Crypto Payment Products Launch; SEC Addresses DeFi, Targets DAO Tokens; OFAC Adds Crypto Exchange to SDN List; Crypto Fraud Schemes Revealed | BakerHostetler – JDSupra

Crypto Payment Products Launch; SEC Addresses DeFi, Targets DAO Tokens;  OFAC Adds Crypto Exchange to SDN List; Crypto Fraud Schemes Revealed | BakerHostetler - JDSupra

New Crypto Payment Products Launch, Report Cites Exchange Consolidation

This week, a major U.S. financial services firm announced its partnership with three leading cryptocurrency service providers in the Asia Pacific region to launch cryptocurrency-funded payment cards. The cards will reportedly allow consumers and businesses in the Asia Pacific region to apply for crypto-linked credit, debit or prepaid cards that instantly convert their cryptocurrencies into traditional fiat currencies for use in online and point-of-sale payments.

In another recent announcement, a major U.S. payments firm disclosed in its third-quarter earnings letter that it’s peer-to-peer payment service, which enables bitcoin transactions, generated $1.82 billion in bitcoin revenue during the quarter and $42 million of gross profit, up 115% and 29%, respectively, year over year.

In another development this week, a national dining and hospitality company announced plans to team up with bitcoin payments and technology firm NYDIG to offer a bitcoin loyalty rewards program. According to the press release, the program will allow customers of the dining and hospitality group to earn bitcoin points when dining at any of its 500 nationwide locations. The offering will reportedly be powered by NYDIG’s secure, regulated, full-stack platform.

A recent “report preview” from blockchain analytics firm Chainalysis cites a recent trend of the consolidation of companies in the cryptocurrency exchange landscape, noting that the number of active exchanges peaked in July 2020 and has since been falling. Among other things, the report breaks down different categories of exchanges and describes the trends and patterns in centralized exchanges, decentralized exchanges, high-risk exchanges, over-the-counter brokers and derivatives exchanges.

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This week, the U.S. Department of the Treasury “announced a set of actions focused on disrupting criminal ransomware actors and virtual currency exchanges that launder the proceeds of ransomware.” According to a press release, the actions are part of the Biden administration’s efforts to “to disrupt ransomware infrastructure and actors and address abuse of the virtual currency ecosystem to launder ransom payments.” The announced actions include “the designation of Chatex, a virtual currency exchange, and its associated support network, for facilitating financial transactions for ransomware actors.” The press release notes that Chatex “has direct ties with SUEX OTC, S.R.O. (Suex),” which “was sanctioned on September 21, 2021, for facilitating financial transactions for ransomware actors.”

Concurrently with the Department of the Treasury announcement, its Office of Foreign Assets Control (OFAC) added Chatex, as well as four other entities and two individuals, to OFAC’s List of Specially Designated Nationals and Blocked Person (SDN List), which means that “all property and interests in property of the designated targets that are subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with them” and with entities 50 percent or more owned by such targets. Three of the designated entities were listed because they “set up infrastructure for Chatex, enabling Chatex operations.” These additions to OFAC’s SDN List also included multiple cryptocurrency addresses that are associated with the newly designated individuals and entities.

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OFAC Adds Crypto Exchange and Cryptocurrency Addresses to OFAC SDN List

An article by Caroline Crenshaw, a commissioner of the U.S. Securities and Exchange Commission (SEC), was published earlier this week on investor risks in decentralized finance (DeFi) and how the DeFi community and SEC should combat them. The commissioner begins by noting that although its underlying technology is new, DeFi is “fundamentally about investing,” and many DeFi products and activities have close analogs within the SEC’s jurisdiction. Likewise, Crenshaw notes in the article that risks associated with traditional financial products, such as fraud, self-dealing, information asymmetry and manipulation, also exist with DeFi products. The commissioner’s article states that these risks are exacerbated by certain DeFi fundamentals, including less transparency, limited gatekeepers and pseudonymity.

