Crypto-Asset Markets: Potential Channels for Future Financial Stability
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American Bar Association Business Law Section Committee on Derivatives and Futures Law
American Bar Association Business Law Section Committee on Derivatives and Futures Law Winter Meeting 2018 Naples, Florida Friday, January 19, 2018 10:15 a.m. to 11:30 a.m. NEW PRODUCTS / FINANCIAL TECHNOLOGY Moderator for the Program: Conrad G. Bahlke, Willkie Farr &Gallagher LLP Speakers: Geoffrey F. Aronow, Sidley Austin LLP Debra W. Cook, Depository Trust & Clearing Corporation Katherine Cooper, Law Office of Katherine Cooper Isabelle Corbett, R3 David Lucking, Allen & Overy LLP Brian D. Quintenz, Commissioner, U.S. Commodity Futures Trading Commission ABA BUSINESS LAW SECTION DERIVATIVES & FUTURES LAW COMMITTEE 2018 WINTER MEETING NEW PRODUCTS / FIN TECH PANEL 2017 Developments in US Regulation of Virtual Currencies and Related Products: Yin and Yang January 5, 2018 By Katherine Cooper1 2017 was a year during which virtual currencies began to move into the mainstream financial markets. This generated significant legal and regulatory developments as U.S. regulators faced numerous novel products attempting to blend the old with the new. Although facing so many novel issues, the regulators’ responses tell a familiar story of the struggle to balance the yin of customer protection with the yang of encouraging financial innovation and competition. Below is a summary of 2017 developments from the SEC, CFTC, OCC, FinCEN and the States. I. Securities and Exchange Commission a. Bitcoin Exchange-Traded Products A number of sponsors of proposed Bitcoin exchange traded products had applications for approval pending before the Securities and Exchange Commission at the beginning of 2017. In March 2017, the SEC rejected a proposal backed by Tyler and Cameron Winklevoss.2 The Bats Exchange proposed a rule amendment which would list the shares of the Winklevoss Bitcoin Trust for trading. -
Rev. Rul. 2019-24 ISSUES (1) Does a Taxpayer Have Gross Income Under
26 CFR 1.61-1: Gross income. (Also §§ 61, 451, 1011.) Rev. Rul. 2019-24 ISSUES (1) Does a taxpayer have gross income under § 61 of the Internal Revenue Code (Code) as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency? (2) Does a taxpayer have gross income under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency? BACKGROUND Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency. Foreign currency is the coin and paper money of a country other than the United States that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. See 31 C.F.R. § 1010.100(m). - 2 - Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. A hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. -
Blockchain & Distributed Ledger Technologies
Science, Technology Assessment, SEPTEMBER 2019 and Analytics WHY THIS MATTERS Distributed ledger technology (e.g. blockchain) allows users to carry out digital transactions without the need SCIENCE & TECH SPOTLIGHT: for a centralized authority. It could fundamentally change the way government and industry conduct BLOCKCHAIN & DISTRIBUTED business, but questions remain about how to mitigate fraud, money laundering, and excessive energy use. LEDGER TECHNOLOGIES /// THE TECHNOLOGY What is it? Distributed ledger technologies (DLT) like blockchain are a secure way of conducting and recording transfers of digital assets without the need for a central authority. DLT is “distributed” because multiple participants in a computer network (individuals, businesses, etc.), share and synchronize copies of the ledger. New transactions are added in a manner that is cryptographically secured, permanent, and visible to all participants in near real time. Figure 2. How blockchain, a form of distributed ledger technology, acts as a means of payment for cryptocurrencies. Cryptocurrencies like Bitcoin are a digital representation of value and represent the best-known use case for DLT. The regulatory and legal frameworks surrounding cryptocurrencies remain fragmented across Figure 1. Difference between centralized and distributed ledgers. countries, with some implicitly or explicitly banning them, and others allowing them. How does it work? Distributed ledgers do not need a central, trusted authority because as transactions are added, they are verified using what In addition to cryptocurrencies, there are a number of other efforts is known as a consensus protocol. Blockchain, for example, ensures the underway to make use of DLT. For example, Hyperledger Fabric is ledger is valid because each “block” of transactions is cryptographically a permissioned and private blockchain framework created by the linked to the previous block so that any change would alert all other Hyperledger consortium to help develop DLT for a variety of business users. -
An Anonymous Trust-Marking Scheme on Blockchain Systems
