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Quick Take

• While the U.S. government has not published regular reports of crimes involving the use of bitcoin, the Department of Justice does publish press releases with bitcoin tags
• The Block has updated a 2020 analysis on bitcoin mentions in DOJ press releases as a proxy for bitcoin-related crime trends
• Of the 94 U.S. Attorney district offices, 62 have published such press releases

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Quick Take

• In this weekly series, we dive into some of the most interesting data and developments across the Layer 1 blockchain landscape, from DeFi and bridges to network activity and funding
• Layer 1 blockchain foundations continue to release incentive programs to attract users and developers, with a flurry of launches in the past month
• Rising demand (or lack of it) from users entering new ecosystems is proving to pose unique challenges for both layer 1 and layer 2 chains
• This week, we take a look at Solana, Binance Smart Chain, Cosmos, Terra, and Arweave

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Crypto exchange Binance is poised to shift away from its long-standing “decentralized headquarters” narrative as it faces global regulatory headwinds.

In a TV interview with the South China Morning Post on Thursday, Binance co-founder and CEO Changpeng Zhao was asked how Binance is getting itself ready to apply for licenses in jurisdictions that have clearer licensing regimes. 

In response, Zhao acknowledged that Binance’s pitch over the past several years that it is a global, decentralized operation with no headquarters does not go down well with regulators. 

“Four years ago when we started it, we wanted to embrace the decentralized model so we wanted to have decentralized teams everywhere. But we do run one centralized exchange, which is the biggest part of our business. Now we have come to realize that for the regulators, we need to be centralized,” he said, during the interview.

Zhao added that telling regulators they have no headquarters could easily put Binance in a negative light.

“There are very simple questions regulators usually ask us [to] which our response is kinda funny. The regulators ask us where’s your headquarters, and our responses is, well, we don’t have headquarters. That doesn’t go well with regulators. They don’t know how to work with us. Sometimes they even think we are dodgy obviously,” Zhao said.

Over the past several months, Binance has been hit by regulatory warnings from multiple jurisdictions including the U.S., U.K., Hong Kong and countries in the European Union. But its sprawling operations with no substantial record of an operational headquarters also left regulators with little control over it.

“Regulators expect a centralized structure where it is set up. For the centralized exchange business, we need to be centralized. We need to have a centralized entity behind it with clear cap tables, clear investors, proper board, proper governance, very transparent KYC [know your customer], AML [anti-money laundering] and risk controls,” Zhao said.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Development and Reformation Commission of China’s Inner Mongolia, previously one of the crypto mining hubs in China, said on Wednesday that it has hired a contractor to help the state monitor for illegal mining operations.

The commission selected Inner Mongolia Mengze Engineering Management Limited, just one week after it opened the bid to the public for applications.

The goal for Mengze — with a $46,000 government budget — is to help the state build up an intelligence and response unit to continuously analyze and spot possible operations that are secretly mining cryptocurrencies in the region.

It’s a sign that China will not ease its crackdown on the crypto mining space in the long term, even though some Chinese Bitcoin and Ethereum miners have quietly resumed operations — mostly in secrecy — now that it has been three months since the initial crackdown.

What’s notable from the bidding document revealed last week is that the Inner Mongolia government is looking for specific details on uncovering mining operations. It outlined at least ten areas that it wants to know about, such as:

1. The production and development process of crypto mining
2. Domestic and international policy stances and regulatory environment over crypto mining
3. The initial purpose and policy perks that Inner Mongolia gave to big data and cloud computing enterprises
4. The cost, revenue, energy consumption and taxation breakdown of crypto mining operations locally
5. The physical distribution breakdown of crypto mining operations locally
6. Techniques for differentiating crypto mining operations from other big data and cloud computing projects
7. Analysis of mainstream mining hardware and their energy consumption breakdown
8. Relevant legal basis for clearing out crypto mining operations
9. The impact of shutting down crypto mining operations on achieving the carbon neutrality goals
10. A long-term regulatory responding mechanism over crypto mining operations

Since China revealed the crackdown on crypto mining in May, a total of seven provinces that had notable amount of mining operations have launched relevant measures. The Hebei province is the latest one to form a special task force to normalize the efforts.

