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Jonathan Barr, Jimmy Fokas and Maria Luevano Author Article for Corporate Governance Advisor

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• <a href="#Crypto">Crypto Product News: BTC/ETH ETNs, Custody, Insurance, Tokenized Treasuries</a> • <a href="#Members">Members of Congress Address ETH Classification in Letter to SEC Chair</a> • <a href="#FATF">FATF Publishes Update on Implementation of Crypto Recommendations</a> • <a href="#OFAC">OFAC Announces Sanctions for Crypto Activities, Adds Public Key to OFAC List</a> • <a href="#DOJ">DOJ and CFTC Bring Actions Against KuCoin Cryptocurrency Exchange</a> • <a href="#Ethereum">Ethereum Layer-2 Protocols Hacked</a>

Crypto Product News: BTC/ETH ETNs, Custody, Insurance, Tokenized Treasuries

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By <a href="https://www.bakerlaw.com/RobertAMusiala" target="_blank" rel="noreferrer noopener">Robert A. Musiala Jr.</a>

The London Stock Exchange (LSE) recently published a market notice addressing applications for Bitcoin and Ether exchange traded notes (ETNs), stating that the LSE “would accept applications for the admission to trading of Bitcoin and Ethereum Crypto ETNs … from 8 April 2024.” According to the notice, the LSE “is proposing that the first day of admission to trading of those Crypto ETN securities will be Tuesday 28 May 2024.”

In a recent press release, WisdomTree “announced that it has been granted a charter from the New York State Department of Financial Services (DFS) to operate as a limited purpose trust company under the New York Banking Law.” According to the press release, “[t]he trust company charter authorizes WisdomTree to perform fiduciary custody of digital assets, including digital wallet services, to issue and exchange DFS-approved stablecoins and manage stablecoin reserves under the newly formed entity, WisdomTree Digital Trust Company, LLC.”

According to another recent press release, “Marsh, the world’s leading insurance broker and risk advisor … announced the launch of a new insurance facility for custodians of digital assets, including financial institutions.” According to the press release, the new offering “provides insurance capacity up to $825 million” and “will support those organisations with digital assets held offline – known as cold storage – as well as those seeking to cover certain elements of risks for assets secured by Multi-Party Computation (MPC) or other custody solutions which do not operate entirely offline.”

According to recent reports, the market value of U.S. Treasury notes that have been tokenized on public blockchains, including Ethereum, Polygon, Avalanche and Stellar, has reached above $1 billion. According to a recent report by 21.co, “projects like Ondo Finance, Backed Finance, Matrixdock, Maple Finance [and] Swarm … have tokenized US Treasuries on-chain and have successfully attracted over $300M AUM.” The report also notes that “Franklin Templeton and WisdomTree also tokenized their US Treasuries products … [I]nstead of using EVM-Compatible blockchains, they opt for Stellar.”

For more information, please refer to the following links:

<a href="https://docs.londonstockexchange.com/sites/default/files/documents/n0324.pdf" target="_blank" rel="noreferrer noopener">London Stock Exchange Market Notice N03/24 – Admission of Bitcoin and Ethereum ETNs</a>

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<a href="https://www.businesswire.com/news/home/20240322928015/en/WisdomTree-Granted-Trust-Company-Charter-by-New-York-State-Department-of-Financial-Services-DFS-WisdomTree-Prime%E2%84%A2-Set-to-Launch-in-New-York" target="_blank" rel="noreferrer noopener">WisdomTree Granted Trust Company Charter by New York State Department of Financial Services (DFS), WisdomTree Prime™ Set to Launch in New York</a>

<a href="https://www.marsh.com/en/about/media/marsh-launches-new-global-facility-providing-cover-up-for-digital-asset-custodians.html" target="_blank" rel="noreferrer noopener">Marsh launches new global facility providing cover up to $825 million for digital asset custodians</a>

<a href="https://www.coindesk.com/markets/2024/03/28/over-1b-in-us-treasury-notes-has-been-tokenized-on-public-blockchains" target="_blank" rel="noreferrer noopener">Over $1B in U.S. Treasury Notes Has Been Tokenized on Public Blockchains</a>

<a href="https://dune.com/21co/tokenization-government-securities" target="_blank" rel="noreferrer noopener">Tokenization: Government Securities</a>

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Members of Congress Address ETH Classification in Letter to SEC Chair

