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Financial Firms and Crypto Networks Launch Initiatives; Nonprofit Challenges Crypto Tax Provision; Crypto Enforcement Continues; UST Analysis Published | BakerHostetler

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Firms Announce New Crypto Initiatives; Data Published on Crypto and NFT Use

By Robert A. Musiala Jr. and Veronica Reynolds

Late last week, a major U.S. cryptocurrency custodian announced “a groundbreaking, industry-first custody exchange network giving institutions direct access to most trading pairs across prominent exchanges.” According to a press release, the cryptocurrency custodian has fully integrated with one major U.S. crypto exchange and has commitments to integrate with four other exchanges. The press release notes that the new network will enable various benefits, including separation between qualified custody and a crypto exchange, increased access to liquidity, reduced counterparty risk, and reduced hot wallet hacking risk.

In another recent development, a major U.S. financial services firm announced that it is working with various NFT marketplaces to enable purchases of NFTs using traditional credit card payments. According to the announcement, a recent survey found that roughly half of respondents sought the ability “to pay with crypto for everyday purchases or [use] a credit or debit card to buy an NFT.”

Also this week, a major global asset management firm announced a partnership with the blockchain arm of a fund distribution platform. According to a press release, the goal of the partnership is to incorporate the asset services of the asset management firm within the blockchain ecosystem, with the hope that the collaboration will help unlock “transactional efficiencies and enhanced transparency as well as operational agility that makes investment solutions available to a broader investor base.”

Finally, this week two survey results were published that provide insight into digital asset investor sentiment. The first found that 71 percent of the world’s wealthiest people – 46 percent of whom reported wealth of at least $30 million – have invested in digital assets. However, the survey indicates that the concentration of digital assets within investor portfolios is small, with only 14 percent allocated to “alternative investments,” which includes cryptocurrency as well as other, riskier assets. A second survey, conducted on Twitter, found that 64 percent of respondents reported they buy NFTs primarily to “make money,” with far fewer respondents reporting they do so to participate in the community and “flex” (14.7 percent), “collect digital art” (12.4 percent), or “access games and tools” (8.6 percent).

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Nonprofit Coin Center Files Lawsuit Challenging Crypto Provision of Tax Code

By Joanna F. Wasick

Last week, Coin Center, a nonprofit research and advocacy center focused on cryptocurrency public policy issues, filed a lawsuit against the United States Treasury, the Internal Revenue Service, the United States and related individuals, asserting that a recent amendment to the tax code was unconstitutional on its face. The amendment, known as the 6050I provision, was part of the Infrastructure Investment and Jobs Act passed last summer, and it will require individuals and businesses that receive $10,000 or more in cryptocurrency to report to the government the name, date of birth and Social Security number of the person who sent those funds. Coin Center’s complaint alleges that this requirement violates the Constitution in two ways: First, it violates the Fourth Amendment and the right of privacy by forcing people to collect sensitive information about others with whom they conduct direct transactions, and second, it violates the First Amendment by forcing politically active organizations to create and report lists of their donors’ names and identifying information. The complaint also names additional co-plaintiffs who, Coin Center asserts, receive the kinds of payments that would trigger the amended law and thereby be turned into “unwitting warrantless surveillance agents for the federal government.”

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OpenSea and Chainlink Announce Network Transitions

By Jordan R. Silversmith

Leading NFT marketplace OpenSea recently announced its transition to a new open-source protocol in an attempt to lower transaction costs. According to the company’s announcement, OpenSea estimates that the switch could significantly lower transaction costs, or “gas” costs, by “about 35% based on last year’s data.” The company estimates the new protocol will save users $460 million in the next year. Sellers on the marketplace will have to pay a one-time fee per collection to sell their NFTs on the new protocol.

In another network transition, decentralized oracle network Chainlink recently announced it had integrated its price information into Moonbeam, a new smart contract parachain on the Polkadot network protocol. According to reports, Chainlink noted that this venture will allow users who build within the platform to access price information compiled and aggregated from various exchanges, allowing decentralized finance developers to bring better price accuracy to their decentralized applications.

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SEC Investigates Stablecoins, Crypto Exchanges; DOJ Seizes Dark Market

By Keith R. Murphy

According to reports, the U.S. Securities and Exchange Commission (SEC) is investigating whether the developer of a well-known blockchain network and decentralized finance application violated U.S. law in how it marketed its algorithmic stablecoin and token. The SEC is reportedly looking to determine whether investor protection laws were broken in connection with the marketing of the coins, which effectively lost all their value recently. A related report indicates that the SEC has also launched a broader inquiry into whether cryptocurrency exchanges have sufficient protections against insider trading on their platforms.

According to a press release from the U.S. Department of Justice (DOJ), an illicit marketplace consisting of a series of websites selling personal information, including Social Security numbers and dates of birth, on the dark web has been seized by the DOJ and other U.S. and foreign law enforcement agencies. The administrators of the marketplace reportedly required buyers to use “digital payment methods, such as bitcoin” and employed various other techniques to maintain their anonymity and avoid detection of their activities for years.

The DOJ’s Office of the Inspector General recently issued its Audit of the United States Marshals Service’s Management of Seized Cryptocurrency. The stated objective of the audit was to evaluate the U.S. Marshals Service’s management of seized cryptocurrency, covering the period from fiscal years 2017 through 2021. Among other findings, the audit report states that the Marshals Service lacks important operating procedures and controls and faces challenges in the management and tracking of seized cryptocurrency. The audit report provides multiple recommendations to address these deficiencies.

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Report Analyzes UST Collapse, Australia Reports Losses to Crypto Scams

By Kayley B. Sullivan

A recently published Chainalysis report examined the collapse of TerraUSD (UST), which was once one of the largest stablecoins by market capitalization. UST is an algorithmic stablecoin, which means that it is backed by an on-chain algorithm that facilitates a change in supply and demand between the stablecoin and one or more cryptocurrencies. In the case of UST, it is backed by TerraLUNA (LUNA).

Analyzing the collapse, the report first points to two traders breaking the “peg” on May 7, which led to investor panic and many holders beginning to sell off or withdraw. To repair this, Terraform Labs and other supporters purchased $2 billion UST. According to the report, this was a short-lived solution, as the continued sell-off drained those funds and LUNA became hyperinflated. As a result, both tokens crashed.

In response to the recent cryptocurrency market crash, a crypto fund and a crypto lending company have reportedly taken some steps toward potential bankruptcy. A major Dubai-based crypto fund has been liquidated by crypto lending firms and is currently in the process of repaying lenders and other counterparties. Similarly, a major crypto lending firm has hired business-restructuring lawyers, according to reports.

According to a recent report from the Australian Competition and Consumer Commission, as a result of cryptocurrency scams, Australians lost more than 205 Australian dollars in the first four months of 2022, a 166 percent increase from the same months in 2021. The report notes that 75 percent of those losses came in the form of investment-related scams.

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