While the crackdown had a strong chilling effect at the beginning, which resulted in Bitcoin and Ethereum’s hash rates plunging, some Chinese miners have gradually found ways to resume operations secretly over the past two months as things cooled off.

But with provincial governments aiming to scale up their knowledge and responding mechanism, it appears there will be a tug of war in the foreseeable future between law enforcement and local crypto miners.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

A former cryptocurrency executive, who raised more than $90 million for an investment fund, was sentenced on Wednesday to more than 7 years in prison for running what prosecutors described as a Ponzi scheme. 

24-year-old Stefan Qin ran Virgil Sigma Fund LP for three years until 2020. He pleaded guilty in February and received sentencing on Wednesday. 

“I abused their trust in immoral and illegal ways to boost my success,” Qin said.

The Department of Justice said in a statement from February:

“Stefan He Qin drained almost all of the assets from the $90 million cryptocurrency fund he owned, stealing investors’ money, spending it on indulgences and speculative personal investments, and lying to investors about the performance of the fund and what he had done with their money.”

In March 2020, a well-placed investor in the market shared a pitch briefing Virgil was sending to investors as part of an effort to raise more funds.  The US attorney’s office for the Southern District of New York claimed that the former hedge funder scammed more than 100 investors, as The Wall Street Journal reported. 

“We sniffed it out pretty quickly cause the numbers didn’t make sense,” the investor said. “The performance numbers vs the market just seemed off.  Although arbitrage strategies at that time were lucrative, the numbers he was talking about didn’t make sense.”

The pitch said that the firm “pursues opportunities off traditionally risky indicators for crypto-currencies, such as extreme volatilities, high barriers of entry, and cross-border trading nascence by taking advantage of arbitrage opportunities globally.”

It shared its returns, which it claimed to have been audited:

The firm claimed to return more than 100% in 2018—a year during which crypto prices plunged that many refer to as crypto winter. It said it returned 30% in 2019. 

Other claims include that the firm was averaging 20,000-60,000 trades a day and boasted a long track record with limited volatility.

The document mentions a fund, dubbed ‘Virgil Sigma Fund China’, that had a 30% performance fee. A source said that this was a new fund for which the firm had been raising capital. In the document, Virgil claimed that Silvergate—a publicly traded crypto firm—served as the fund’s bank.

The document later notes:

“Virgil does NOT invest in tokens or ICOs. Virgil does NOT buy-and-hold cryptocurrencies for return. The bulk of Virgil portfolio is held in fiat currency and hedged wherever/whenever appropriate. Less than 10% of the Fund is held in any single exchange at any given time, capping the Fund’s exposure to isolated sec.”

The aforementioned Journal report noted that in addition to using the firm’s assets to pay redemption requests, Qin also used it to pay the rent on his luxury New York City apartment.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The tax section of the $3.5 trillion “Build Back Better” reconciliation package has left the House of Representatives committee responsible for ensuring revenue, with new rules for cryptocurrency attached. 

Wednesday afternoon, the Ways and Means Committee voted to transmit its draft to the Budget Committee. The vote was 24-19, with Democratic Representative Stephanie Murphy being the sole member to break party ranks. 

The House Ways and Means Committee is responsible for legislation that touches on taxation. It is, consequently, an extremely powerful sub-group of Congress. Given Democrats’ determination to push the budget bill through intact, the current language is unlikely to change without serious upheaval in the Senate.

Before transmitting the broader provisions to the Budget Committee, the Ways and Means Committee voted to approve an amendment including a new subsection that adds digital assets to rules on wash sales and so-called constructive trades.

As The Block reported earlier this week, Democrats on the committee floated the new rules as means of reducing tax-loss harvesting among crypto trades — part of the overall effort to expand revenue to fund the provisions of the broader agenda. 

“If this version of the bill were to pass, crypto holders will have to wait 30 days before (and after) buying the same coin he/she sold at a loss. If you buy the same coin without waiting for 30 days, the IRS would not allow you to deduct the loss as a capital loss in the tax year. That said, note that the taxpayer will not completely lose the tax benefit of the loss. It will be deferred. The loss would be added to the basis of the coin. So, when you later dispose of the coin, it will result in lower capital gains,” Cointracker’s Shehan Chandrasekera told The Block in an email.

