Launch of new crypto and NFT products; Treasury publishes FSOC Digital Asset Report; SEC Brings Enforcement Action Against Crypto Promoters, Fraudsters | Baker Hostetler

Crypto product launch, report details CBDC pilots and bank crypto exposure

Of Robert A. Musiala Jr.

Last week, Circle Internet Financial, the issuer of the USD Coin (USDC), announced plans “to make USDC available on five additional blockchain ecosystems” including Arbitrum, Cosmos, NEAR, Optimism and Polkadot. Separately, according to recent reports, a major US financial firm has launched a new Ethereum Index Fund. The fund will reportedly be open to investors who are able to provide a minimum investment of $50,000.

In a press release published this week, a major global financial messaging service announced findings from its recent “experiments” related to central bank digital currencies (CBDCs) and “tokenized assets.” According to the press release, the findings show that CBDCs and tokenized assets “can move seamlessly on existing financial infrastructure.” The experiments will reportedly “achieve CBDC-to-CBDC transactions between different DLT networks based on popular Quorum and Corda technologies, as well as fiat-to-CBDC flows between these networks and a real-time gross settlement system.” Several major central and commercial banks reportedly participated in the experiments.

A recent report from the Bank for International Settlements (BIS) provides an analysis of banks’ exposure to “cryptoassets.” Among other things, the report noted: (1) “Total exposures to cryptoassets reported by banks amount to approximately €9.4 billion,” representing “only 0.14% of total exposures on a weighted average basis across the sample of banks”; (2) “Crypto-asset exposures are unevenly distributed among reporting banks, with two banks accounting for more than half of total crypto-asset exposures, and another four banks accounting for just under 40% of the remaining exposures”; and (3) “Reported crypto asset exposures consist primarily of Bitcoin (31%), Ether (22%) and a variety of instruments with either Bitcoin or Ether as the underlying cryptoassets (25% and 10%, respectively).”

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The DAO that governs the DAI Stablecoin invests in US Treasuries and corporate bonds

Of Jordan R. Silversmith

According to recent reports, the decentralized autonomous organization (DAO) that governs MakerDAO and the protocol underlying the algorithmic, “overcollateralized” stablecoin DAI has announced plans to allocate $500 million to invest in “minimal risk” US Treasuries and corporate bonds . The DAO that governs the DAI stablecoin reportedly said that 80% of the investment will go into short-term US Treasuries, while 20% will go into investment-grade corporate bonds. The community voted for the allocation proposal, which was presented in June, in part to diversify the MakerDAO balance and provide a more stable support for the DAI stablecoin. According to reports, the investment will be facilitated with the help of DeFi advisor Monetalis and digital asset bank Sygnum.

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Digital collectibles + physical consumer goods: Brands embrace hybrid NFT model

Of Lauren Bass

A maker of pop culture collectibles has reportedly teamed up with a major Hollywood studio and an American multinational retailer to design and distribute a new comic book via a non-fungible token (NFT). According to reports, this self-described “phygital” collectible will be available to buyers as both a physical paper copy as well as a digital NFT minted on the World Asset eXchange (WAX) blockchain.

In similar news, an American jeans maker has reportedly teamed up with a Web3 media company to create an interactive digital comic strip whose story was dictated by community participants, 20 of whom won exclusive clothing items with NFC (near field communication) technology that linked to an NFT of the finished strip. This reportedly marks the retailer’s second hybrid NFT series, following a previous collaboration with a Grammy-winning singer/songwriter. According to reports, both collaborations were created on the LTD.INC platform, which provides blockchain proof of ownership as well as access to exclusive digital content and community.

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Treasury publishes report on Digital Asset Financial Stability Risks/Regulation

At Sydney Park

This week, the Financial Stability Oversight Council (FSOC) released its report on Digital Asset Financial Stability Risks and Regulation (Report) in response to President Biden’s Executive Order 14067, “Ensuring Responsible Development of Digital Assets.” According to an FSOC Fact Sheet, the report “reviews specific financial stability risks and regulatory gaps posed by various types of digital assets and provides recommendations for addressing such risks.” The fact sheet notes that “crypto-asset activities” could pose a risk to the US financial system “if their interconnections with the traditional financial system . . . grow without following or being coupled with appropriate regulation.” The fact sheet acknowledges that “the existing regulatory system covers a large portion of the crypto-asset ecosystem.” However, the fact sheet highlights three gaps in regulation: (1) “spot markets for non-securities crypto assets are subject to limited direct federal regulation”; (2) “companies with cryptoassets do not have a consistent or comprehensive regulatory framework”; and (3) “[f]financial stability and investor protection implications’ arising from ‘retail investors’ exposure to certain practices typically proposed by vertically integrated trading platforms, such as automated settlement’.

Of the 10 recommendations provided in the report, the fact sheet highlights three recommendations that specifically address the regulatory gaps identified: (1) enactment of legislation providing “regulatory authority for federal financial regulators over the spot market for non-securities cryptoassets”; (2) to take steps “to address regulatory arbitrage”; and (3) conduct a study of “potential vertical integration of crypto-asset firms.”

In a statement released this week in support of the report and its findings, Acting Comptroller of the Currency Michael J. Hsu stated: “We know what happens when regulatory agencies fail to coordinate effectively . . . each member must consider financial stability from a system-wide perspective …. This is especially important in emerging areas like crypto.” In comments this week, Treasury Secretary Janet Yellen said the report “provides a strong foundation for policymakers as we work to reduce the risks of digital assets while realizing the potential benefits.”

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SEC Brings Enforcement Action Against Crypto Promoters and Fraudsters

Of Shade Quailey

This week, the US Securities & Exchange Commission (SEC) published a press release announcing charges against Kim Kardashian for “publicizing on social media a crypto-asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.” According to the press release, Kardashian failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security offered by EthereumMax. The SEC order found that Kardashian’s actions violated the anti-touting provision of the federal securities laws. Kardashian agreed to a settlement in which she will pay $1.26 million in fines, disgorgement and interest and cooperate with the SEC Enforcement Division’s Crypto Assets and Cyber ​​Unit’s ongoing investigation. She also agreed not to market crypto assets for three years.

In a quote from the press release, SEC Chairman Gary Gensler said, “Ms. Kardashian’s case … serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investment in securities.” In another quote, the Director of the SEC’s Enforcement Division, Gurbir S. Grewal, said, “[F]State securities laws are clear that any celebrity or other person promoting a crypto-asset security must disclose the nature, source and amount of the compensation they received in exchange for the promotion. … Investors have a right to know whether the publicity of a security is objective.”

In a separate action, the SEC announced charges against foreign companies Arbitrade Ltd. and Cryptobontix Inc., their respective principals, and a so-called international gold trader for allegedly committing a pump-and-dump scheme involving crypto-assets “Dignity” or “GRAVE.” The complaint alleges that between May 2018 and January 2019, Arbitrade and Crytobontix, through their principals and international gold traders, made false announcements claiming (1) that Arbitrade had purchased $10 billion in gold bullion, (2) that the company would support each DIG. token issued and sold to investors with $1.00 worth of this gold, and (3) that independent accounting firms had performed an “audit” of the gold and confirmed its existence. The complaint alleges that the procurement of the gold was in reality a sham to increase demand for DIG, which enabled the principals to sell at least $36.8 million of DIG, including to US investors, at fraudulently inflated prices.

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