Crypto Products Launch, Reports Detail CBDC Pilots and Bank Crypto Exposure
By Robert A. Musiala Jr.
Last week, Circle Internet Financial, the issuer of USD Coin (USDC), announced plans “to make USDC available on five additional blockchain ecosystems” including Arbitrum, Cosmos, NEAR, Optimism and Polkadot. Separately, according to recent reports, a major U.S. financial services firm has launched a new Ethereum Index Fund. The fund will reportedly be open to investors who are able to provide a minimum investment of $50,000.
In a press release published this week, a major global financial messaging service announced findings from its recent “experiments” related to central bank digital currencies (CBDCs) and “tokenized assets.” According to the press release, the findings show that CBDCs and tokenized assets “can move seamlessly on existing financial infrastructure.” The experiments reportedly “achieved CBDC-to-CBDC transactions between different DLT networks based on popular Quorum and Corda technologies, as well as fiat-to-CBDC flows between these networks and a real-time gross settlement system.” Multiple major central and commercial banks reportedly participated in the experiments.
A recent report from the Bank for International Settlements (BIS) provides an analysis of banks’ exposure to “cryptoassets.” Among other things, the report noted: (1) “Total cryptoasset exposures reported by banks amount to approximately €9.4 billion,” representing “only 0.14% of total exposures on a weighted average basis across the sample of banks”; (2) “Cryptoasset exposures are distributed unevenly across reporting banks, with two banks making up more than half of overall cryptoasset exposures, and four more banks making up just below 40% of the remaining exposures”; and (3) “Reported cryptoasset exposures are primarily composed of Bitcoin (31%), Ether (22%) and a multitude of instruments with either Bitcoin or Ether as the underlying cryptoassets (25% and 10% respectively).”
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DAO Governing DAI Stablecoin Invests in US Treasuries and Corporate Bonds
By Jordan R. Silversmith
According to recent reports, the decentralized autonomous organization (DAO) that governs MakerDAO and the protocol underpinning the algorithmic, “overcollateralized” stablecoin DAI, has announced plans to allocate $500 million to invest in “minimal risk” U.S. Treasuries and corporate bonds. The DAO governing the DAI stablecoin reportedly said 80% of the investment will reportedly go toward U.S. short-term Treasuries, while 20% will go to investment-grade corporate bonds. The community voted in favor of the allocation proposal, which was presented in June, in part to diversify the MakerDAO balance sheet and provide a more stable backing for the DAI stablecoin. According to reports, the investment will be facilitated with help from DeFi adviser Monetalis and digital asset bank Sygnum.
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Digital Collectibles + Physical Consumables: Brands Embrace Hybrid NFT Model
By Lauren Bass
A pop culture collectible manufacturer has reportedly teamed with a major Hollywood studio and an American multinational retailer to design and distribute a new comic book via a non-fungible token (NFT). According to reports, this self-described “phygital” collectible will be available to buyers as both a physical hard copy as well as a digital NFT minted on the World Asset eXchange (WAX) blockchain.
In similar news, an American jean manufacturer reportedly teamed with a Web3 media company to create an interactive digital comic strip whose storyline was dictated by community participants, 20 of whom won exclusive pieces of clothing chipped with NFC (near-field communication) technology that linked to an NFT of the completed strip. This reportedly marks the retailer’s second hybrid NFT series, following an earlier partnership with a Grammy-winning singer/songwriter. According to reports, both collaborations were created on the LTD.INC platform, which provides blockchain proof of ownership as well as access to exclusive digital content and communities.
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Treasury Releases Report on Digital Asset Financial Stability Risks/Regulation
By Sydney Park
This week, the Financial Stability Oversight Council (FSOC) released its report on Digital Asset Financial Stability Risks and Regulation (Report) in response to President Biden’s Executive Order 14067, “Ensuring the Responsible Development of Digital Assets.” According to an FSOC fact sheet (Fact Sheet), the Report reviews “specific financial stability risks and regulatory gaps posed by various types of digital assets and provides recommendations to address such risks.” The Fact Sheet notes that “crypto-asset activities” could pose risks to the U.S. financial system “if their interconnections with the traditional financial system . . . grow without adherence to or being paired with appropriate regulation.” The Fact Sheet acknowledges that “the existing regulatory system covers a large part of the crypto-asset ecosystem.” However, the Fact Sheet highlights three gaps in regulation: (1) “spot markets for crypto-assets that are not securities are subject to limited direct federal regulation”; (2) “crypto-asset businesses do not have a consistent or comprehensive regulatory framework”; and (3) “[f]inancial stability and investor protection implications” arising from “retail investors’ exposure to certain practices commonly proposed by vertically integrated trading platforms, such as automated liquidation.”
Of the 10 recommendations made in the Report, the Fact Sheet highlights three recommendations that specifically address the identified regulatory gaps: (1) the passage of legislation providing for “rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities”; (2) taking steps “to address regulatory arbitrage”; and (3) undertaking a study of “potential vertical integration by crypto-asset firms.”
In a statement released this week in support of the Report and its findings, Acting Comptroller of the Currency Michael J. Hsu stated, “We know what happens when regulatory agencies fail to coordinate effectively . . . each member must consider financial stability from a systemwide perspective …. This is especially important in emergent areas like crypto.” In remarks this week, Secretary of the Treasury Janet Yellen said the report “provides a strong foundation for policymakers as we work to mitigate the risks of digital assets while realizing the potential benefits.”
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SEC Brings Enforcement Actions Against Crypto Promoters and Fraudsters
By Shade Quailey
This week, the U.S. Securities & Exchange Commission (SEC) published a press release announcing charges against Kim Kardashian for “touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.” According to the press release, Kardashian “failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax.” The SEC order found that Kardashian’s actions violated the anti-touting provision of the federal securities laws. Kardashian agreed to a settlement in which she will pay $1.26 million in penalties, disgorgement and interest and cooperate with the SEC Enforcement Division’s Crypto Assets and Cyber Unit’s ongoing investigation. She also agreed to not promote crypto assets for three years.
In a quote from the press release, Gary Gensler, the chair of the SEC, said, “Ms. Kardashian’s case … serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.” In another quote, the director of the SEC’s Enforcement Division, Gurbir S. Grewal, said, “[F]ederal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion. … Investors are entitled to know whether the publicity of a security is unbiased.”
In a separate action, the SEC announced charges against foreign companies Arbitrade Ltd. and Cryptobontix Inc., their respective principals, and a so-called international gold trader for allegedly perpetrating a pump-and-dump scheme involving crypto asset “Dignity” or “DIG.” The complaint alleges that between May 2018 and January 2019, Arbitrade and Crytobontix, through their principals and international gold trader, issued false announcements claiming (1) that Arbitrade had acquired $10 billion in gold bullion, (2) that the company would back each DIG token issued and sold to investors with $1.00 worth of this gold, and (3) that independent accounting firms had performed an “audit” of the gold and verified its existence. The complaint alleges that in reality, the acquisition of the gold was a sham to increase demand for DIG, which enabled the principals to sell at least $36.8 million of DIG, including to U.S. investors, at fraudulently inflated prices.
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