U.S. Developments

Denver to Implement Blockchain-Based Elections for Overseas Voters

Denver moves to become the second U.S. jurisdiction to implement a blockchain-based voting system for overseas voters. Active duty military and other eligible overseas voters will be able to use a mobile phone application in the next election to cast their vote on municipal issues.

Denver plans to use Voatz, a mobile application used by West Virginia in the 2018 mid-term election, where an estimated 144 overseas voters made use of the application. Voatz only runs on newer-model smartphones and verifies a voter’s identity by using facial recognition software and, when available, fingerprint analysis. Voatz records votes by using the HyperLedger blockchain framework first created by IBM and now supported by the Linux foundation.

While the news of Denver’s entry to blockchain voting is a jurisdictional expansion of the platform, Denver is not expanding the voter base to include domestic voters. Denver anticipates that the blockchain voting application will affect roughly 4,000 overseas voters.

Despite some adoption of blockchain voting platforms for overseas voters, do not expect these systems to be available for domestic voters anytime soon. The blockchain voting system replaces an outdated and insecure e-mail-based system. Federal law requires that governmental bodies provide digital voting options to overseas voters. No such requirement applies to domestic voters.

But for all this enthusiasm, academics have been far less bullish. Ron Rivest of MIT and Josh Benaloh of Microsoft have asserted that like all digital systems, blockchain-based voting platforms are vulnerable to denial of service-type attacks that prevent certain geographic areas from voting in order to control elections. Benaloh further asserts that in a blockchain solution, the system depends on the honesty of miners and simply trusting miners to not ignore or modify votes is a universal flaw. The CEO of the Voatz platform argues that there would be a record of such actions by bad-faith miners and that these miners would be removed from the platform.

Wyoming Splits from Indirect Ownership Approach of Uniform Law Commission

The Wyoming legislature recently passed a bill that treats cryptographic assets under a direct ownership approach. Direct ownership of cryptographic assets is a split from the indirect ownership approach described in the “Supplemental Act” that was jointly proposed (but not enacted) by California, Nevada, Oklahoma, and Hawaii. Direct ownership treats cryptocurrency in an exchange as if it were fiat currency with the same level of fluidity. Indirect ownership allows an exchange to merely have a contractual obligation to its users regarding ownership of relevant crypto coins.

The Supplemental Act requires that owners of cryptographic assets relinquish property rights to intermediaries (e.g., exchanges) in return for security entitlements, which are contract rights rather than property rights. As contract rights, the security entitlements are regulated under Article 8 of the Uniform Commercial Code (UCC), which allows exchanges to sell security entitlements to cryptographic assets they may not have on hand. Critics assert that this approach leads to ledger irregularities.

Wyoming’s new “direct ownership” approach renders property rights to exchange consumers for both digital securities/virtual currency type cryptographic assets and utility token type cryptographic assets. The Wyoming bill divides cryptographic assets into three categories. Digital Consumer Assets, comprising utility tokens, are treated similarly as “general intangibles” under the UCC. Digital Securities, bluntly defined as “digital assets which constitute a security,” are treated as securities. Virtual Currencies, including assets such as Bitcoin, are treated the same as money under the UCC.

By contrast, under the Supplemental Act, virtual currencies would be treated as general intangibles that are perfected by filing a financing statement in the debtor’s jurisdiction rather than by obtaining control.

Federal Prosecutors in New York Allege OneCoin Project Is a Pyramid Scheme

Konstantin Ignatov, a leader connected with OneCoin, was arrested by the FBI at the Los Angeles International Airport on charges of operating a multibillion-dollar pyramid scheme involving the sale of fraudulent cryptocurrency. Ignatov’s sister, Ruja Ignatova, was also charged in the indictment and remains at large. A third defendant, Mark Scott, was arrested last year in Massachusetts on related money laundering charges.

According to IRS Special Agent in Charge, John R. Tafur, “This is an old scam with a virtual twist. As alleged in court documents, the cryptocurrency OneCoin was established for the sole purpose of defrauding investors. Ignatov and Ignatova allegedly convinced victims to invest in OneCoin based on complete lies about the virtual currency. IRS Criminal Investigation is committed to investigating cryptocurrency scams in an effort to protect the American public and bring cryptocurrency crooks to justice.”

FBI Assistant Director-in-Charge, William Sweeney, Jr., further added, “As we allege, OneCoin was a cryptocurrency existing only in the minds of its creators and their co-conspirators. Unlike authentic cryptocurrencies, which maintain records of their investors’ transaction history, OneCoin had no real value. It offered investors no method of tracing their money, and it could not be used to purchase anything. In fact, the only ones who stood to benefit from its existence were its founders and co-conspirators. Whether you’re dealing with virtual currency or cold, hard cash, we urge the public to exercise due diligence with any investment.”

The U.S. is the latest in a series of countries to bring charges against OneCoin members. Ruja Ignatova has been similarly charged in India, and 4 others have been charged and sentenced in China.


International Developments


Investigation into Canada’s QuadrigaCX Continues

QuadrigaCX’s court-appointed auditor has reported that the number of offline “cold storage wallets” contained only 104 Bitcoin (roughly US$400,000), meaning that roughly US$134 million of user money is still unaccounted for. QuadrigaCX stated that the user money was held in Bitcoin stored in the offline wallets, and that it had lost access to these wallets when the exchange’s founder, Gerald Cotton, suddenly died. As discussed on this blog earlier in the month, the death of one who has possession of private keys has some interesting legal implications.

The 104 Bitcoin currently in the five discovered offline wallets entered these accounts by inadvertent transfer and appears to have no connection to the 26,350 Bitcoin owed to the exchange’s user base. According to the auditor’s report, QuadrigaCX may still have accounts on at least 14 other exchanges where the users’ Bitcoin may have been funneled.

Canada Revenue Agency (CRA) Increasing Audits of Bitcoin Investors

A number of Canadian Bitcoin investors have been targeted with comprehensive questionnaires regarding their crypto-investing over the past few years. The CRA established a dedicated unit to address the tax implications of cryptocurrencies in 2017. There are now 60 cryptocurrency-related audits pending in Canada.

The questionnaires that Canadians have been receiving are 13 pages long and include 54 questions. Some of the questions notably concern the use of “mixers” or “tumblers” that obfuscate a user’s funds by routinely moving those funds around. Other questions concern uses of changing services that enable users to shift crypto assets between coin types without tying in real world identities.

Some questions are harder to verify or establish supporting inferences should the targeted individuals avoid answering truthfully or completely. The questionnaire includes questions regarding the purchase of cryptocurrency from private individuals, including how the individuals became aware of one another, and whether any coins had been stolen.

Malta Banks Have Reached Their Appetite for Risk in Cryptospace

Malta has encouraged many blockchain startups to incorporate and operate in the country because of its crypto-favorable laws and policies. Despite these policies, Maltese banks have been less interested in transacting with blockchain startups.

Pursuant to the Virtual Financial Assets Act, which went into effect in November 2018, banks will not conduct business with blockchain-related startups until they obtain a license with the Malta Financial Services Authority (MFSA). This requirement is peculiar for some startups that, while blockchain-related, have little to no connection to financial services. Although 28 applications have been submitted since November 2018, the MFSA has not granted any licenses thus far. While the MFSA intends to begin granting licenses before the end of first quarter 2019, some companies are unable to transact because they do not have a bank account.