Blockchain Week In Review: Week Of April 30, 2021 – Technology

Weekly Focus:

  • Bipartisan crypto bill passes House of Representatives

  • Fed leaves interest rates unchanged, while Chairman Powell says
    equity markets are a “bit frothy”

  • Paxos becomes third federally regulated crypto bank (&
    raises $300 million)

  • Wyoming DAO law to go into effect in July

  • DOJ announces arrest of Bitcoin Fog founder who allegedly
    laundered $335M in crypto

  • Turkey bans cryptocurrency payments, sets up central
    custodian

  • South Korea set to tax crypto trading gains

U.S. Developments

Bipartisan crypto bill passes House of
Representatives

Last week, the U.S. House of Representatives passed H.R. 1602, titled “Eliminate Barriers to
Innovation Act of 2021.”  The bill was first introduced
back in March by Representatives Patrick McHenry (R-N.C.) of the
House Financial Services Committee and Stephen Lynch (D-Mass.) of
the Task Force on Financial Technology.  According to the text
of the bill, both the Securities and Exchange Commission (SEC) and
the Commodity Futures Trading Commission (CFTC) will jointly
establish a working group known as the “SEC and CFTC Working
Group on Digital Assets.”  Members of this group will
include government representatives as well as members of financial
technology companies, financial firms, academic and research
institutions, and investor protection organizations, among
others.  If the bill becomes law, the Working Group will also
be required to submit a report to the SEC and CFTC that includes
(i) an analysis of the legal and regulatory framework of digital
assets, specifically the impact that lack of clarity in such
framework has on digital asset markets; and (ii) recommendations
for the improving and creating digital asset markets, establishing
standards for custody and private key management, and best
practices for reducing fraud and improving investor protection in
digital asset markets.

On April 22, 2021, the bill was referred to the Senate Committee
on Banking, Housing and Urban Affairs, which is led by Senators
Sherrod Brown (D-Ohio) and Pat Toomey (R-Penn.).

Fed leaves interest rates unchanged, while Chairman
Powell says equity markets are a “bit
frothy”

In a press conference on Wednesday, U.S.
Federal Reserve Chairman Jerome Powell was asked by a reporter at
Yahoo Finance whether the Federal Reserve believes there is a
relationship between low interest rates and easy monetary policy,
especially in light of the recent rise of GameStop and the
meme-inspired cryptocurrency, Dogecoin.  Powell replied,
“Some of the asset prices are high.  You are seeing
things in the capital markets that are a bit frothy. 
That’s a fact.  I won’t say it has nothing to do with
monetary policy, but it also has a tremendous amount to do with
vaccination and reopening of the economy.  That’s really
what has been moving markets a lot in the past few months, this
turn away from what was a pretty dark winter to now a much faster
vaccination process and a faster reopening, so that’s part of
what is going on.”

The press conference followed a two-day, closed-door meeting by
the Federal Reserve’s monetary-policy panel, known as the
Federal Open Market Committee (FOMC).  The FOMC concluded unanimously at that meeting to
continue its current approach of maintaining the benchmark U.S.
interest rate near zero and buying $120 billion worth of bonds each
month.  Even though the FOMC voted to keep interest rates the
same, the Committee statement did recognize the current economic
recovery:  “Amid progress on vaccinations and strong
policy support, indicators of economic activity and employment have
strengthened.”  The FOMC also admitted that inflation has
risen and is targeting an inflation rate moderately above 2 percent
in the near term.

You can view the full press conference here and here.  You can read the full FOMC
statement here.

Paxos becomes third federally regulated crypto bank
(& raises $300 million)

Last Friday, the Office of the Comptroller of the Currency (OCC)
issued a preliminary conditional approval for a federal trust
bank to Paxos National Trust, New York.  Paxos is a stablecoin
issuer and blockchain startup, known for its Paxos Standard (PAX)
stablecoin and PAX Gold, which is a digital asset backed by
physical gold.  With this conditional approval, Paxos will
join Anchorage Digital Bank and Protego (see Feb. 12, 2021 Week in Review) as the third
crypto-native company to secure a conditional federal trust
charter.  The OCC letter listed a range of permissible
activities including digital asset custody, management of
stablecoin reserves, trading services, and providing KYC as a
service.

“This is a preliminary conditional approval, which means
that the OCC is approving our business plan,” said Paxos
General Counsel Dan Burstein.  “It’s deeming the
activities that we have identified in the business plan to be those
that can be carried out by a national trust, that we have the right
team in place and the right controls and plan in place to control
our risk and to operate as a national trust company.” 
Paxos will now have 18 months to meet the terms of its conditional
approval and set up the trust bank before it begins to operate.

In 2015, Paxos was also the first crypto company to secure the
New York Department of Financial Services state Trust
charter.  If ultimate approval is granted by the OCC for the
federal charter, Paxos will become the first digital assets
custodian to be regulated at both the state and federal levels.

Following the conditional approval of its federal charter,
Paxos announced on Thursday that it had raised
a $300 million Series D funding round, valuing the company at $2.4
billion.

