CBDC Report Published; Launch of crypto and NFT initiatives; OFAC Redesigns Tornado Cash; SEC and CFTC Target Crypto Fraud; FTX files for bankruptcy | Baker Hostetler

Published CBDC report, launch of blockchain settlement and payment initiatives

Of Robert A. Musiala Jr.

This week, the New York branch of the US Federal Reserve published a report on the Phase I results of Project Cedar, “a multi-phase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC).” According to a press release, it currently takes two days for most foreign exchange spot trades to settle, exposing payment senders and receivers to “settlement, counterparty and credit risks that could, among other things, impede an institution’s ability to convert its assets into cash.” In Project Cedar Phase I, the experiment “simulated a foreign exchange (FX) spot trade and introduced a central bank digital currency prototype to test whether the use of blockchain technology could improve the speed, cost and access of cross-border wholesale payments.” In this test environment, the experiment should have revealed three key findings:

• Faster payments: In the test environment, transactions on the blockchain-enabled system were settled in less than 15 seconds on average.
• Nuclear settlement: The simulated ledger network enabled atomic settlement, meaning that the two sides of the simulated transactions were settled either simultaneously or not at all, reducing currency risk.
• Safer and accessible transactions: The distributed ledger system design enabled payments on a 24/7/365 basis and supported goals related to interoperability across financial institutions, including central and private sector banks.

Separately, a major global bank this week published a press release announcing “the world’s first digital bond listed and settled on both blockchain-based and traditional exchanges.” According to the press release, “[t]The CHF 375 million bond is digital-only and will be issued on the blockchain-based platform of SIX Digital Exchange (SDX) while dually listed and traded on SDX and SIX Swiss Exchange (SIX).”

In a recent notable item, a major South African grocery chain has reportedly announced plans to begin allowing customers to pay for groceries with bitcoin at 39 stores in South Africa using any bitcoin lightning-enabled app. According to reports, customers will scan a QR- code from the app and accept the conversion rate on your smartphone at the time of transaction.

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NFT World Cup Initiative Launched, Market Players Launch NFT Royalty Solutions

Of Veronica Reynolds

According to a recent press release, a major US financial firm has partnered with a major cryptocurrency exchange to launch an NFT auction for fans of the FIFA World Cup Qatar 2022. The initiative will reportedly feature digital art designed using an algorithm and “inspired by iconic goals from five legendary footballers.” The experience will become immersive later this month, when fans will be able to create their own “digital art inspired by their own signature moves” and emboss the art on their own NFT.

This week, NFT marketplace OpenSea reportedly unveiled a new onchain tool that will make it easier to enforce royalties. The tool, described in an OpenSea blog post as a “simple piece of code,” is intended to allow NFT creators to enforce on-chain fees on an opt-in basis and block their NFTs from being listed on marketplaces that don’t support creator fees. The tool is only available to new, not-yet-existing NFT collections, a decision that reportedly left some users feeling that there is no plan and [there are] no clear answers [regarding] existing collection and the artist’s royalty.”

Last week, Solana-based NFT marketplace Exchange.Art announced a “Royalties Protection Standard” that will reportedly “enforce royalties for creators on secondary sales of NFTs originally used on their platform.” According to reports, the new standard is an opt-in program that the marketplace is designed to allow NFT creators to choose which secondary NFT platforms can host their NFTs and to prevent “creators’ work from being ‘forced-listed'” on marketplaces which do not enforce NFT royalties.

In a related development, an Ethereum layer 2 NFT platform recently announced the release of its “community-governed whitelist and blacklist for smart contracts that respect royalty fees.” The feature reportedly allows NFT creators to use the lists to control smart contracts that distribute their NFTs without the help of a third-party exchange, and can be used to limit the transferability of NFTs through the utility’s royalty-respecting smart contracts.

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OFAC redesigns Tornado Cash, Mixer receives hacked crypto

Of Amos Kim

This week, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it has delisted and redesignated Tornado Cash to record additional reasons for the designation, including its role in concealing “the movement of over $455 million stolen in March 2022 by the OFAC Designates DPRK-Controlled Lazarus Group in Largest Known Virtual Currency Heist to Date.” OFAC also issued new guidance “to provide additional compliance guidance regarding the nature of the Tornado Cash entity, and updated three existing FAQs with additional guidance.” According to reports, earlier this week, based on data from Etherscan, the hacker responsible for the $28 million hack of Deribit, a major bitcoin and ether options exchange, transferred over 1,600 ether (~$2.5 million) to Tornado Cash.

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SEC, CFTC Take Enforcement Actions Involving Fake Crypto Trading Robots

Of Joanna F. Wasick

Last week, the US Securities and Exchange Commission (SEC) announced charges against four individuals for their roles in Trade Coin Club (TCC), which the SEC describes as “a fraudulent crypto-Ponzi scheme that raised more than 82,000 bitcoins, worth 295 million dollars at the time, from more than 100,000 investors worldwide.” According to the complaint, TCC was a multi-level marketing scheme that operated from 2016 to 2018 and promised profits from the trading activities of an alleged crypto-asset trading robot. The defendants told investors that the bot made “millions of microtransactions” every second and that investors would receive a minimum return of 0.35 percent daily. However, according to the SEC, instead of the investors’ funds being distributed to the alleged fine, they went into the pockets of the defendants and other TCC promoters.

In a similar action, last week, the Commodity Futures Trading Commission (CFTC) issued an order indicating that Jeremy Rounsville defrauded investors through his company, Arbitraging.co, which also claimed to have a “highly advanced arbitrage bot” that executed the company’s complex strategies for trading digital assets. However, according to the CFTC, the bot never executed any trades; customers were unable to withdraw and lost all their money. The order requires Rounsville to pay a civil monetary penalty of $177,000, permanently prohibits him from soliciting or trading in commodity interests and virtual currencies or registering with the CFTC in any capacity, and requires him to cease and desist from further violations of the Commodity Exchange Act. and CFTC regulations.

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FTX files for bankruptcy amid Binance’s FTT sale and incoming DOJ probe

Of Christopher W. Lamb

On November 11, 2022, the once third largest cryptocurrency exchange, FTX, announced that it was filing for bankruptcy protection along with approximately 130 additional affiliates. According to reports, CEO and founder Sam Bankman-Fried has stepped down and will be replaced by John Ray III, a turnaround veteran who participated in the Enron bankruptcy.

Several reports have been released this week highlighting attempts by FTX to secure a bailout of over $1 billion before receiving a non-binding letter of intent from fellow cryptocurrency exchange Binance. Binance reportedly neglected to proceed after an initial review of FTX’s books and due to concerns that FTX was the subject of government investigations. A report explained that the problems began when Binance began offloading hundreds of millions of dollars in FTT, a token created by FTX, on Sunday. According to the report, FTX’s legal and compliance staff quit shortly after. Another report indicated that FTX was already the subject of investigations by state and federal regulators, and that the US Department of Justice (DOJ) may have opened an investigation into FTX related to its recent liquidity problems.

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