An Anonymous Trust-Marking Scheme on Blockchain Systems Teppei Sato Keita Emura Tomoki Fujitani Kazumasa Omote University of Tsukuba National Institute of University of Tsukuba University of Tsukuba Japan Information and National Institute of National Institute of Communications Technology Information and Information and Japan Communications Technology Communications Technology Japan Japan Abstract—During the Coincheck incident, which recorded During the Coincheck incident, which recorded the largest the largest damages in cryptocurrency history in 2018, it was damages in cryptocurrency history in 2018, some volun- demonstrated that using Mosaic token can have a certain effect. teers tracked leaked New Economy Movement (NEM) cryp- Although it seems attractive to employ tokens as countermea- sures for cryptocurrency leakage, Mosaic is a specific token tocurrencies using Mosaic, which is a NEM-specific fea- for the New Economy Movement (NEM) cryptocurrency and ture allowing a self-made token to be sent on the NEM is not employed for other blockchain systems or cryptocurren- blockchain. These volunteers sent Mosaic to addresses that cies. Moreover, although some volunteers tracked leaked NEM received leaked NEMs from Coincheck addresses and warned using Mosaic in the CoinCheck incident, it would be better the recipients that these should not be exchanged for other to verify that the volunteers can be trusted. Simultaneously, if someone (e.g., who stole cryptocurrencies) can identify the cryptocurrencies or legal currencies. A criminal can discard volunteers, then that person or organization may be targets of such marked addresses, so it can be seen as a cat-and- them. In this paper, we propose an anonymous trust-marking mouse game. -
Blockchain Law: the Fork Not Taken
Blockchain Law The fork not taken Robert A. Schwinger, New York Law Journal — November 24, 2020 I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference. — Robert Frost Is the token holder — often the holder of some form of digital currency — always free to choose which branch of the fork to take? A blockchain is often envisioned as a record of a single continuous Background: ‘Two roads diverged in a sequential series of transactions, like the links of the metaphorical chain from which the term “blockchain” derives. But sometimes yellow wood’ the chain turns out to be not so single or continuous. Sometimes situations can arise where a portion of the chain can branch off A blockchain fork occurs when someone seeks to divide a into a new direction from the original chain, while the original chain blockchain into two branches by changing its source code, which also continues to move forward separately. This presents a choice is possible to do because the code is open. For those users who for the current holders of the digital tokens on that blockchain choose to upgrade their software, the software then “rejects about which direction they wish to follow going forward. In the all transactions from older software, effectively creating a new world of blockchain, this scenario is termed a “fork.” branch of the blockchain. However, those users who retain the old software continue to process transactions, meaning that But is the tokenholder—often the holder of some form of digital there is a parallel set of transactions taking place across two currency—always free to choose which branch of the fork to different chains.” See generally N. -
Review Articles
review articles DOI:10.1145/3372115 system is designed to achieve common Software weaknesses in cryptocurrencies security goals: transaction integrity and availability in a highly distributed sys- create unique challenges in responsible tem whose participants are incentiv- revelations. ized to cooperate.38 Users interact with the cryptocurrency system via software BY RAINER BÖHME, LISA ECKEY, TYLER MOORE, “wallets” that manage the cryptograph- NEHA NARULA, TIM RUFFING, AND AVIV ZOHAR ic keys associated with the coins of the user. These wallets can reside on a local client machine or be managed by an online service provider. In these appli- cations, authenticating users and Responsible maintaining confidentiality of crypto- graphic key material are the central se- curity goals. Exchanges facilitate trade Vulnerability between cryptocurrencies and between cryptocurrencies and traditional forms of money. Wallets broadcast cryptocur- Disclosure in rency transactions to a network of nodes, which then relay transactions to miners, who in turn validate and group Cryptocurrencies them together into blocks that are ap- pended to the blockchain. Not all cryptocurrency applications revolve around payments. Some crypto- currencies, most notably Ethereum, support “smart contracts” in which general-purpose code can be executed with integrity assurances and recorded DESPITE THE FOCUS on operating in adversarial on the distributed ledger. An explosion of token systems has appeared, in environments, cryptocurrencies have suffered a litany which particular functionality is ex- of security and privacy problems. Sometimes, these pressed and run on top of a cryptocur- rency.12 Here, the promise is that busi- issues are resolved without much fanfare following ness logic can be specified in the smart a disclosure by the individual who found the hole. -
Segwit2x –
