Launch of NFT initiatives; OFAC Adds Public Crypto Keys to SDN List; Treasury Dept. publishes crypto reports; Encryption enforcement and hacks continue | Baker Hostetler

Non-Workable Marketing: Brands continue to launch NFTs

Of Lauren Bass

A South Korean tech company has reportedly launched a week-long campaign in the metaverse. According to reports, the virtual events took place across multiple platforms and the company’s own website, and attendees had the opportunity to join a scavenger hunt, enter an NFT contest and attend live-streamed presentations of new products.

To mark its 75th anniversary, an American jean maker has reportedly teamed up with a Grammy-winning soul singer to create and sell a hybrid NFT collection consisting of a unique custom outfit and a tokenized digital replica that can be “wearable” in the metaverse. According to reports, this hybrid NFT was born out of a partnership with platform LTD.INC, which creates “ultra-rare physical and digital NFT collections for artists, creators and brands.”

In a final piece of NFT news, golf’s premier professional tour organization has reportedly teamed up with NFT Marketplace Autograph to create a dedicated NFT platform. Like other sports organizations that have launched NFT marketplaces, the golf organization’s platform will reportedly offer digital content created from the organization’s archives of videos and player data. According to the organization, all income generated from the platform, which will be launched in 2023, will go to the players.

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OFAC adds public crypto keys to SDN list related to Russian Group

Of Jordan R. Silversmith

Last week, the US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned 22 individuals and two entities in connection with Russia’s invasion of Ukraine, adding the individuals and entities to OFAC’s Specially Designated Nationals (SDN) list. According to a press release, several of the sanctioned individuals are responsible for promoting the Russian Federation’s goals in Ukraine, both before and during Russia’s latest invasion of Ukraine in 2022. Among the sanctioned units is Task Force Rusich, a neo-Nazi paramilitary group that has participated in combat with Russia’s military in Ukraine; in addition to sanctioning the group, OFAC added five associated cryptocurrency addresses to OFAC’s SDN list. The Finance Ministry’s announcement noted that the actions come as part of a united international front to isolate Russia’s financial systems and counter any Russian attempts to evade sanctions.

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The US Department of the Treasury publishes digital asset reports and RFCs

Of Robert A. Musiala Jr.

Last week, the US Department of the Treasury (treasury) published three reports pursuant to President Joe Biden’s Executive Order to ensure the responsible development of digital assets. The reports address the future of money and payment systems, consumer and investor protection and illicit financial risks. According to a statement from Treasury Secretary Janet L. Yellen, the reports “provide a strong foundation for policymakers as we work to realize the potential benefits of digital assets and to reduce and minimize risk.” The BakerHostetler Blockchain and Digital Assets team will publish alerts analyzing each of the three reports in the coming weeks.

Also last week, pursuant to the same order, the Treasury Department issued a request for comment (RFC) seeking “feedback from the American people on the illicit financial and national security risks posed by digital assets.” The RFC invites input on issues related to digital assets in the areas of illicit financial risk, anti-money laundering (AML) and counter-terrorist financing (CFT) regulation and oversight, global implementation of AML/CFT standards, private sector engagement and AML/CFT solutions, and the central bank’s digital currencies. The RFC will be open for comments through November 3, 2022.

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Republican senator criticizes SEC’s approach to crypto markets

Of Robert A. Musiala Jr.

Last week, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) released his opening statement from a recent hearing with U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, in which the senator said that “the SEC has failed to provide both consumers and innovators with much-needed regulatory clarity when it comes to digital assets, prompting Congress to step in.” Among other things, Toomey criticized the SEC for failing to take action to prevent the recent bankruptcies of Celsius and Voyager, saying, “The SEC took enforcement action against BlockFi for similar activities last winter, but somehow … Celsius and Voyager continued through this spring, when both companies imploded and went bankrupt, with investors staring at billions in losses.” Toomey also criticized Gensler’s recent comments suggesting that “many crypto intermediaries … trade in securities and must register with the SEC.” According to Toomey, “Given the new nature of these symbols, Congress should step in to provide clarity. In particular, we must revise the definition of ‘security’ as part of a larger effort to tailor a regulatory framework that is calibrated to the unique the risks and activities of the crypto market.”

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DOJ and SEC Target Crypto Fraud and Unregistered ‘Crypto Asset Securities’

Of Keith R. Murphy

A recent press release from the US Department of Justice (DOJ) announced that a cryptocurrency scammer was sentenced to 42 months in prison for developing a fraudulent investment scheme that took more than $600,000 from 60 victims. According to the press release, the scammer convinced victims to lend money to his organization, the World Sports Alliance, based on a purported affiliation with the United Nations and for the promise of investment returns linked to a digital currency called IGObit.

Another recent DOJ press release announced that an individual is accused of laundering and transferring the proceeds of Ponzi-type investment fraud schemes based in Nigeria. According to the press release, the schemes involved offering trading and bitcoin investment services in a Ponzi-like scam. The defendant allegedly laundered the fraudulent proceeds through a network of co-conspirators in the United States, using his personal and business accounts in the United States and Nigeria.

Another Ponzi-type scam was targeted by the US Securities and Exchange Commission (SEC), which recently announced an action against an individual and his affiliates for fraudulently soliciting and misappropriating funds from investors. The defendant and his companies allegedly fraudulently offered and sold securities using false and misleading statements to raise approximately $4.3 million, telling investors that the funds would be invested in digital assets. According to the press release, only a fraction of these funds were invested in digital assets, and the defendants made early repayments to investors in a Ponzi-like fashion to attract more investment.

This week, the SEC also issued a cease-and-desist order against Sparkster Ltd. and its CEO for the alleged unregistered offering and sale of “crypto-asset securities.” The SEC also accused a crypto influencer of failing to disclose compensation he received from the company for promoting the company’s SPRK tokens and of failing to file a registration statement with the SEC for tokens he resold. The order finds that the SPRK tokens, as offered and sold, were securities that were neither registered with the SEC nor exempt from registration. The company and its CEO settled and agreed to collectively pay more than $35 million to a fund for distribution to injured investors, according to the press release.

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Cryptocurrency Market Maker Suffers From $160M DeFi Hack

Of Joanna F. Wasick

Early this week, cryptocurrency markets maker Wintermute suffered a $160 million hack of the wallet the company uses for DeFi trading, company founder and CEO Evgeny Gaevoy tweeted. Gaevoy noted that the DeFi wallet was “completely separate and independent” from Wintermute’s CeFi and OTC operations. He also stated that Wintermute remains solvent, with “double over” $160 million in equity remaining, and any disruption to services will be resolved within days. The Wintermute attack is just the latest in a series of high-profile hacks of crypto platforms this year. In August, for example, crypto worth millions from Solana’s wallets was stolen; and Nomad, a crypto-bridge company that allows users to transfer tokens between blockchains, suffered an attack in which $190 million worth of crypto was drained.

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