nl_pk=d839899d-0537-414a-b7cc-d6d00bb8e8ff&amp;utm_source=newsletter&amp;utm_medium=email&amp;utm_campaign=fintech&amp;utm_content=2023-01-27&amp;nlsidx=0&amp;nlaidx=3">SEC Rejects Ark21Shares Bitcoin ETF Over Fraud Concerns</a>

<a href="https://www.sec.gov/rules/sro/cboebzx/2023/34-96751.pdf">SECURITIES AND EXCHANGE COMMISSION (Release No. 34-96751; File No. SR-CboeBZX-2022-031)</a>

OFAC Adds Bitcoin and Ethereum Public Keys to OFAC’s SDN List

By <a href="https://www.bakerlaw.com/ChristopherLamb">Christopher Lamb</a>

According to a press release published this week by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), pursuant to Executive Order (E.O.) 14024, OFAC is “imposing full blocking sanctions against 22 individuals and entities across multiple countries related to a sanctions evasion network supporting Russia’s military-industrial complex.” As part of the action, OFAC added a new Bitcoin public key and a new Ethereum public key to OFAC’s Specially Designated Nationals (SDN) List. The actions are related to OFAC’s commitment to the Russian Elites, Proxies, and Oligarchs (REPO) Task Force, “a multilateral effort to identify, freeze, and seize assets of sanctioned Russians around the world.” OFAC continues to cooperate with the Treasury’s Financial Crimes Enforcement Network (FinCEN) to identify further Russian assets and proxies in an attempt to continue “shutting off opportunities for Russia to evade or circumvent U.S. and partner sanctions.” According to the OFAC press release, the full blocking sanctions were imposed for involvement in a “Russian sanctions evasion network led by Russia- and Cyprus-based arms dealer Igor Vladimirovich Zimenkov.” OFAC’s press release provides further details on the apparent violations by the 22 individuals and OFAC’s considerations and analysis.

<a href="https://home.treasury.gov/news/press-releases/jy1241">Treasury Targets Global Sanctions Evasion Network Supporting Russia’s Military-Industrial Complex</a>

<a href="https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20230201">Russia-related Designations; Counter Narcotics Designation Update</a>

UK and Hong Kong Financial Regulators Address Digital Assets

By <a href="https://www.bakerlaw.com/AmosKim">Amos Kim</a>

This week, the United Kingdom’s HM Treasury published a consultation paper setting out proposals for a new regulatory regime for cryptocurrency assets. This consultation builds on previous HM Treasury proposals, which were focused on stablecoins and the financial promotion of cryptocurrency assets. According to a press release, “The proposals [in the consultation papers] seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks.” The press release further notes that the proposed measures in the consultation “have been informed by recent market events – including the failure of FTX – which reinforce the case for effective regulation and sector engagement.” According to the press release, the objectives of the consultation “include[] a proposal to bring centralized cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending.”

In other foreign regulatory news, the Hong Kong Monetary Authority (HKMA) issued the “Consultation Conclusion” to a previously published discussion paper on cryptoassets and stablecoins, “summarizing the feedback received in relation to the paper and the HKMA’s response.” The Consultation Conclusion was the result of 58 responses “from the industry, public bodies, business and professional organizations, and individuals, etc.” According to an HKMA press release, in general, there was broad support for “the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime.” The HKMA press release states that HKMA “will consider the feedback received, latest market development[s] and international discussion . . . [including] engage[ments] with stakeholders and market participants” when creating forthcoming “regulatory arrangements.”

<a href="https://www.gov.uk/government/consultations/future-financial-services-regulatory-regime-for-cryptoassets">UK HM Treasury: Future financial services regulatory regime for cryptoassets</a>

<a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1133404/TR_Privacy_edits_Future_financial_services_regulatory_regime_for_cryptoassets_vP.pdf">UK HM Treasury: Future financial services regulatory regime for cryptoassets Consultation and call for evidence</a>

<a href="https://www.hkma.gov.hk/eng/news-and-media/press-releases/2023/01/20230131-9/">Hong Kong Monetary Authority: Conclusion of discussion paper on crypto-assets and stablecoins</a>

Founder of Crypto Fraud Sentenced; South Korea Prosecutors Raid Exchange

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

According to a press release published this week by the U.S. Department of Justice (DOJ), the founder of My Big Coin, a purported cryptocurrency and virtual payment services company, was sentenced to more than eight years in prison and ordered to pay forfeiture/restitution of approximately $7.6 million after a federal jury found him guilty on four counts of wire fraud, three counts of unlawful monetary transactions and one count of operating an unlicensed money-transmitting business. According to the DOJ press release, the founder’s fraudulent scheme spanned more than three years and defrauded investors out of more than $7.5 million. Previously filed civil charges against the founder by the Commodity Futures Trading Commission, which were stayed pending the outcome of the criminal case, are now likely to move forward.

According to recent reports, in connection with the Seoul Southern District Prosecutor’s Office’s investigation into price manipulation, the offices of a major South Korean cryptocurrency exchange have been raided and their records searched. According to Seoul prosecutors, the search was “to secure the transaction details of a specific coin, and … has nothing to do with [the exchange].” However, according to reports, the exchange itself is under investigation by the South Korean tax authorities for tax evasion, and separately, several of the exchange’s executives have been charged with embezzlement, breach of trust and fraudulent illegal transactions.

<a href="https://www.justice.gov/usao-ma/pr/founder-purported-cryptocurrency-company-sentenced-more-eight-years-prison-multi-million">Founder of Purported Cryptocurrency Company Sentenced to More Than Eight Years in Prison for Multi-Million-Dollar Fraud Scheme</a>

<a href="https://www.coindesk.com/business/2023/01/27/crypto-exchange-bithumb-raided-in-south-korean-price-manipulation-probe-report/">Crypto Exchange Bithumb Raided in South Korean Price Manipulation Probe: Report</a>

Chicago

Partner

Robert A. Musiala Jr.

White House Issues Statement on Crypto; Bitcoin ETF Rejected; Public Keys Added to OFAC List; Regulators Address Digital Assets; Crypto Enforcement Continues