Part of the funds from the Cryptopia hack were recently sent to the Binance cryptocurrency exchange. In response, Changpeng Zhao (CZ), the CEO of Binance froze the funds, raising questions around cryptocurrency’s anonymity and fungibility.

Cryptopia is a tiny exchange with a daily trading volume averaging around $2 million. The exchange was hacked on the evening of Jan. 13th for an estimated $3.5 million in cryptocurrency. The company announced the hack on Jan. 15th.

Now, the hackers are likely looking for ways to launder, convert, and obfuscate the source of these funds. Especially now that authorities in New Zealand are involved.

As part of this process, the hackers sent 31,320 Metal (MTL) ERC20 tokens to Binance. Trading at approximately $0.24 at press time, this amounts to roughly $7,500 in stolen cryptocurrency. After receiving a tip-off on Twitter, Changpeng Zhao immediately froze the funds:

CZ Binance@cz_binance

Just checked, we were able to freeze some of the funds. I don’t understand why the hackers keep sending to Binance. Social media will be pretty fast to report it, and we will freeze it. It’s a high risk maneuver for them.I Dream Of Alts@ShaftedTanguHey @cz_binance Binance has stolen tokens from Topia hitting it sir. Can you lock it down? https://etherscan.io/address/0x99f9fc8852a1bedc914669e61040ad6fc3455442#tokentxns …1,3658:18 PM – Jan 16, 2019Twitter Ads info and privacy418 people are talking about this

Implications for Fungibility

Fungibility, as it applies to cryptocurrency, is the concept that any given coin is identical and substitutable for any other coin in the same denomination. To give a non-cryptocurrency example, an ounce of pure gold is equivalent to any other ounce of pure gold. Correspondingly, someone might think that one bitcoin is equivalent to any other bitcoin.

The problem boils down to traceability. If that bitcoin is tainted by money laundering or criminal activity, then it is not equivalent in value or utility to another ‘clean’ bitcoin. These tainted coins could result in blacklisting on exchanges. If they are found to be involved in criminal activity, future receivers could face legal consequences.

Frozen Funds Demonstrate Non-Fungibility

There is no doubt that freezing the hackers’ funds were justified. Exchanges should collaborate to inhibit illegal activity and make it as difficult as possible to engage in harmful criminal behavior.

Yet, the very fact that Binance was able to identify the stolen funds and freeze them at all could be cause for broader concern.

If someone receives $20 in cash, the previous owners of that cash are largely untraceable. If someone receives $20 in bitcoin, all previous walletaddresses attached to that transaction are visible. And, if bitcoin is treated as a commodity, then this could have interesting legal ramifications.

If someone unknowingly receives illicit funds, how will law enforcement treat these cases, and who does the onus for checking fall on?

For other commodities, if stolen goods are purchased unknowingly, law enforcement has the right to seize those goods and return them to the original owner. Those who intend to resell goods have an even higher responsibility to evaluate whether purchased goods are stolen.

Yet, it’s still unclear whether exchanges, businesses, and individuals need to go through similar processes. If they do, it introduces yet another complication and cost for transacting in cryptocurrency.

Potential Solutions

Privacy coins such as Monero and Zcash offer one potential solution: using technology to obfuscate transaction history.

But, both of these coins need to catch up to the network effects already established by Bitcoin and Ethereum—which are already accepted at a larger—albeit still limited—number of vendors. Moreover, there is still a non-zero risk that regulators succumb to the public perception that these coins are used by “criminals and tax-evaders,” and place a blanket ban on privacy coins.

Other ways crypto users have tried to limit personal liability include maintaining anonymity between wallet addresses and personal identification, using new wallet addresses for each transaction, using cryptocurrency mixers, washing coins in a loosely regulated exchange, or other systematic ways for obfuscating the transaction history of funds before making a purchase. Whether these activities fall into a legal gray area is another question.

There still isn’t a clear solution to the issues of fungibility. Until then, it is likely that, over time, regulators and law enforcement will set a clearer precedent through doled-out enforcement actions.

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Last year, the crypto community pointed fingers at tax payers liquidating assets in order to cover inflated tax bills due to the substantial gains realized during the 2017 Bitcoin bull run as among the chief reasons the bear market had begun.