SegWit2x – A New Statement The Overwhelming power of SegWit2x In order to safeguard the community from an undesired chain split, the upgrade should be overwhelming, but it’s not enough. It should also ‘appear’ as overwhelming. People, businesses and services needs to be certain about what is going to happen and the risks if they won’t follow. My impression is that still too many speaking english people in the western world think the upgrade will be abandoned before or immediately after block 494784 is mined, thus they are going to simply ignore it. That could lead to unprepared patch up and confusion, while naïve users risk to harm themselves. For this reason and for the sake of the Bitcoin community as a whole, we need to show again, clearly and publicly the extent of the support to SegWit2x. We also need to commit ourselves in a widespread communication campaign. I know this is not a strict technical matter, but it could help a lot avoiding technical issues in the future. What we have to do First, we need a new statement from the original NYA signers and all the business, firms and individuals who joined the cause later. That statement should be slightly different from the original NYA though, and I am explaining why. We all know that what Bitcoin is will be ultimately determined by market forces, comprehensive of all the stakeholders involved: businesses, miners, users, developers, traders, investors, holders etc. Each category has its own weight in the process, and everybody has incentives in following the market. -
Liquidity Or Leakage Plumbing Problems with Cryptocurrencies
Liquidity Or Leakage Plumbing Problems With Cryptocurrencies March 2018 Liquidity Or Leakage - Plumbing Problems With Cryptocurrencies Liquidity Or Leakage Plumbing Problems With Cryptocurrencies Rodney Greene Quantitative Risk Professional Advisor to Z/Yen Group Bob McDowall Advisor to Cardano Foundation Distributed Futures 1/60 © Z/Yen Group, 2018 Liquidity Or Leakage - Plumbing Problems With Cryptocurrencies Foreword Liquidity is the probability that an asset can be converted into an expected amount of value within an expected amount of time. Any token claiming to be ‘money’ should be very liquid. Cryptocurrencies often exhibit high price volatility and wide spreads between their buy and sell prices into fiat currencies. In other markets, such high volatility and wide spreads might indicate low liquidity, i.e. it is difficult to turn an asset into cash. Normal price falls do not increase the number of sellers but should increase the number of buyers. A liquidity hole is where price falls do not bring out buyers, but rather generate even more sellers. If cryptocurrencies fail to provide easy liquidity, then they fail as mediums of exchange, one of the principal roles of money. However, there are a number of ways of assembling a cryptocurrency and a number of parameters, such as the timing of trades, the money supply algorithm, and the assembling of blocks, that might be done in better ways to improve liquidity. This research should help policy makers look critically at what’s needed to provide good liquidity with these exciting systems. Michael Parsons FCA Chairman, Cardano Foundation, Distributed Futures 2/60 © Z/Yen Group, 2018 Liquidity Or Leakage - Plumbing Problems With Cryptocurrencies Contents Foreword .............................................................................................................. -
MYBTGWALLET SCAM the Dark Side of the Fork
MYBTGWALLET SCAM The dark side of the fork Intro After Bitcoin Cash fork on Aug. 1st, Bitcoin was involved in two other forks between October and November: before the so disputed Segwit2x announced fork, on Oct. 24th a new crypto was launched. Bitcoin Gold was a new greedy chance for Bitcoin owners to earn some free money: importing mnemonic seeds or private keys belonging to a BTC wallet in a BTG one they had the opportunity to redeem their free BTG. This was possible through local BTG clients or through some web services such as MyBTGWallet.com, a website listed directly on BTG official webpage. This particular case turned in a scam that stole an impressive number of Bitcoin from “unexperienced” users. The Scam Site MyBTGWallet scam worked in a very simple way: users imported the mnemonic seed of their BTC wallet on the scam page providing in this way the scammer with the private keys needed to steal the balance of bitcoin still on the wallet and any other cryptocurrencies stored on the same wallet (e.g. Ethereum or Litecoin in case it was a multicurrency wallet). MyBTGWallet page The site used a clever trick to save the mnemonic seed into the cookies of the browser and then siphoned the cookies via a google tracking javascript having this way access to all seeds checked on the website. 2 The numbers The website was used by many bitcoin holders after the fork happened. The scammers progressively moved the stolen funds to other bitcoin addresses. Thanks to open source intelligence activities, we were able to create the clusters of the stolen bitcoin and determine that the number of compromised addresses is almost 4500. -
Transparent and Collaborative Proof-Of-Work Consensus
