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In this issue: • <a href="#Z">“Z” Doors Are Open: Rival Zero Knowledge EVMs Launched by Matter, Polygon</a> • <a href="#US">U.S. Central Bank Publishes Order Denying Custodia Bank Application</a> • <a href="#CFTC">CFTC Charges Binance Alleging Numerous Commodity Exchange Act Violations</a> • <a href="#SEC">SEC Charges Crypto Exchange; DOJ Charges Crypto ATM; Do Kwon Arrested</a>

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“Z” Doors Are Open: Rival Zero Knowledge EVMs Launch

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

Earlier this week, a technology innovation lab reportedly released a public Alpha version of its “zero-knowledge Ethereum Virtual Machine” (zkEVM), which has been described as a layer 2 protocol that scales Ethereum’s security and values through zero-knowledge cryptography. According to reports, a zkEVM is software that executes smart contracts to make it easier for developers to reconfigure and design applications on the Ethereum network that offer lower costs and enhanced speed, security, and privacy. Because the protocol is still in Alpha test mode, the innovation lab has reportedly employed heightened security and risk procedures to monitor anomalies and vulnerabilities.

Mere days after that debut, a cryptocurrency and technology platform reportedly launched its own zkEVM beta, which the platform touted as “the first zero-knowledge scaling solution that is fully equivalent to an EVM.” According to reports, the technology platform will make all aspects of its zkEVM open source to allow developers to study, share, and contribute to innovations in the zero-knowledge space.

For more information, please refer to the following links:

<a href="https://blog.matter-labs.io/gm-zkevm-171b12a26b36">gm zkEVM! Yes, zkSync Era Mainnet is now open to all</a>

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<a href="https://www.coindesk.com/tech/2023/03/24/matter-labs-claims-zksync-era-achieves-zero-knowledge-scaling-with-ethereum-compatibility/">Matter Labs Opens zkSync Era to Users, Claiming First in ‘Zero Knowledge’ Tech on Ethereum</a>

<a href="https://wiki.polygon.technology/docs/home/polygon-basics/zkEVM-basics/">What is Polygon zkEVM</a>

<a href="https://www.coindesk.com/tech/2023/03/27/polygon-zkevm-mainnet-beta-goes-live-ethereums-buterin-to-process-first-transaction/">Polygon zkEVM Mainnet Beta Goes Live; Ethereum’s Buterin Sends First Transaction</a>

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U.S. Central Bank Publishes Order Denying Custodia Bank Application

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

Last week, the U.S. central bank publicly released an order, dated January 27, 2023, providing the reasons for its decision to deny the application of Custodia Bank (“Custodia”) to hold a master account and become a member of the U.S. central bank. As described by the order, Custodia is a Wyoming state-chartered special purpose depository institution (SPDI) that “intends to focus its business model almost entirely on the crypto-asset sector.”

The 86-page denial order provides an analysis and evaluation of Custodia’s general character of management (“Managerial Factor”), financial condition (“Financial Factor”), whether the corporate powers to be exercised are consistent with the purposes of applicable law (“Corporate Powers Factor”), and Custodia’s ability to meet the convenience and needs of the community (“Convenience and Needs Factor”). The order concludes that Custodia’s application “would be inconsistent with the financial, managerial, and corporate powers factors.”

With respect to the Managerial Factor, the order cites concerns related to Custodia’s status as an uninsured depository institution and its plans to focus “almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.” The order also cites risk management concerns related to Bank Secrecy Act and sanctions compliance, information technology, internal audit, financial projections, and liquidity management.

Addressing the Financial Factor, the order cites concerns over Custodia’s lack of a diversified business, stating “Custodia’s revenue and funding model relies almost solely upon the existence of an active and vibrant market for crypto-assets. However, crypto-asset markets have exhibited significant volatility.”

With respect to the Corporate Powers Factor, the order finds that approval of Custodia’s application would be inconsistent with applicable law governing the U.S. central banking system given the “speculative and volatile” crypto-asset ecosystem and Custodia’s “novel and unprecedented” crypto-focused business model. The order also cites a concern that “[t]he absence of deposit insurance coverage … could increase the firm’s risk of runs and contagion … This is especially concerning because the global crypto-asset industry … is highly susceptible to runs, as recent events have demonstrated.”

Finally, addressing the Convenience and Needs Factor, the order notes safety and soundness concerns “indicate[] Custodia will not be able to meet the convenience and needs of its community” and “could in fact pose significant risk to its community.” Notably, Custodia’s application was denied without prejudice, which allows Custodia to reapply in the future.

<a href="https://www.federalreserve.gov/newsevents/pressreleases/files/orders20230324a1.pdf">FEDERAL RESERVE SYSTEM Custodia Bank, Inc., Cheyenne, Wyoming, Order Denying Application for Membership</a>

<a href="https://www.coindesk.com/policy/2023/03/24/federal-reserve-says-custodias-crypto-focused-business-model-is-inconsistent-with-approval/">Federal Reserve Says Custodia’s Plans Would Endanger Itself and the Crypto Industry</a>

<a href="https://cointelegraph.com/news/custodia-bank-s-membership-denied-for-ties-with-crypto-markets-says-us-fed">Custodia Bank’s membership denied for ties with crypto markets, says US Fed</a>

CFTC Charges Binance Alleging Numerous Commodity Exchange Act Violations

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

According to a press release published this week by the Commodity Futures Trading Commission (CFTC), the CFTC has filed a civil enforcement action in the U.S. District Court for the Northern District of Illinois against Changpeng Zhao and three entities that operate the Binance cryptocurrency exchange platform, finding “numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.” According to the press release, the CFTC alleges that “Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (together, Binance) operate the Binance centralized digital asset trading platform … through an intentionally opaque common enterprise, with Zhao at the helm as Binance’s owner and chief executive officer.”

