NFT Initiatives Launch Across Markets; US Banking Regulators Address Crypto; DOJ and Congress Target Crypto Fraud; FBI Cites Risks as DeFi Hacks Continue | BakerHostetler

NFT Initiatives Launch in Ticket Sales, Social Media and College Football

By Christina O. Gotsis

According to a recent press release, a major ticket sales and distribution company announced that event organizers who sell tickets on its platform now can issue NFTs before, during and after live events. To date, the company has reportedly minted more than 5 million digital keepsakes on the Flow blockchain that can be activated to access additional engagement opportunities.

In a recent update to a May blog post, a major U.S. technology company announced that users of two of its social media platforms now can post NFTs by linking their digital wallets to their social media accounts. According to the blog post, “This will enable people to connect their digital wallets once to either app in order to share their digital collectibles across both.” The social media platforms support the posting and sharing of NFTs minted on the Flow blockchain or from wallets supporting Ethereum or Polygon.

In a final development, according to a press release, Fantastec SWAP, a technology firm focused on sports NFTs, recently launched limited-edition digital signature NFTs for two college football teams ahead of football season. Each athlete’s digital signature was reportedly recorded and authenticated on the Flow blockchain.

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US Banking Regulators Publish DeFi Analysis, Address Crypto in Speeches

By Joanna F. Wasick

Earlier this month, the U.S. central bank board published a paper that provides a broad overview of the DeFi ecosystem and analyzes the potential benefits and risks of DeFi adoption. The paper cautions that while DeFi “has not yet reached the point of becoming systemically important,” policymakers should assess DeFi’s impact on “financial stability” in the event DeFi increases in popularity and usage. That increase may occur, the paper finds, if cryptocurrency prices stabilize, if blockchain services gain greater interoperability with the existing payments and financial systems, or if crypto assets become a separate, parallel financial system that provides real economy services. The paper also examines how DApps, smart contracts, and other DeFi products and services operate in the DeFi ecosystem, and it emphasizes the need for greater regulatory oversight in the space overall. Following the paper’s publication, Michael Barr, the recently appointed vice chair of the U.S. central bank board, gave his first official speech, echoing some of the paper’s call for greater oversight in crypto. Specifically, Barr stated that greater transparency overall was needed and that banks engaged in crypto-related activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering.

Earlier this week, Michael Hsu, acting chief of the Office of the Comptroller of the Currency (OCC), also spoke out on the crypto industry. He remarked that under his direction, the OCC had adopted a cautious approach to permitting national banks and federal savings associations to engage in certain crypto activities. He lauded that approach, given the fragility in the crypto ecosystem, as evidenced by the Terra stablecoin collapse in May and its aftermath, in which billions of dollars in investor value were wiped out. Hsu stated that the OCC is building on the work it has accomplished over the past five years in the fintech/crypto space with regard to policy and service providers and related to IT and operational resilience supervision. He said that the OCC is also working closely with fellow agencies to help ensure benefits from shared intelligence and understanding. However, he cautioned, “Much more work remains to be done.”

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DOJ Targets Crypto Fraud, House Subcommittee Addresses Consumer Risks

By Robert A. Musiala Jr.

In a recent press release, the U.S. Department of Justice announced the extradition of a Latvian man in relation to “a six-count indictment charging him with wire fraud, securities fraud, and conspiracies to commit wire fraud and securities fraud in connection with the operation of eight companies that purported to offer, invest in or mine digital assets.” According to the press release, the defendant operated a series of entities “that advertised through email campaigns, social media and websites dedicated to cryptocurrencies” and made false representations to solicit investments related to initial coin offerings, cryptocurrency investment platforms and cryptocurrency mining operations, resulting in losses of at least $7 million from victims in the U.S. and elsewhere.

Another recent press release announced that a U.S. representative, the chair of the Subcommittee on Economic and Consumer Policy, has sent letters to the U.S. Department of the Treasury, the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission, and the U.S. Federal Trade Commission, as well as to five major U.S. cryptocurrency exchanges, “requesting information about the steps they are taking to combat cryptocurrency-related fraud and scams and additional actions that are needed to protect Americans.” According to the press release, “[T]he federal government has been slow to curb cryptocurrency scams and fraud, and existing federal regulations do not comprehensively or clearly cover digital assets under all circumstances.”

According to reports last month, a major U.S. cryptocurrency investment firm recently disclosed in public filings that it has been responding to SEC staff regarding the securities law analysis related to the native cryptocurrencies of the Stellar (XLM), Zcash (ZEC) and Horizen (ZEN) blockchains. Among other things, the disclosures reportedly diverge from prior filings by acknowledging that ZEC, ZEN and XLM each “may currently be a security, based on the facts as they exist today.”

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FBI Cites DeFi Hacking Threats as Hacks Continue; Reports Identify ISIS NFT

By Jordan R. Silversmith

The U.S. Federal Bureau of Investigation (FBI) recently released a warning to investors that cybercriminals are increasingly exploiting vulnerabilities in decentralized finance (DeFi) platforms to steal cryptocurrency from investors. Finding that almost 97 percent of the $1.3 billion stolen in cryptocurrencies between January and March 2022 was from DeFi platforms, the FBI noted that this represents an increase from 72 percent in 2021.The warning also noted that the FBI has observed cybercriminals exploiting vulnerabilities in smart contracts governing DeFi platforms. The warning urges investors to research any DeFi platforms they use and to ensure that the DeFi platforms are secure.

An Avalanche-based lending protocol was recently the victim of such a hack. A blockchain cybersecurity firm reported that a hacker stole $371,000 worth of USD Coin using a smart contract exploit. The protocol later released a detailed statement about the incident, explaining that an “exploiter” deployed a custom smart contract that utilized a $51 million flash loan from Avalanche to artificially manipulate the pool price for a single block. After consulting security experts, the protocol developed a mitigation plan, notified law enforcement and paused the exploited market.

According to recent reports, blockchain analysts and intelligence officials have noticed that the Islamic State of Iraq and Syria (ISIS) has begun to use non-fungible tokens (NFTs) for recruiting and funding. The report describes an NFT “visible on at least one NFT trading website” that bears the ISIS emblem and is titled “IS-NEWS #01.” According to the report, although the ISIS-themed NFT does not appear to have been traded, its existence on the blockchain makes it nearly impossible to remove or to censor, unlike other online recruiting and messaging tools.

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