The OCC approval notice can be read here.  The OCC press release can be
viewed here.

Wyoming DAO law to go into effect in July

Last week, Wyoming Governor Mark Gordon signed legislation that
creates a legal link between decentralized autonomous organizations
(DAOs) and the state government.  The act, SF0038, provides “for the formation and
management of decentralized autonomous organizations.” 
In other words, DAOs will be recognized as limited liability
corporations (LLCs) in Wyoming, effective July 1st.

One requirement of the law is that the DAO LLCs must be
domiciled in the state of Wyoming, which may pose issues to the
DAOs, since DAOs—as their name suggests—is a
decentralized organization with no hierarchy of control or
principal place of business.  The law does allow DAOs to rely
on a registered agent in Wyoming to establish domicile. 
Senator Chris Rothfuss (D-Laramie) told CoinDesk that this new law may
provide better protection for DAOs against being sued as general
partnerships: “Digital asset stakeholders made it clear to us
they were concerned about facing general partnership liability in
the absence of a well-defined corporate structure.  Our DAO
LLC legislation should dispel that concern.”

The text of the new law will be created under Wyoming Statute
§§ 17-31-101 to -116.  The full text of the new law
can be read here.

DOJ announces arrest of Bitcoin Fog founder who
allegedly laundered $335M in crypto

On Wednesday, the Department of Justice announced that it had arrested Roman
Sterlingov, the Russian-Swedish founder of Bitcoin Fog. 
According to the DOJ announcement, Bitcoin Fog was a cryptocurrency
tumbler or “mixer,” where a user’s cryptocurrency
funds can be mixed with other user’s funds with the intent of
obfuscating the crypto coins’ transaction histories. 
Bitcoin Fog gained “notoriety as a go-to money laundering
service for criminals seeking to hide their illicit proceeds from
law enforcement,” according to the DOJ.  The DOJ also
stated that Bitcoin Fog moved more than 1.2 million bitcoin, which
were valued at $335 million at the time of the transactions.

Prior to the arrest, an affidavit was filed on Monday by a
special agent for the Internal Revenue Service (IRS), which
revealed that Sterlingov was identified through analyzing the
Bitcoin blockchain.  Undercover transactions began in
September 2019, which confirmed that Bitcoin Fog was successfully
“tumbling” crypto transactions by breaking a link in the
blockchain between the source and ultimate destination of the
funds.

The full DOJ press release can be read here.  The affidavit from the IRS special
agent can be read in full here.

International Developments

Turkey bans cryptocurrency payments, sets up central
custodian

Two weeks ago, the Central Bank of the Republic of Turkey
(CBRT) published the Regulation on the
Prohibition of Crypto Assets to be used in Payment (the
“Regulation”).  The Regulation is set to take effect
on April 30, 2021.  The law defines cryptocurrencies as
“assets” under Turkish law and prohibits any direct or
indirect payment of cryptocurrencies.  Crypto cannot be
exchanged for services, and electronic financial institutions
cannot mediate platforms that offer trading, custody, transfer, or
issuance services for crypto assets.

The press release published by the CBRT
explains the rationale behind the Regulation: “Crypto assets
entail significant risks to the relevant parties due to the
following reasons: they are neither subject to any regulation and
supervision mechanisms nor a central regulatory authority; their
market values can be excessively volatile; they may be used in
illegal actions due to their anonymous structures; wallets can be
stolen or used unlawfully without the authorization of their
holders; and transactions are irrevocable.”

Following the publication of the Regulation two weeks ago, two
of Turkey’s local exchanges (Thodex and Vebitcoin) collapsed,
prompting Turkey to announce a new plan to manage its
cryptocurrency market risk.  According to a report from Bloomberg, the Turkish
government is planning to establish a central custodian bank to
eliminate counterparty risk.  Turkish authorities are also
contemplating a capital threshold for crypto exchanges and
education requirements for the executives running the
exchanges.

According to Bloomberg, two of Turkey’s largest
exchanges (Paribu and BtoTurk) were trading over $1 billion worth
of crypto daily at the beginning of 2021, and the crypto trading
volume in January alone accounted for approximately 25% of the
traded volume on the Turkish stock exchange, BIST.

South Korea set to tax crypto trading gains

Earlier this week, South Korea Finance Minister Hong
Nam-ki said that the South Korean government
will start taxing capital gains from trading of cryptocurrencies
beginning in January 2022.  The proposal will tax annual
cryptocurrency gains of more than 2.5 million won (South
Korea’s currency) ($2,253) at a rate of 20%. 
“It’s inevitable, we will need to impose taxes on gains
from trading of virtual assets,” said Hong Nam-ki.

The announcement follows last week’s remarks from Eun
Sung-soo, South Korea’s top financial regular, who suggested
that all cryptocurrency exchanges in South Korea could eventually
be shut down, since no cryptocurrency exchange had applied for a
Virtual Asset Service Provider (VASP) application.

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