StrongChain: Transparent and Collaborative Proof-of-Work Consensus Pawel Szalachowski, Daniël Reijsbergen, and Ivan Homoliak, Singapore University of Technology and Design (SUTD); Siwei Sun, Institute of Information Engineering and DCS Center, Chinese Academy of Sciences https://www.usenix.org/conference/usenixsecurity19/presentation/szalachowski This paper is included in the Proceedings of the 28th USENIX Security Symposium. August 14–16, 2019 • Santa Clara, CA, USA 978-1-939133-06-9 Open access to the Proceedings of the 28th USENIX Security Symposium is sponsored by USENIX. StrongChain: Transparent and Collaborative Proof-of-Work Consensus Pawel Szalachowski1 Daniel¨ Reijsbergen1 Ivan Homoliak1 Siwei Sun2;∗ 1Singapore University of Technology and Design (SUTD) 2Institute of Information Engineering and DCS Center, Chinese Academy of Sciences Abstract a cryptographically-protected append-only list [2] is intro- duced. This list consists of transactions grouped into blocks Bitcoin is the most successful cryptocurrency so far. This and is usually referred to as a blockchain. Every active pro- is mainly due to its novel consensus algorithm, which is tocol participant (called a miner) collects transactions sent based on proof-of-work combined with a cryptographically- by users and tries to solve a computationally-hard puzzle in protected data structure and a rewarding scheme that incen- order to be able to write to the blockchain (the process of tivizes nodes to participate. However, despite its unprece- solving the puzzle is called mining). When a valid solution dented success Bitcoin suffers from many inefficiencies. For is found, it is disseminated along with the transactions that instance, Bitcoin’s consensus mechanism has been proved to the miner wishes to append. -
Blockchain in Japan
Blockchain in Japan " 1" Blockchain in Japan " "The impact of Blockchain is huge. Its importance is similar to the emergence of Internet” Ministry of Economy, Trade and Industry of Japan1 1 Japanese Trade Ministry Exploring Blockchain Tech in Study Group, Coindesk 2" Blockchain in Japan " About this report This report has been made by Marta González for the EU-Japan Centre for Industrial Cooperation, a joint venture between the European Commission and the Japanese Ministry of Economy, Trade and Industry (METI). The Centre aims to promote all forms of industrial, trade and investment cooperation between Europe and Japan. For that purpose, it publishes a series of thematic reports designed to support research and policy analysis of EU-Japan economic and industrial issues. To elaborate this report, the author has relied on a wide variety of sources. She reviewed the existing literature, including research papers and press articles, and interviewed a number of Blockchain thought leaders and practitioners to get their views. She also relied on the many insights from the Japanese Blockchain community, including startups, corporation, regulators, associations and developers. Additionally, she accepted an invitation to give a talk1 about the state of Blockchain in Europe, where she also received input and interest from Japanese companies to learn from and cooperate with the EU. She has also received numerous manifestations of interest during the research and writing of the report, from businesses to regulatory bodies, revealing a strong potential for cooperation between Europe and Japan in Blockchain-related matters. THE AUTHOR Marta González is an Economist and Software Developer specialized in FinTech and Blockchain technology. -
CRYPTO CURRENCY Technical Competence & Rules of Professional Responsibility
CRYPTO CURRENCY Technical Competence & Rules of Professional Responsibility Marc J. Randazza Rule 1.1 Comment 8 To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject. Crypto Currency 1. What is Crypto Currency? 2. How does it work? 3. How could you screw this up? Blockchain •Decentralized •Transparent •Immutable Blockchain Blockchain • Time-stamped series of immutable records of data • Managed by a cluster of de-centralized computers • Each block is secured and bound to another, cryptographically • Shared • Immutable • Open for all to see – how you keep it honest Blockchain Blockchain • Transparent but also pseudonymous • If you look on the ledger, you will not see “Darren sent 1 BTC to Trixie” • Instead you will see “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC” • But, if you know someone’s wallet ID, you could trace their transactions Crypto Roller Coaster – 5 years Crypto Roller Coaster – 1 day How can you screw this up? Quadriga You can lose it & Bankruptcy Your mind • C$190 million turned to digital dust • Thrown away with no back up • Death of CEO turned death of • $127 million in the trash – gone business • 7,500 BTC – Fluctuates WILDLY Ethical Considerations You might be surprised at what violates Rule 1.8 Which Rules? Rule 1.2 (d) – Criminal or Fraudulent Activity Rule 1.5 (a) – Reasonable Fee Rule 1.6 – Confidentiality Rule 1.8 (a) – Business Dealings With Clients Rule 1.8(f) – Compensation From Other Than Your Client Rule 1.15 (a) – Safekeeping Property Rule 1.15 (c) – Trust Accounts Rule 1.2(d) – Criminal or Fraudulent Activity • Crypto *can* be used for criminal activity • Tends to be difficult, but not A lawyer shall not ..