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US Department of Justice, CFTC Probe Crypto Market Manipulation: Report

The U.S Department of Justice has reportedly launched a criminal investigation into cryptocurrency traders who may have manipulated the market old-school illicit tactics.

According to a report by Bloomberg on Thursday citing anonymous sources familiar with the probe, the investigation is being conducted together with the Commodity and Futures Trading Commission (CFTC).

One area of the investigation targets so-called spoofing – a technique that has been used in traditional financial markets to affect price movements by making large volumes of fake orders – that possibly influenced trades of bitcoin and ethereum, according to the report.

In addition, DoJ is probing crypto traders who may have cheated the system by sending themselves large volumes of orders to create a mirage of increasing demand in order to tip other investors into making a move.

The news marks the latest effort by U.S. authorities to ensure a fair cryptocurrency market since the CFTC gave the green light to domestic exchanges to list bitcoin-backed futures and derivative products late last year.

Today’s report also comes just weeks after a commissioner from CFTC made comments on the agency’s growing scrutiny over cryptocurrency activities that may have violated the law.

As previously reported by CoinDesk, speaking at a conference in Washington, D.C., CFTC commissioner Brian Quintenz said the agency is particularly focusing on “fraud, market manipulation and disruptive trading involving virtual currency.”

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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‘BitLicense Refugees’: ShapeShift, Kraken Talk Escape from New York

If you wanted to hear red-meat rhetoric about New York State’s regulatory approach, a fireside chat Tuesday between two of the cryptocurrency industry’s most outspoken leaders delivered.

For example, the audience at Consensus 2018 in New York City cheered when ShapeShift CEO Erik Voorhees invoked a local icon to make the case that the state’s BitLicense was a case of regulatory overreach.

Here we are two miles from the Statue of Liberty and you cannot sell CryptoKitties in the state without that license. That’s the absurdity of what’s happened here,” he said.

And Jesse Powell, the CEO of Kraken, got some laughs at the expense of former New York Attorney General Eric Schneiderman.

When Scheniderman’s office sent a request for information to Kraken (along with several other exchanges) earlier this year – three years after his company stopped doing business in New York – it felt like “a slap in the face,” Powell said.

But then “it turns out this asshole actually slapped people in the face,” he quipped, referring to the allegations of physical abuse that forced Schneiderman to resign shortly afterward.

Yet between these zingers and applause lines about the BitLicense – which both executives blame for driving their companies out of state – there were subtler points made. The conversation highlighted the challenges facing both the industry and regulators worldwide as governments come to terms with the ramifications of cryptocurrency.

Powell, for example, pointed out the tension between anti-money-laundering regulations and customer privacy protections. In the case of the BitLicense, he said, Kraken would have had to “disclose all the information about our entire global client base to the state of New York.”

That was not only distasteful, Powell said, but “potentially illegal” under the privacy laws of other countries.

“To service New York today, what we’d have to do is create a special purpose entity just to service New York and completely firewall off” all the exchange’s other users to protect their privacy, he said.

Alternative models

Widening the lens, Powell contended that the U.S. “has really failed” by leaving it up to local regulators to figure out how to deal with cryptocurrencies.

“In others parts of the world, it’s an issue that’s being taken seriously by heads of state – presidents, prime ministers. It’s not something that’s relegated to individual regulators at a state level,” he said. “It should be treated as a national economic and national security issue, maybe even an international issue.”

Powell cited Japan’s Virtual Currency Act as an example of “reasonable” regulation. Although the law is “not perfect,” he said, “we’re already seeing an explosion of business in Japan” as a result of the clarity it brought.

Voorhees, however, held up a different U.S. state as an example of how to do things right: Wyoming, which recently passed a package of five blockchain-related laws.

The two most important ones, in his view, were a law that excludes tokens from being automatically categorized as securities, and another that excludes digital asset companies from being automatically classified as money transmitters.

“That’s the model people should be looking at, they’ve done it the best,” Voorhees said.

And despite using the phrase “statist oppression” early in the conversation to describe his feelings about New York when the BitLicense was created, Voorhees later clarified that he thinks regulators generally have good intentions.

But their aims can be met today by means other than imposing bureaucratic, bank-style regulations on businesses that want to be nothing like traditional financial institutions, he argued.

“The crypto industry and regulators can find common ground in realizing that this incredible new technology can achieve many of the noble goals of the regulators such as protecting consumers,” Voorhees said.