In 2018, however, the inverse happened, and most cryptocurrency investors suffered massive losses as the price of Bitcoin and other cryptocurrencies fell by as much as 80-90% in most cases. With tax season rolling around again, investors should be liquidating assets in order to lock in realized losses that can be claimed on an individual’s taxes, offsetting other aspects of the individual’s tax bill, or possibly leading to a return.

However, new data reveals that only 34% of losses American cryptocurrency investors saw in 2018 have been realized, suggesting that most Americans don’t understand crypto-related tax laws, and don’t realize they can claim the losses on their taxes.

Nearly Two-Thirds of American Crypto Losses Could Go Unrealized

According to credit monitoring services company Credit Karma, United States citizens have suffered losses related to their cryptocurrency investments to the tune of $5 billion. However, only about a third of those $5 billion in losses will be realized losses, or roughly $1.7 billion.

When an individual American tax payer invests in a cryptocurrency, a cost basis is established for tax purposes. Selling an asset also triggers a taxable event. How much that asset has appreciated – or in the case of the 2018 bear market that is still currently ongoing, how much that asset has depreciated – at the time it is sold, determines what the individual is responsible for tax-wise. If an asset is never sold, the gains or losses are only paper gains and losses, meaning they cannot be claimed on an individual’s taxes, but may still be reflected in one’s portfolio.

Related Reading | U.S. Lawmakers Ask IRS for Clarity on Crypto Tax Laws

The data suggests that either Americans don’t understand that assets must be sold to trigger the taxable event and lock in unrealized losses that can be claimed on their taxes, or the HODL mentality has made it so they simply won’t sell their assets for any reason – not even to lock in unrealized losses for tax reasons.

Credit Karma general manager Jagjit Chawla says it’s the former.

“Even though those who sold their bitcoin at a loss can typically claim a tax deduction we found that before taking our survey, 61% of respondents who lost money on bitcoin didn’t actually realize they could get a tax deduction for bitcoin losses,” he explained.

The survey revealed that respondents were confused in general, with more than half believing their losses were too small to make an impact, while others didn’t even know they were required to file their cryptocurrency losses on their taxes. Not doing so could lead to severe penalties. Some claimed they didn’t even know how to file their crypto losses.

U.S. Crypto Tax Law Is Complicated, Varies By Duration of HODL

Complicating things further, in the United States, cryptocurrencies are treated as propertyand are subject to capital gains tax the same way real estate is. Capital gains tax rates vary by income levels, and are classified as “short-term” and “long-term” depending on how long the asset has been held by the owner. Each classification also has different rates.

Related Reading | Former U.S. Representative Ron Paul Pushes for Crypto Tax Exemption 

Locking in realized cryptocurrency losses could allow war-torn investors to claim up to $3,000 in losses on their tax bills. Losses exceeding $3,000 can be carried over into the following tax year. Investors can also use carried over losses to offset potential tax gains on next year’s tax bill, if the cryptocurrency market eventually turns around and a new bull run begins this year.

When investing in cryptocurrencies, be sure to also speak to a certified public accountant that is well-versed in capital gains tax law, and at least has a familiarity of cryptocurrencies. Given how new the technology and asset class, this may be like finding a needle in a haystack, but considering how important taxes are to any individual, knowing your cryptocurrency taxes are handled properly is worth the extra effort.

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The head of an Indian nonprofit trade organization said cryptocurrency is “illegal,” and urged businesses to obey the law, local news daily the Hindu reportedThursday, Oct. 25.

Debjani Ghosh, the president of the National Association of Software and Services Companies (NASSCOM), was cited by the Hindu saying that cryptocurrencies are illegal from NASSCOM’s perspective. NASSCOM is a nonprofit trade association of over 2,000 member companies for the Indian IT and business process outsourcing industries.

“It is [the] law of the land and hence, we have to work with it,” Ghosh claimed about cryptocurrency’s ‘illegal’ status. She added, “If we do not agree, we have to go back to the government and speak about why cryptocurrencies aren’t correct.” However, Ghosh noted that the “illegal” status of crypto is the result of the government’s failure to keep up with innovation:

“The genesis of this problem, however, lies in the failure of policy making not keeping pace with rapid technological changes. NASSCOM’s focus would be to say, how do you synergize technological development and policy making. I think that will be our focus.”