To protect investors in the DeFi space, Crenshaw asserts that the DeFi community must work with the SEC to maintain certain conduct expectations that ensure a fair market where all investors can exist on a level playing field. And if a development team is unsure as to whether its project is within the SEC’s jurisdiction, according to the commissioner, that team should reach out to the SEC for guidance before proceeding to market. She then cautions that for any noncompliant DeFi projects in the SEC’s jurisdiction, “we do have an effective enforcement mechanism.”

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Enforcement Agencies Target DAO Offering and Fraudulent Crypto Companies

By Veronica Reynolds

This week, the U.S. Securities and Exchange Commission (SEC) filed an “Order Instituting Administrative Proceedings and Notice of Hearing” against American CryptoFed DAO LLC, a decentralized autonomous organization (DAO) established under Wyoming’s DAO statute. According to an SEC press release, the order halts the effectiveness of American CryptoFed’s registration of two digital tokens as securities. The order alleges that American CryptoFed submitted a Form 10 document to the SEC on Sept. 16 seeking to register two tokens – Ducat and Locke – as equity securities under the Securities Exchange Act of 1934. Thereafter, according to the order, SEC staff communicated to American CryptoFed certain deficiencies in its Form 10 submission, including failure to provide certain financial information and audited financial statements as well as providing inconsistent and misleading statements and omissions. The order states that American CryptoFed resubmitted a purported amended Form 10 two days later, asserting the tokens were not securities. According to the order, because American CryptoFed did not correct its Form 10 deficiencies or withdraw its Form 10, it must attend a hearing to determine whether the allegations in the order are valid and whether American CryptoFed’s purported token registration should be denied or suspended.

In New Jersey, the state’s Bureau of Securities recently issued summary cease and desist orders against five companies “touting fraudulent investment opportunities relating to cryptocurrencies” and requiring they stop operating in violation of New Jersey law. According to the orders, the companies all promote fraudulent statements and omissions, including vague promises of profit, limited and misleading disclosures, bogus client endorsements, and failure to identify the companies’ principals. A press release issued by the bureau asserts that none of the companies are registered with the bureau to sell or offer securities or act as broker-dealers in New Jersey, even though some of the companies targeted by the orders falsely claim to be licensed, insured or otherwise authorized to sell securities in the state. According to the press release, at least three of the five companies targeted by the orders have been found by the bureau to have defrauded investors out of approximately $89,000.

The FBI recently issued a public service announcement (PSA) warning about cryptocurrency fraud schemes that utilize cryptocurrency ATM machines and QR codes. The PSA provides details of typical encounters between a victim and criminal actors who make use of impersonation schemes, romance schemes and lottery schemes in order to steal funds. The victim is encouraged to deposit funds into a cryptocurrency ATM, populate the transfer recipient information through a QR code directed by the criminal actors and then transfer the funds in the form of cryptocurrency, often to foreign locations. The PSA further notes the difficulty of trying to recover such stolen funds given the decentralized nature of cryptocurrency.

A recent report warns of ads posted on a major international technology and search engine company website through which users are being directed to fake cryptocurrency wallet providers. According to the report, scammers are purchasing ads in response to users’ searches for the names of popular cryptocurrency wallets. However, the ads, which appear to mimic sites of actual wallet providers, instead direct the users to a phishing website. Once at the fraudulent website, users are asked to provide their credentials, or to enter a recovery password if they are trying to create a new wallet, resulting in the potential immediate transfer of funds directly to the scammer. According to a comment in the report, this appears to be a new trend in cybercrime, where a search engine is used as a primary way to reach victims as opposed to the typical phishing attack through email.

A decentralized finance lender reportedly suffered a hack of over $55 million, based on a report last week. The company indicated that a private key related to the protocol’s deployment was affected, but its smart contracts were not, according to the report. The company reportedly experienced three hacks last year and was previously able to recover some of the funds involved in those hacks.

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