According to a recent press release, in response to an announcement by Prometheum Capital that it will provide custody services for ETH, a group of Republican members of Congress from the House Financial Services Committee and House Committee on Agriculture sent a letter to Securities and Exchange Commission (SEC) Chair Gary Gensler demanding that the SEC “clarify the SEC’s position with respect to a Special Purpose Broker Dealer’s (SPBD) ability to custody non-security digital assets, the SEC’s willingness to address SPBD non-compliance, the regulatory classification of ETH, and the SEC’s position regarding Prometheum’s announcement.” The press release further notes, “The SEC and the CFTC have an extensive record of identifying ETH as a non-security digital asset” and states that “the SEC’s current regime, grounded in this precedent, does not permit SPBD custody of non-security digital assets.”

According to the letter addressed to Chair Gensler, the “unwillingness to clarify the treatment of ETH only exacerbates the confusion and uncertainty regarding ETH’s classification as demonstrated by the Prometheum announcement.” Among other things, the letter further notes, “The regulatory treatment of ETH is not solely a matter of importance to the SEC[;] it directly implicates the CFTC and the commodity futures markets … . If the SEC determines that ETH is a digital asset security, CFTC registered commodity derivative exchanges may no longer be able to list and offer ETH Futures for trading as commodity futures products.” According to the letter, “[t]he negative repercussions of the SEC implicitly or directly classifying ETH as a digital asset security will cascade throughout the digital asset marketplace both in the short and long term.”

<a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409210" target="_blank" rel="noreferrer noopener">Financial Services, Agriculture Republicans Demand SEC Clarify Position Regarding Prometheum’s Custody of Ethereum’s Ether</a>

FATF Publishes Update on Implementation of Crypto Recommendations

By <a href="https://www.bakerlaw.com/RobertAMusiala" target="_blank" rel="noreferrer noopener">Robert A. Musiala Jr.</a><a href="https://www.bakerlaw.com/VeronicaReynolds"></a>

The Financial Action Task Force (FATF) recently published a report titled Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity. According to the report, “[f]ollowing a 12-month process to collect and evaluate information, the FATF is publishing a table which sets out the status of implementation by FATF members and jurisdictions with materially important virtual asset service providers (VASP) activity of the FATF’s Standards on virtual assets and VASPs (Recommendation 15).” The report notes that “[v]irtual assets are inherently international and borderless, meaning a failure to regulate VASPs in one jurisdiction can have serious global implications,” including those related to financing the proliferation of weapons of mass destruction, ransomware and terrorist financing.

The table in the report “includes all FATF members plus twenty jurisdictions with materially important VASP activity” as identified based on virtual asset trading volume and user base. The table “shows the steps FATF members and … jurisdictions with materially important VASP activity have taken to implement the FATF Standards in relation to regulating and supervising VASPs.” According to an FATF press release, “[m]any countries have yet to fully implement the FATF’s requirements on virtual assets and [VASPs] to prevent their misuse for illicit finance.”

<a href="https://www.fatf-gafi.org/content/dam/fatf-gafi/publications/VACG-Table-Jurisdictions-2024.pdf.coredownload.pdf" target="_blank" rel="noreferrer noopener">FATF: Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity</a>

<a href="https://www.fatf-gafi.org/en/publications/Virtualassets/VACG-Snapshot-Jurisdictions.html" target="_blank" rel="noreferrer noopener">Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity</a>

OFAC Announces Sanctions for Crypto Activities, Adds Public Key to OFAC List

In two separate press releases published March 25-26, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against various individuals and entities related, in part, to activities involving cryptocurrencies. The first press release describes sanctions against “thirteen entities and two individuals for operating in the financial services and technology sectors of the Russian Federation economy including persons developing or offering services in virtual assets that enable the evasion of U.S. sanctions.” The second press release describes sanctions against “six entities, one individual and two tankers … that have engaged in facilitating commodity shipments and financial transactions for the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF), the Houthis, and Hizballah,” including a “Lebanon-based Syrian money exchanger” that “provided Hizballah with digital wallets to receive funds from IRGC-QF commodity sales, as well as to conduct cryptocurrency transfers” and “conducted cryptocurrency transfers for sanctioned Hizballah officials.” As part of the second action, OFAC added a new cryptocurrency public key to OFAC’s specially designated nationals list.

