NFT initiatives are launched across markets; US Banking Regulators Address Crypto; DOJ and Congress Target Crypto Fraud; FBI Cites Risks As DeFi Hacks Continue | Baker Hostetler

NFT initiatives are launched in ticketing, social media and college football

Of Christina O. Gotsis

According to a recent press release, a major ticketing and distribution company announced that event organizers selling tickets on the platform can now issue NFTs before, during and after live events. To date, the company has reportedly created more than 5 million digital tokens on the Flow blockchain that can be activated to access more engagement opportunities.

In a recent update to a blog post from May, a major US technology company announced that users of two of its social media platforms can now 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 both apps to share their digital collectibles across both.” The social media platforms support publishing and sharing of NFTs minted on the Flow blockchain or from wallets that support Ethereum or Polygon.

In a recent 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 the 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

Of Joanna F. Wasick

Earlier this month, the US Federal Reserve 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 warns that while DeFi “has not yet reached the point of becoming systemically important,” policymakers should consider DeFi’s impact on “financial stability” should DeFi increase in popularity and use. This increase could occur, the paper finds, if cryptocurrency prices stabilize, if blockchain services gain greater interoperability with existing payment and financial systems, or if cryptoassets become a separate, parallel financial system that delivers real-economy services. The article also examines how DApps, smart contracts, and other DeFi products and services work in the DeFi ecosystem, and it underscores the need for greater regulatory oversight in the space. Following the paper’s publication, Michael Barr, the newly appointed deputy chairman of the US Federal Reserve Board, gave his first official speech, echoing some of the paper’s calls for greater oversight of crypto. Specifically, Barr stated that greater transparency overall was needed and that banks engaged in crypto-related activities must have appropriate measures in place to manage emerging risks associated with these activities and to ensure compliance with all relevant laws, including those related to for money laundering.

Earlier this week, Michael Hsu, acting head of the Office of the Comptroller of the Currency (OCC), also spoke about the crypto industry. He noted that under his leadership, the OCC had adopted a cautious approach to allowing national banks and federal savings associations to engage in certain crypto activities. He praised this approach, given the fragility of the crypto ecosystem, as evidenced by the Terra stablecoin collapse in May and its aftermath, which wiped out billions of dollars in investor value. Hsu stated that the OCC is building on the work it has done over the past five years in the fintech/crypto space with respect to policy and service providers and related to IT and operational resilience oversight. He said the OCC also works closely with other agencies to ensure benefits from shared intelligence and understanding. However, he warned: “Much more work remains to be done.”

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DOJ Targets Crypto Fraud, House Subcommittee Addresses Consumer Risk

Of Robert A. Musiala Jr.

In a recent press release, the US Department of Justice announced the extradition of a Latvian man in connection with “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 defendants operated a number 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, resulting in .in losses of at least $7 million from victims in the United States and elsewhere.

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

According to reports last month, a major US cryptocurrency investment firm recently disclosed in public filings that it has responded to SEC staff regarding the securities law analysis related to the initial cryptocurrencies of the Stellar (XLM), Zcash (ZEC) and Horizen (ZEN) blockchains. Among other things, the disclosures will depart from previous 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 NFTs

Of Jordan R. Silversmith

The US Federal Bureau of Investigation (FBI) recently issued a warning to investors that cybercriminals are increasingly exploiting vulnerabilities in decentralized finance (DeFi) platforms to steal cryptocurrency from investors. Finding that nearly 97 percent of the $1.3 billion stolen in cryptocurrencies between January and March 2022 were 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 cyber criminals which exploits vulnerabilities in smart contracts that regulate DeFi platforms. The warning urges investors to research any DeFi platforms they use and ensure that the DeFi platforms are secure.

An Avalanche-based lending protocol recently fell victim to 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 used a $51 million flash loan from Avalanche to artificially manipulate the pool price of a single block. After consulting with security experts, the protocol developed a mitigation plan, alerted police and stopped 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 using non-fungible tokens (NFT) for recruitment and funding. The report describes an NFT “visible on at least one NFT trading website” bearing the ISIS emblem and titled “IS-NEWS #01.” According to the report, while the ISIS-themed NFT does not appear to have been traded, its existence on the blockchain makes it nearly impossible to remove or censor, unlike other online recruitment and messaging tools.

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