Weekly Focus:

  • Money Laundering in Bitcoin . . . is Still Money Laundering
  • CFTC Designates Sixth Bitcoin Contract Market
  • Terminating Sanctions Ordered Against Blockvest LLC Founder
  • China’s Central Bank Starts CBDC Pilot Program
  • Dutch National Bank Wants to Test CBDCs for the Eurosystem
  • Coinbase Launches Price Oracle for DeFi
  • Ant Financial Launches SME Consortium Blockchain

U.S. Developments

Money Laundering in Bitcoin . . . is Still Money Laundering

On April 17, 2020, the U.S. Court of Appeals for the Ninth Circuit, affirmed a conviction on five counts of money laundering where the underlying payments were made with Bitcoin. The appeal raised the issue of whether a reasonable trier of fact could have found beyond a reasonable doubt that money laundering transactions with payment in Bitcoin could be considered to affect interstate commerce as required for a conviction under 18 U.S.C. § 1956.

The underlying crime involved the appellant transferring Bitcoin to a federal agent in numerous cash-for-Bitcoin transactions. The appellant would receive cash from the federal agent and then transfer Bitcoin from the appellant’s digital wallet to the digital wallet of the federal agent. The appellant was indicted on five counts of money laundering involving over $150,000 in transactions.

The Ninth Circuit held that the transfer of Bitcoin had an effect on interstate commerce because the transfer involved the use of the internet or cellular network connected to a computer to transfer Bitcoin and the necessary keys to the digital wallet of another computer connected to the internet or cellular network. The court explained that a nexus with interstate commerce is essential to the money laundering offense, but that the connection does not need to be extensive. Further, the court noted that the use of the internet and the creation and maintenance of a website involves uploading information to services in multiple states, resulting in interstate commerce. The government had proved that the appellant’s business involved activities throughout the U.S. and internationally, as well as engagement with the federal agent to use particular applications on the agent’s smartphone to transfer Bitcoin between digital wallets. As a result, the minimum interstate commerce nexus required by the law was met.

CFTC Designates Sixth Bitcoin Contract Market

 On April 20, 2020, the Commodity Futures Trading Commission (CFTC) announced that it issued an Order of Designation to Bitnomial Exchange, LLC, making it a designated contract market (DCM). Bitnomial is the sixth company to be approved by the CFTC to offer Bitcoin futures and options contracts (joining CME, Cboe, Bakkt, ErisX, and Ledger X). In a press release, Bitnomial states that it will list margined and physically delivered Bitcoin futures and options, which it claims would be the first exchange to offer these capabilities.

A DCM is an exchange that lists trading futures or option contracts based on an underlying commodity and operates pursuant to Section 5 of the Commodity Exchange Act, which provides access to the exchange to a broad set of traders, including retail customers.

Terminating Sanctions Ordered Against Blockvest LLC Founder

We previously discussed a preliminary injunction issued by the Securities and Exchange Commission (SEC) against Blockvest LLC and its founder Reginald Buddy Ringgold, III—aka Rasool Abdul Rahim El—for making fraudulent offers of securities when issuing its initial coin offering (ICO). Over a year later, on April 17, 2020, a magistrate judge found in favor of the SEC’s motion for terminating sanctions, and recommended they be issued to the company and its founder because their “egregious misconduct” deserved a “harsh remedy.”  In the magistrate judge’s report, the judge went through a litany of bad actions by Blockvest and its founder through the ICO process, as well as throughout the SEC enforcement and court proceedings, which led the court to its finding that terminating sanctions were warranted.

International Developments

China’s Central Bank Starts CBDC Pilot Program

China’s central bank, the People’s Bank of China (PBOC), has announced (announcement available in Chinese) the beginning of a pilot program in four cities to test a central bank digital currency (CBDC) payment system. As part of the pilot program, China is looking to the use of its CBDC in connection with the Winter Olympics in 2022 that will be held in Beijing. Reports indicate the PBOC intends to use the CBDC to replace aspects of the country’s monetary base and remove some cash from circulation. To that end, reports state that government workers in the test cities are being told to install an app on their phones to receive and use the CBDC. The pilot program is being presented by the PBOC as a limited trial that will not be issued broadly in the near term. Reports also suggest that numerous large restaurant chains could be testing the new CBDC as pilot merchants, including Starbucks, McDonald’s and Subway, as well as other local hotels, convenience stores, and restaurants.

Dutch National Bank Wants to Test CBDCs for the Eurosystem

On April 21, 2020, the Dutch Central Bank (DNB) published a report (available in Dutch only) on central bank digital currencies (CBDC), suggesting that the Netherlands play a primary role in testing CBDCs in the Eurosystem. The DNB is not currently piloting a CBDC, but rather wants to be a research, development, and deployment hub for Europe.

According to a press release accompanying the report, the DNB recommends development of CBDC because many countries are seeing declines in cash usage, and private parties, such as Facebook’s Libra, are offering alternatives to fiat currencies. In response to these changes, the DNB sees CBDCs as a way to promote the smooth functioning of the payment system with CBDC serving as a backup to payments in private money, and at the same time promoting the use of public money.

The DNB suggests that development of CBDC should look to technologies pioneered by cryptocurrencies to reduce transaction costs and to control the volume of CBDC in circulation, as well as interest payments on CBDC.

Industry Developments

Coinbase Launches Price Oracle for DeFi

Coinbase announced the release of its proprietary price oracle, titled Coinbase Oracle, available through Coinbase Pro API, to support the DeFi price feed process. A price oracle serves as a third-party price feed to a decentralized network. Trust in the DeFi space is challenging due to decentralization, but centralized pricing oracles have also been criticized for being maintained by a central party. Coinbase’s announcement acknowledges this conflict, but notes that Coinbase aims to act as a trusted party for pricing by signing the pricing data with Coinbase’s private key.

Ant Financial Launches SME Consortium Blockchain

Chinese fintech company, Ant Financial, recently launched of a consortium blockchain platform, called OpenChain, to aid small and medium-sized enterprises (SMEs) to deploy blockchain applications. Ant Financial announced that OpenChain will support use cases in various industries, including supply chain finance, product provenance, digital invoices, and charities.