Regulatory hopscotch

Ultimately, though, the two executives depicted cryptocurrency as a highly mobile activity that can easily relocate when any jurisdiction starts to appear heavy-handed.

Powell said Kraken’s main office is located in San Francisco only as a convenience because that’s where he lived when he started the company. Crypto businesses can basically pick up and move anywhere in the world they want to be, he said.

And users need not always move to another place, use a VPN to mask their IP address or even break the law to get around restrictions; Powell shared a tip for New York residents who feel deprived because of the way the BitLicense has limited their cryptocurrency trading options.

“If you’re here stuck in New York and you can’t trade how you want to trade, set up a Wyoming LLC and you can trade through that and have your business trade for you,” he said.

Further limiting regulators’ power, Powell said, the rise of decentralized exchanges will give users even more alternatives.

“If they can’t do what they want on Kraken they’re doing to do it on a decentralized exchange,” he said.

And Voorhees said “regulatory hopscotch” by exchanges and other businesses that move from one country to another is only a symptom of a broader phenomenon that won’t easily be resolved.

He concluded:

“Bitcoin basically broke down the borders of how value moves across humanity. There is no way that an invention like that doesn’t run straight into the jaws of regulations. And that conflict is going to be one of the great themes of my lifetime.”

Photo via Wolfie Zhao for CoinDesk. Left to right: CoinDesk research director Nolan Bauerle, Jesse Powell and Erik Voorhees. 

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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‘Belligerent’ Crypto Miners Prompt Power Utility to Beef Up Security

A public utility in one of the U.S. hot spots for bitcoin mining is adopting new security measures in light of harassment of some of its employees.

The steps are being taken by the Chelan County Public Utility District (PUD) in Washington County – as previously reported, the area has attracted a number of bitcoin miners because of its abundant access to hydropower sources. Yet “confrontations” between staffers and would-be mine operators, as first reported by The Wenatchee World, has sparked a drive to add new cameras, install security panels and institute other actions.

On Monday, Chelan County PUD director of corporate security Rich Hyatt briefed the district’s commissioners during a meeting, attributing the moves to “belligerent behavior by impatient cryptocurrency miners” who are reacting poorly following a moratorium imposed on new bitcoin mines.

Hyatt explained:

“Some of the things we’re doing internally, we’ve got a lot of business security measures, at [headquarters] we’ve [installed] a lot of security panels, we’ve increased the camera coverage. We’ve also designed and are going into the construction phase for a very small store front lobby that would give employees a lot more security without having personnel or customers being able to walk right into their work area. We’re monitoring those areas.”

He also described new measures being taken to dissuade unauthorized bitcoin miners from setting up facilities, saying his office was making agreements with the chief of police, the county sheriff and the county prosecutor to investigate and potentially prosecute repeat offenders.

“We … have an agreement with those agencies that we could use [them] as the mechanism that when we prepare a case and gather the evidence and establish probable cause, we can take that case through their detectives and that can help the county for prosecution considerations,” he said.

The agency has also trained its personnel on how to deal with potentially hostile people by installing panic buttons for front-line staff and adding security officers able to spot “negative body language,” he said.

Security camera image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Australia’s Securities Watchdog Airs Concerns About Overseas ICOs

Australia’s securities watchdog has revealed plans to extend existing guidelines for initial coin offerings (ICOs).

In a speech at a fintech event in Sydney on Thursday, John Price, a commissioner of the Australian Securities and Investments Commission (ASIC), told the audience to expect updates that will focus overseas ICO fundraising projects targeting the country’s investors.

“We will highlight that Australian corporate and consumer law might apply – even if an ICO is created and offered from overseas. This is an important point given the international nature of this sector,” Price said during the event.

The remarks stem from concerns over the current perception that ICOs can bypass the regulator’s oversight by registering overseas.

“I cannot stress enough that if you are doing business here and selling something to Australians – including issuing securities or tokens to Australian consumers – our laws here can apply,” Price said.

ASIC first issued formal guidance for ICOs in September 2017, seeking to define the circumstances in which tokens should be treated as financial products and hence regulated by Australia’s Corporate Act 2001.

Price said, however, that the regulator still has concerns over the emerging space’s low threshold for immature businesses to enter, which drives a “certain level of opportunism.”

The commissioner stated:

“The stories that come out about these businesses are, and will continue to have, a negative impact on investor confidence over time.”