The component parts of the “Build Back Better” budget bill have been shifting between Democrats of the House and Senate for weeks, ever since the House approved a framework for the budget at the end of August. Coordination between the House and Senate is critical, as Democrats are trying to tie this legislation to the infrastructure bill, which has more bipartisan support. 

Republicans of the Ways and Means Committee submitted an extended list of amendments on Wednesday, most of which lost votes along strict party lines of 25-18.

Indeed, Republicans on the committee lamented not being able to see the language of the bill until recently, with one staffer commenting on the extended amendment process: “Don’t blame us, this is the first time we’re getting to work on this bill.”

Elsewhere, Democratic Senator Joe Manchin has come out against the scope of the Build Back Better Agenda, threatening the narrow majority that the party holds in the Senate. Speaking to reporters after Wednesday’s mark-up, Ways and Means Chairman Richard Neal noted the importance of working with the Senate Finance Committee, whose remit will include the provisions approved today. Neal said that he has “talked to Senator Wyden as much as anyone can,” referring to the chair of that committee. 

The budget is due by October, though Congress has stalled that process in the past. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Crypto exchange company Coinbase wants to offer futures trading, and it’s seeking membership in the country’s top derivatives self-regulatory organization (SRO) as part of that process.

Coinbase Financial Markets Inc. is seeking membership, per an application with the National Futures Association dated September 15. Bloomberg first reported the news.

The timing of any application approval is unclear. Coinbase is listed as a “pending NFA member” on the SRO’s website.

In an interview with The Block during an episode of The Scoop podcast, Coinbase head of institutional sales Brett Tejpaul highlighted the role of derivatives, including futures, as part of the companies roadmap. Specifically, he pointed to “the formation of the derivative market, which then will include all the things I mentioned, plus derivatives, futures, options, swaps, structured products” as part of a broader push to attract business from future clients. 

This story is developing.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Franklin Templeton, the asset management firm, has formed a blockchain venture fund that could raise as much as $20 million, public documents show.

The firm’s Wednesday filing shows that the Franklin Templeton Blockchain Fund I, L.P. has raised $10 million to date out of a projected $20 million. It is classified as a pooled venture capital fund.

As previously reported, Franklin Templeton has participated in a number of initiatives focused on crypto. The company is a stakeholder in a venture fund of funds launched this summer by Galaxy Digital. Franklin Templeton is an investor in crypto startups like Amberdata, taking part in the $15 million funding round announced this week. The firm also took part in an extended Series A round for custody startup Curv, which was later acquired by PayPal.

CoinDesk reported earlier this month that Franklin Templeton is seeking to hire roles in an internal digital asset team. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• China has quietly made its standalone digital yuan mobile app available to almost 10% of the population.
• The latest step in a long, gradual rollout of the central bank digital currency reveals how it can be programmed through smart contracts.

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On this episode of The Scoop, Bittrex Global CEO Stephen Stonberg joined host Frank Chaparro for a discussion on Bittrex’s US and global businesses, his outlook on security tokens, and how the company is tackling regulatory tightening in an effort to safely enter markets across the world.

In its global business, Stonberg said that Bittrex is testing out lending and staking products as well as dipping its toes into STOs or Security Token Offerings, such as in real estate, stocks, cars, etc. Bittrex test-launched a limited number of what Stonberg termed ‘unsolicited ETFs’ like “Google tokenized and Tesla tokenized” which they are currently only selling to a small subset of clients via their Bermuda license.

As the market matures and investors eventually look for yield in alternative products outside of utility tokens, Bittrex is positioning itself to capture that market share.

“I would expect that as utility tokens become a more mature market, that you won’t see those types of returns,” said Stonberg.

Stonberg views real estate on the blockchain as one of the use cases that will reshape the industry. In fact, Bittrex is exploring the potential of STO-based tokens, such as in real estate as well as possibly art and IPOs, as Stonberg suggested. “I really think that you’re going to see everything being tokenized. Why should we not have real estate tokenized? Like, why should if you’re IPOing a company, why does it have to be an IPO? Why can’t it be in the venture stage?”

As for where competitors are in the adoption cycle, Stonberg added: “Right now, we’re in the fund build phase where the regulators haven’t caught on yet.” However, he did not comment on whether Bittrex has plans at this time to fundraise or enter public markets.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.