<a href="https://home.treasury.gov/news/press-releases/jy2209" target="_blank" rel="noreferrer noopener">Treasury Targets Qods Force, Houthi, and Hizballah Finance and Trade Facilitators</a>

<a href="https://ofac.treasury.gov/recent-actions/20240326" target="_blank" rel="noreferrer noopener">Counter Terrorism Designations; Syria Designations</a>

<a href="https://www.trmlabs.com/post/us-treasury-sanctions-terrorist-financier-for-providing-crypto-related-services-to-hezbollah" target="_blank" rel="noreferrer noopener">US Treasury Sanctions Terrorist Financier for Providing Crypto-Related Services to Hezbollah</a>

<a href="https://home.treasury.gov/news/press-releases/jy2204" target="_blank" rel="noreferrer noopener">Treasury Designates Russian Companies Supporting Sanctions Evasion Through Virtual Asset Services and Technology Procurement</a>

<a href="https://www.trmlabs.com/post/us-treasurys-ofac-sanctioned-russia-based-crypto-exchanges-and-fintechs-for-facilitating-sanctions-evasion" target="_blank" rel="noreferrer noopener">US Treasury’s OFAC sanctions Russia-based crypto exchanges and fintech’s for facilitating sanctions evasion</a>

DOJ and CFTC Bring Actions Against KuCoin Cryptocurrency Exchange

By <a href="https://www.bakerlaw.com/ChristopherLamb">Christopher Lamb</a>

A recent press release by the U.S. Department of Justice (DOJ) announced the unsealing of an indictment against the global cryptocurrency exchange KuCoin and two of its founders, Chun Gan aka “Michael” and Ke Tang aka “Eric.” The indictment alleges that KuCoin conspired to operate an unlicensed money transmitting business and conspired to violate the Bank Secrecy Act by “willfully failing to maintain an adequate anti-money laundering (‘AML’) program designed to prevent KuCoin from being used for money laundering and terrorist financing, failing to maintain reasonable procedures for verifying the identity of customers, and failing to file any suspicious activity reports.” According to the release, “KuCoin solicited business from U.S. customers through its spot trading platform and, later, its futures trading platform” and KuCoin and its founders were aware of U.S. AML obligations “but willfully chose to flout those requirements.”

According to another recent press release, the Commodity Futures Trading Commission announced a civil enforcement action in the U.S. District Court for the Southern District of New York charging Mek Global Limited, PhoenixFin PTE Ltd., Flashdot Limited and Peken Global Limited – collectively, KuCoin – for violating the Commodity Exchange Act and CFTC regulations. According to the release, “KuCoin illegally dealt in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions; solicitated and accepted orders for commodity futures, swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a futures commission merchant,” among other violations. The CFTC is seeking “disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction” against those charged.

<a href="https://www.justice.gov/usao-sdny/pr/prominent-global-cryptocurrency-exchange-kucoin-and-two-its-founders-criminally">Prominent Global Cryptocurrency Exchange KuCoin And Two Of Its Founders Criminally Charged With Bank Secrecy Act And Unlicensed Money Transmission Offenses</a>

<a href="https://www.cftc.gov/PressRoom/PressReleases/8884-24" target="_blank" rel="noreferrer noopener">CFTC Charges KuCoin with Operating Illegal Digital Asset Derivatives Exchange</a>

According to recent reports, Munchables, a non-fungible token game built on the Ethereum layer-2 Blast protocol, was the victim of a hack in which the attacker stole ETH valued at $62 million. The hack was reportedly executed by a Munchables developer who later returned the ETH without demanding a ransom.

In another recent incident, a hacker stole $16 million in digital assets from Ethereum layer-2 protocol Curio. The hack reportedly involved a smart contract exploit in which the hacker exploited a vulnerability related to voting power privileges and breached a MakerDAO-based smart contract.

<a href="https://cointelegraph.com/news/munchables-hacker-returns-ether-without-ransom" target="_blank" rel="noreferrer noopener">Munchables hacker returns $62.8M Ether without ransom</a>

<a href="https://cointelegraph.com/news/nft-game-munchables-blast-exploited-62-million" target="_blank" rel="noreferrer noopener">Crypto game Munchables on Blast exploited for $63M</a>

<a href="https://cointelegraph.com/news/curio-smart-contract-exploit-hacker-mints-1-billion-tokens" target="_blank" rel="noreferrer noopener">Hacker mints 1B tokens in $16M Curio smart contract exploit</a>

Weekly Blockchain Blog – April 1, 2024

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