Australian dollar image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Fear and HODLing at MIT: Blockchain Experts Weigh Impact of SEC Crackdown

Regulation: It’s good for you, but it’s going to hurt.

That seemed to be the main takeaway for the cryptocurrency industry from Monday’s Business of Blockchain conference at the Massachusetts Institute of Technology (MIT).

On the one hand, the event was clouded by speculation that the U.S. Securities and Exchange Commission (SEC) may go as far as to classify two of the top three coins by market cap, ethereum and Ripple’s XRP, as securitiesSuch a determination could subject a wide swath of industry members to legal penalties – far beyond the promoters of recent initial coin offerings (ICOs) who were already on alert the last few months.

Those fears were reinforced late in the day when Gary Gensler, an old lion of financial services regulation, confirmed for the crowd that in his view, bitcoin’s two largest rivals may fit the description of securities in U.S. law.

“Ripple Labs sure seems like a common enterprise, or the Ethereum Foundation in 2014,” said Gensler, a former chairman of the Commodity Futures Trading Commission. “Ripple is doing a lot to advance the value of XRP.”

(The so-called Howey test says something is a security under U.S. law if it is an investment in a “common enterprise” offering an expectation of profits from the efforts of others.)

Yet, on the other hand, the general sentiment at the event was optimistic about regulators’ growing involvement in the space.

Neha Narula, director of the Digital Currency Initiative at MIT Media Lab, for example, told CoinDesk insufficient regulation can actually stifle innovation by deterring honest players because rampant scammers undermine market integrity.

And aligning with Gensler, Narula said, there need to be more honest conversations about the fact that many emerging cryptocurrencies are actually securities.

However, there may not be a bright line separating the two.

As Narula said:  

“We’re realizing money versus equity isn’t a binary choice. It’s a spectrum.”

Coming pain

And that realization could have a serious impact on the cryptocurrency industry.

Patrick Murck, counsel at Cooley LLP and fellow at Harvard’s Berkman Klein Center for Internet & Society, told CoinDesk the token economy could be on the verge of a dramatic shift if the SEC agrees with Gensler.

If ether and XRP are deemed securities, cryptocurrency exchanges and general industry promoters or foundations, or anyone who sold or evangelized projects like ethereum to the general public, could be subject to legal penalties.

“It would be like shooting fish in a barrel,” Murck said, adding:

“There’s nothing magical about the blockchain that absolves you from investor protection regulations if investors have to trust you to deliver something.”

Driving that point home, Gensler in his talk cited several reasons that the way ethereum and XRP were issued and traded seemed to meet the definition of securities.

For example, the 2014 ethereum crowdsale would have created an expectation of profit for the people who purchased tokens before the network went live.

“The Ethereum Foundation offering had a 50 percent appreciation right in the first 42 days written into the offering,” Gensler said on stage. (The industry think tank Coin Center in Washington, D.C. promptly issued a statement that “ether is not a security,” rebutting Gensler’s argument.)

Meanwhile, for issuers of new tokens, it’s almost impossible to walk the line, even with more feedback from regulators and lawyers.

For example, so-called airdrops, once viewed as a way to avoid breaking securities laws by simply sending free tokens to people who already have some type of cryptocurrency wallet, are instead creating a damned-if-you-do, damned-if-you-don’t situation.

If issuers fail to collect information about recipients of airdrops, they may inadvertently violate international sanctions (what if that wallet belongs to someone in Iran?). On the other hand, if they do collect such information, the airdrop may start to look like an investment in regulators’ eyes, according to Murck.

“The SEC has interpreted the first prong of the Howey Test broadly,” Murck told CoinDesk. “The collection of information may be enough to fit the first prong” – pegging an airdrop as “an investment of money.”

Long-term gain?

Even so, Murck joined others at the conference in welcoming regulators’ participation in the space.

“They’re becoming a part of our blockchain community and that’s a valuable thing,” Murck said.

Part of the value is clearing up uncertainty.

The shortage of such clarity was illustrated during a talk by Kathleen Breitman, a co-founder of the Tezos project.

When asked whether securities regulations apply to her project’s tokens, Tezzies, she responded:

“I don’t know. I don’t mean to play coy, I’m not just an attorney…I would recommend token holders comply with relevant laws.”

But Gensler said legal clarity is slowly emerging in this red-hot market.

“If you do an issuance now, in April 2018, do it under U.S. securities laws,” said Gensler, who is now a senior lecturer at the MIT Sloan School of Management, “It’s better to bring it into a public policy framework, even if there’s a little bit of a chill.”