The press release states that Binance “offered and executed commodity derivatives transactions to and for U.S. persons from July 2019 through the present” and that “Binance has instructed its employees and customers to circumvent compliance controls in order to maximize corporate profits.” According to the release, Binance did not require identity verification of customers to trade on the platform and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering.” The complaint alleges a number of infractions, including but not limited to failure to diligently supervise Binance’s activities as a Futures Commission Merchant, failure to restrict U.S. customers from trading on its platform, and willful evasion of the requirements of the CEA. The complaint also alleges that Zhao is liable for “violations based on his control over Binance and his long-running failure to act in good faith” and for being “responsible for all major strategic decisions at Binance, including devising the secret plot to instruct U.S.-based VIP customers to evade Binance’s compliance controls.”

In addition to Zhao, the CFTC charged Binance’s CCO, Lim, for “willfully aiding and abetting Binance’s violations through intentional conduct that undermined Binance’s compliance program.” The CFTC’s Enforcement Division principal deputy director and chief counsel is quoted as saying, “The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law.” According to reports, following the issuance of the CFTC complaint, Binance has seen over $400 million on Ethereum withdrawn from its platform. Additionally, according to reports, the bitcoin balance held at the exchange has been reduced by over 3,900 bitcoin, with 3,400 bitcoin withdrawn within 24 hours of the complaint being filed.

<a href="https://www.cftc.gov/PressRoom/PressReleases/8680-23">CFTC Charges Binance and Its Founder, Changpeng Zhao, with Willful Evasion of Federal Law and Operating an Illegal Digital Asset Derivatives Exchange</a>

<a href="https://www.coindesk.com/business/2023/03/27/binance-depositors-flee-following-cftc-charges-on-chain-data-shows/">Binance Depositors Flee Following CFTC Charges, On-Chain Data Shows</a>

<a href="https://cointelegraph.com/news/binance-bitcoin-balance-drops-by-3-4k-btc-within-24-hours-of-cftc-lawsuit">Binance Bitcoin balance drops by 3.4K BTC within 24 hours of CFTC lawsuit</a>

SEC Charges Crypto Exchange; DOJ Charges Crypto ATM; Do Kwon Arrested

By <a href="https://www.bakerlaw.com/ChristinaOGotsis">Christina O. Gotsis</a>

According to a press release published this week by the U.S. Securities and Exchange Commission (SEC), the SEC has charged Beaxy, a “crypto asset trading platform,” and its executives for failing to register as a national securities exchange, broker and clearing agency. The SEC also charged Beaxy’s founder with raising $8 million in an unregistered offering of the Beaxy token (BXY) and alleged that he misappropriated at least $900,000 for personal use. Finally, the SEC charged market makers using the platform as unregistered dealers. Certain Beaxy executives and market makers have agreed to shut down the platform, return assets to customers, and pay $165,800 in civil penalties. The SEC is litigating its charges against Beaxy and its founder.

Also this week, a press release from the U.S. Department of Justice (DOJ) announced the arrest of the founder of Coindawg, a cryptocurrency ATM business, in connection with a scheme to steal and launder over $1 million in Small Business Administration loans. The DOJ alleged that the individual fraudulently obtained the loans, which were intended to provide COVID-related relief, and converted approximately $700,000 into bitcoin for his co-conspirators. The individual then allegedly stole approximately $300,000, which he used, in part, to purchase cryptocurrency ATMs and promotional services to start Coindawg. Law enforcement seized 18 Coindawg cryptocurrency ATMs that had exchanged over $3 million worth of cryptocurrency and charged 15% in transaction fees.

According to reports, international enforcement agencies also took action this week, with Interpol arresting South Korean national Do Kwon, founder of a collapsed crypto company that in a matter of days wiped out about $40 billion in value from the crypto market. Kwon is wanted in several countries, including the U.S., South Korea, and Singapore. Kwon was arrested in Montenegro with counterfeit documentation.

<a href="https://www.sec.gov/news/press-release/2023-64?utm_medium=email&amp;utm_source=govdelivery">SEC Charges Crypto Trading Platform Beaxy and its Executives for Operating an Unregistered Exchange, Broker, and Clearing Agency</a>

<a href="https://www.justice.gov/usao-sdny/pr/coindawg-founder-arrested-laundering-proceeds-fraudulently-obtained-small-business">Coindawg Founder Arrested For Laundering Proceeds Of Fraudulently Obtained Small Business Administration Loans</a>

<a href="https://www.cnn.com/2023/03/23/tech/south-korea-do-kwon-terra-fraud-arrest-hnk-intl/index.html">Interpol confirms arrest of crypto fugitive Do Kwon in Montenegro</a>

Zero Knowledge EVMs Launch; U.S. Central Bank Publishes Custodia Denial Order; CFTC Charges Binance Exchange; SEC, DOJ Bring Enforcement Actions