New initiatives are launched in Staking, DeFi, DAOs; IRS Issues NFT Guidance; White House Report Criticizes Crypto; SEC and DOJ Crypto Enforcement Continues | Baker Hostetler

Staking Market Launches, ‘Defi Cover’ Data Published, DAO Buys Golf Course

Of Christopher Lamb

According to a recent press release, MetaMask Institutional, the “web3 wallet for organizations,” has launched its “institutional stake marketplace” in partnership with three other blockchain companies. According to the press release, “[t]The first-of-its-kind platform is designed to simplify and provide unparalleled access to institutional stakes” and will “reduce … complexity by streamlining access to the best stake providers”.

A recent report provides data on the emerging “DeFi cover” market, which provides “insurance options” for DeFi market players. According to the report, DeFi coverage providers paid out $34.4 million in claims in 2022. The most notable payouts include “$22.5 million during the collapse of the Terra ecosystem in May 2022 and $4.7 million from the collapse of a major crypto exchange in November 2022.” The report notes the small percentage of DeFi funds that were insured by DeFi coverage in 2022, with only $231 million worth of DeFi funds insured, “representing just 0.5% of the total value locked in DeFi the industry.” The report provides data on 23 DeFi coverage providers operating across the Ethereum, Polygon, Arbitrum, Optimism, BNB Smart Chain, Astar and Avalanche blockchain networks.

According to reports, LinksDAO is about to become the first decentralized autonomous organization (DAO) to acquire a golf course, winning a bid to buy Spey Bay Golf Club in Scotland. The successful bid is reportedly the result of a DAO governance vote in which 88.6 percent of LinksDAO token holders voted to make an offer to buy the golf course.

According to a press release, the Provenance Blockchain Foundation, “which catalyzes the adoption and development of the public and open source Provenance Blockchain … announced the launch of a $50 million grant program for blockchain developers.” In a quote from the press release, the head of developer ecosystem at the Provenance Blockchain Foundation said: “This program is not just a grant, the Provenance Blockchain Foundation will work directly with developers.” Interested developers can apply at

For more information, please see the following links:

IRS issues guidance on non-fungible tokens

Of Nicholas C. Mowbray

The IRS issued guidance this week regarding the federal income tax treatment of NFTs. The guidance states that the IRS intends to issue future guidance stating that certain NFTs are collectibles for federal income tax purposes and solicits comments from taxpayers regarding the federal income tax treatment of NFTs. The guidance further states that future guidance addressing whether an NFT is a collectible will adopt a “look through” approach that analyzes the NFT’s underlying right or digital file, and whether it is a collectible.

Generally, collectibles that qualify as capital assets are subject to a maximum 28 percent long-term capital gains rate, which is higher than the capital gains rates that apply to capital assets that are not collectibles. Additionally, there are adverse federal income tax consequences to an individual retirement account that holds a collectible.

For more information, please see the following links:

Economic report from the president criticizes digital assets

Of Robert A. Musiala Jr.

This week, the White House released its Economic Report of the President. The 507-page report includes a 37-page chapter devoted to digital assets titled “Digital Assets: Reearning Economic Principles.” The chapter presents a generally skeptical view of “encryption agents”, although it acknowledges that “[t]the development of cryptoassets and their underlying distributed ledger technology has the potential to transform industries and business models.” According to the chapter, despite certain perceived advantages, “[s]So far, cryptoassets have not provided any of these benefits.” The chapter is divided into three sections titled “The Perceived Appeal of Crypto Assets,” “The Reality of Crypto Assets,” and “Investing in the Nation’s Digital Financial Infrastructure.”

The first part “reviews the potential benefits that cryptoassets can offer, as often highlighted by their advocates.” The section describes “several possible benefits that proponents claim [the] the popularity of cryptoassets.” These include use as investment vehicles; faster, “censorship-resistant” payments; financial inclusion; and improved financial technology infrastructure.

The second part “evaluates what [crypto assets] has actually achieved.” The section argues that as investments, cryptoassets are “highly risky” and “many … do not have a fundamental value.” The section contrasts this with stocks, “which are claims on companies’ future profits”; debt, which “is a claim to interest and principal”; and commodities such as gold and silver, which “can be used in jewelry and for special manufacturing purposes”. Comparing cryptoassets to sovereign money, the section argues that cryptocurrencies are not as effective as the US dollar in terms of serve as a unit of account, medium of exchange, or store of value. The section also cites various risks of cryptoassets, including the environmental impact of cryptocurrency mining, “run risk” for stablecoins, fraud, lack of disclosures, conflicts of interest in cryptoasset platforms that perform multiple functions, potential future systemic risks, illegal financial risks, and ransomware.