And perhaps some cooling off would be healthy. MIT’s Narula said she is deeply concerned about the lack of due diligence completed for many, if not most, cryptocurrency projects. Just because the code is open source doesn’t mean that knowledgeable people have evaluated it.  

“A lot of investors don’t know that. They go by signaling,” Narula said. “A lot of projects have had some pretty fundamental flaws that were exposed only after a project launched.”

If nothing else, the excited chatter in the halls of MIT suggested that regulatory encroachment has yet to put a damper on the energy being channeled into blockchain tech.

Amber Baldet, the former JPMorgan Chase blockchain expert, said what makes her optimistic about the space, writ large, isn’t skyrocketing coin prices or even regulatory clarity on the horizon. It’s the explosive growth of this community in the wake of the 2017 boom.

“In order to have an internet of value, people are going to have to interact with each other,” Baldet said, speaking to the need for an ecosystem that includes everyone from enterprises like her former employer to accredited investors to retail investors.

She concluded:

“You meet thousands of people tackling these challenges in unique ways.”

Image via Annaliese Milano for CoinDesk.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Riot Blockchain Has Been Subpoenaed By the SEC

Riot Blockchain, the Nasdaq-listed company that made headlines last year after its pivot to cryptocurrency related services, has received a subpoena from the U.S. Securities and Exchange Commission.

The disclosure was made in Riot Blockchain’s annual report, which was released on April 17. The company said in its filing that the SEC is “requesting certain information from the Company.”

“As part of its review of the Company’s public filings, the Securities and Exchange Commission…has inquired about certain of the Company’s assets’ classification as, and amount of, possible Investment Company assets,” explained elsewhere in its filing, adding: “The Company intends to fully cooperate with the SEC request.”

That the firm would face a probe from the U.S. securities regulator is perhaps unsurprising, given that the agency indicated in January that it was scrutinizing companies that have pivoted toward blockchain in recent months amid a wave of interest from investors.

“The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering,” SEC chairman Jay Clayton remarked at the time.

Riot Blockchain’s stock price soared in December, exceeding $40 per share at one point – as of Tuesday, the stock was trading at $7.30, according to data from Google. The company has also been hit with several investor lawsuits in the wake of that stock price peak.

The subpoena also comes just a week after Riot Blockchain announced its acquisition of a futures brokerage firm on March 31, announcing plans to launch a cryptocurrency and futures exchange in the U.S.

Elsewhere in the report, Riot Blockchain offered new details about a potential delisting from the Nasdaq, a possibility it first disclosed back in January due to its failure to hold an annual meeting (a situation that was later the subject of a CNBC report).

“In order to maintain our NASDAQ listing, we must satisfy the requirements of a plan of compliance that we submitted to, and was accepted by, NASDAQ. That plan contemplates, among other things, holding our 2017 annual meeting of shareholders no later than May 15, 2018,” Riot Blockchain wrote.

SEC image via CoinDesk

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Taiwan Central Bank Proposes Money Laundering Rules for Bitcoin

The Central Bank of Taiwan is eyeing new rules that would bring bitcoin under the island’s existing anti-money laundering regulations.

During a meeting with Taiwan’s legislative arm Monday, central bank governor Yang Chin-long was questioned over how the banking authority would address the current “opacity” in bitcoin trading in the country, as highlighted by the recent price plunge, according to Taiwan’s Central News Agency.

Responding to parliament member’s enquiries, the governor said the central bank has increased its efforts in monitoring the volatile movements of bitcoin prices and will issue warnings to investors over the risks of cryptocurrency transactions.

Further to that effort, Yang said the banking authority has also recommended to Taiwan’s Ministry of Justice that bitcoin trading should be regulated under current anti-money laundering (AML) rules in the financial sector.

While it remains to be if the suggestion will find support at the ministry, the effort marks the latest move by Taiwanese authorities in placing bitcoin regulation on their agenda.

Earlier this month, the island’s finance minister, Sheu Yu-jer, stated his belief that cryptocurrencies – which are treated as virtual commodities – should be taxed in Taiwan, adding that the agency is currently studying how to implement relevant taxation rules.

Yang’s comments also come at a time when other major Asian governments have already moved to regulate cryptocurrencies under anti-money laundering rules to prevent financial crimes.

As reported by CoinDesk, South Korea formally prohibited domestic banks from providing virtual, anonymous accounts for cryptocurrency exchange users and mandated a new real-name verification process from February 2018.