The chapter’s final section acknowledges that “[t]the growth of crypto-assets has revealed a demand for a faster and more inclusive financial system with a real-time payment system and circulating digital money.” The section explores various potential methods to meet this demand using alternatives to cryptoassets, including central bank digital currencies (CBDCs) and the upcoming FedNow Instant Payment System.

For more information, please see the following links:

SEC charges crypto entrepreneur and celebrities; DOJ targets crypto scammers

Of Joanna F. Wasick

On Wednesday, the US Securities and Exchange Commission issued a press release announcing charges against crypto-asset entrepreneur Justin Sun and three of his wholly-owned companies for the unregistered offering and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT). The SEC also accused Sun and his companies of fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous buying and selling of a security to make it appear actively traded without an actual change in beneficial ownership, and to orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation. Eight celebrities, including Lindsay Lohan and DeAndre Cortez Way (aka Soulja Boy), were also charged with illegally touting TRX and/or BTT without disclosing that they were compensated for doing so and the amount of compensation.

Earlier this week, the US Department of Justice (DOJ) announced the dropping of charges against Irina Dilkinska in connection with her participation in “the massive OneCoin fraud scheme, which began operating in 2014 in Bulgaria and marketed and sold a fraudulent cryptocurrency of the same name through a global multi-level marketing network. According to a DOJ press release, as a result of misrepresentations about OneCoin, victims invested over $4 billion worldwide in the fake cryptocurrency. A US attorney stated: “Irina Dilkinska, the alleged head of legal and compliance for OneCoin’s cryptocurrency pyramid scheme, accomplished the exact opposite of her job title and allegedly enabled OneCoin to launder millions of dollars of illegal proceeds through shell companies. Dilkinska helped maintain an extensive scheme with millions of victims and billions of dollars in losses, and she will now face justice for her alleged crimes.” Dilkinska was reportedly extradited from Bulgaria before the announcement.

For more information, please see the following links:

US Crypto Exchange Receives SEC Wells Notice, Publishes Staking Analysis

Of Keith R. Murphy

According to recent reports and a blog post by the company, a major US cryptocurrency exchange has received a Wells Notice issued by the US Securities and Exchange Commission (SEC). According to the company, the notice applies to an unspecified portion of its publicly traded digital assets, as well as its betting operations, despite several attempts by the company to engage the SEC on which assets are claimed to be securities and for guidance on how to potentially register a portion of the business with the SEC. In a blog post responding to the Wells notice, the company’s general counsel said: “We are confident in the legality of our assets and services and, if necessary, welcome a legal process to provide the clarity we have advocated and to demonstrate that the SEC has simply not been fair or reasonable in its involvement in digital assets.” The company’s blog post further notes the conflicting stances on these issues by multiple regulatory agencies, calling for regulations, as opposed to enforcement actions, to aid continued innovation.

Just days before the Wells notice was received, the same cryptocurrency exchange issued a letter to the SEC that provided additional comments on the company’s petition for a regulatory framework for digital asset securities previously submitted to the SEC in July 2022. The content of the letter focuses on securities litigation of services related to the validation of proof-of-stake protocols (staking). According to reports, the letter was in response to the SEC’s recent enforcement action against another US cryptocurrency exchange’s betting program. In the letter, the company argues that staking is not a “monolithic operating concept” and that while some existing models may fall within the definition of investment contract offerings, others do not and do not meet the criteria of the “Howey test.” According to reports, the company’s CEO indicated that the company is prepared to defend its position in the stake program.

For more information, please see the following links:

Moscow Money Mules and Hackers: Digital Asset Threats Continue

Of Lauren Bass

According to a recent report by a global anti-corruption NGO, Transparency International Russia, cryptocurrency exchanges and OTC desks in the Moscow International Business Center (also known as Moscow-City) have evaded international sanctions and know-your-customer protocols to help Russian citizens move money out of Russia. The transactions are said to have taken place via encrypted Telegram messages without any confirmation of identity or source of funds. According to the report, customers in Russia buy USDT, then use OTC desks to exchange the USDT for a foreign currency – often sterling – which is physically delivered by an on-demand courier service to a delivery point (or person) in another country. The report suggests that since 2021, over $50 million has been processed through OTC boards as part of this arrangement.

OpenZepplin, a leading technology security firm, recently released a report that points out that an increase in blockchain hacking techniques and exploits in 2022 has led to consumer losses of over $3.7 billion. The report outlines the top 10 hacks that blockchain owners should be aware of – including software bugs and code vulnerabilities.

For more information, please see the following links:

[View source.]