Malaysia, too, ushered in an anti-money laundering policy in early March, stipulating that know-your-customer processes must be followed for all cryptocurrency exchange activities, including crypto-to-crypto trading.

Yang Chin-long image via YouTube

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Report: Kazakhstan’s Central Bank Wants to Ban Cryptocurrencies

The National Bank of Kazakhstan wants to ban cryptocurrency trading and mining in the European nation, its chairman said.

Speaking to Sputnik News, Daniyar Akishev said the central bank is “taking [a] very conservative approach” towards cryptocurrencies, looking for “extremely tough restrictions.”

To that end, he told the Russian government news site, he wants to ban all crypto exchanges and prevent residents from converting the nation’s fiat currency into any form of cryptocurrency.

In addition, he said he wants to ban cryptocurrency mining within Kazakhstan’s borders, telling Sputnik:

“We minimize the risks related to the national market. However, no central bank has all the instruments to control this market in the cross-border market. Therefore, at least, we must prevent this risk via the national currency.”

The bank – and other government agencies – believe that cryptocurrencies are “an ideal instrument for money laundering and tax evasion,” he said.

Despite the chairman’s words, it does not appear that there are any regulations, laws or bills aimed at curbing the use of cryptocurrencies in Kazakhstan at present.

Kazakhstan flag image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Quebec Pushes Hydropower Utility to Halt New Bitcoin Mines

The Canadian province of Quebec has temporarily put a halt to the development of new cryptocurrency mining operations.

The region – known for its cheap hydropower – has been an attractive destination for cryptocurrency miners looking to expand their businesses. Yet on Friday, Canadian newspaper Les Affaires reported that operators tied to utility firm Hydro-Quebec are turning down new clients, in part due to the demands placed on the hydroelectric dam by existing operations.

Quebec’s Minister of Energy and Natural Resources, Pierre Moreau, said cryptocurrency mines require a lot of energy, but only generate a small number of jobs when compared to other factories, such as those which refine aluminum.

Further, he added, there is a possibility that the region would be unable to meet the energy demands crypto miners create, saying:

“The objective of government is to insure to all Quebecois that during winter, Hydro-Quebec doesn’t say, ‘well, excuse me, I cannot provide [energy] because we’re in the middle of mining cryptocurrency.'”

Indeed, a Hydro-Quebec document seemed to agree, pointing out that it would not be possible to supply sufficient power for every project that had applied to set up facilities, according to Les Affaires.

The plant had received applications for “projects representing many thousands of megawatts” in the last few months, according to the news service.

Officials are now working on new guidelines for cryptocurrency mining facilities. Once these guidelines are complete, authorities will begin considering applications again.

Editor’s note: Some statements in this article were translated from French.

13 Valves Dam image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Lawyaw uses AI to help lawyers draft documents faster – TechCrunch

It’s no secret that much of the legal industry is build on reusable content. Most law firms have their own customized set of standard documents (like NDAs or Wills), but lawyers or associates still have to customize these documents by hand each time a client needs them drafted.

Lawyaw, part of YC’s Winter ’18 class, is building software to automate this process by letting lawyers turn previously completed documents into smart templates.

Here’s how it works: Lawyers can drag an already customized world document into Lawyaw’s platform and it will automatically use natural language processing to first figure out what sections need to be replaced, then actually fill in those sections with the correct personalized phrases and variables. For example, software will automatically detect and replace a client’s name, contact information, location, and even more complicated things like scope of engagement.

If a variable isn’t automatically detected Lawyaw lets users manually select it, which the software will remember for future uses. Currently the platform only identifies about 50% of all variables in a document (up from 10% when it launched), but of those detected the accuracy rate for autofilling correct information is 99%. So essentially the algorithm is optimizing for quality over quantity right now, but that should equalize as the natural language processing gets better over time.

Of course Lawyaw isn’t the only solution for automatically populating legal documents. But most other solutions use complex document customization that requires knowledge of conditionals, tags and syntax. Plus, the platform has a few other useful features like integrated e-signing and a directory of over 5,000 standard court forms that can be customized.

Lawyaw charges each user $59 per month or $39 if paid annually. Interested users can just sign ups themselves instead of having to be subjected to firm-wide demos or annoying sales reps, both of which are still the status quo for legal software.

So far over 1,000 law firms have signed up, with 900 lawyers actively drafting over 24,000 total documents to date.

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