Cryptocurrency is currently legal in India, but in July the Reserve Bank of India (RBI) banned the country’s banks from servicing businesses involved in exchanging or processing digital assets. At the time, RBI cited risks to financial stability and the security of investors as being the main reasons behind the ban.

Following the crackdown, commentators were quick to note that, while banking activities for crypto business were suspended, it was not a ban on crypto in India outright. The country’s supreme court continues to uphold the ban even after hearing a raft of petitions.

Since July, the ban has had severe repercussions for the industry. Exchanges in particular have faced difficult conditions, with major platform Zebpay halting operations and relocating to crypto-friendly Malta.

Ghosh’s comments come after police clamped down this week on a project from crypto exchange Unocoin, arresting its co-founders after they installed a Bitcoin ATM in a Bangalore shopping mall.

Various media outlets have cited authorities who reportedly explained that the ATM “had not taken any permission from the state government and is dealing in cryptocurrency outside the remit of the law.” According to a police official quotedby the Times of India, the central bank considers cryptocurrency “illegal.”

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The Switzerland-based Capital Markets and Technology Association (CMTA) has published new anti-money-laundering (AML) standards for digital assets and distributed ledger technologies (DLT) Oct. 18.

CMTA is a non-profit, independent association established in Geneva earlier this year with the aim of promoting the adoption of DLT, such as blockchain, and digital assets in the financial markets.

Its creation was a joint initiative from online bank Swissquote, market software provider Temenos, and the country’s largest law firm Lenz & Staehelin.

According to CMTA, the newly-published standards are designed to “clarify […] measures to be taken in order to comply with the Swiss regulations against money laundering and the financing of terrorism.” As per CMTA general secretary Fedor Poskriakov, the document is intended to “pav[e] the way for a compliant tokenization of financial assets.”

The document is split into two parts, the first of which outlines compliance standards for digital asset issuers, whether or not they formally designate themselves as Initial Coin Offerings (ICOs); the second addresses Swiss banks, securities dealers, and other intermediaries who may wish to enter into business relationships with digital asset issuers or investors, or whose business practices involve “a material exposure” to digital assets and/or DLT.

Notably, the standards are not statutory and do not have formal regulatory status, yet CMTA states they “represent a consensus” among financial sector experts as to how good practice should be established and conducted in the emerging digital assets space.

CMTA outlines that the guidance has been developed on the basis of a range of legislative frameworks, including the Swiss Anti-Money Laundering Act (AMLA), the Swiss Anti-Money Laundering Ordinance (AMLO), FINMA’s Anti-Money Laundering Ordinance (AMLO-FINMA) and other laws for Swiss banks’ code of conduct and due diligence requirements.

As reported last week, France’s intergovernmental organization, the Financial Action Task Force (FATF), has recently updated its standards regarding digital currencies to ensure that virtual asset service providers are subject to AML and CFT regulations.

Earlier this week, Swissquote announced it had become “the first bank worldwide” to offer purchase and custodial services of ICO-issued tokens for clients.

This post credited to cointelegraph  Image source: Cointelegraph 

North Dakota Securities Commissioner Karen Tyler has issued cease and desist orders against three firms for allegedly offering unregistered and fraudulent securities in the form of Initial Coin Offerings (ICOs), according to an announcement published Oct. 11.

The companies at the center of the orders are Crystal Token, Advertiza Holdings (Pty) Ltd., and Life Cross Coin a/k/a LifecrosscoinGmbH. Per the statement, Crystal Token (CYL) is an “evolutionary multi-utility” ERC-20 token, that promises earnings up to two percent per day. The token’s website allegedly contains fraudulent claims of “excessive unsubstantiated” rates of return on investment. CYL is not authorized to sell securities in North Dakota.

Advertiza Holdings offers cryptocurrency called “Tizacoin,” or “TIZA,” and claims that holders “can expect to make a profit from the appreciation of the value of TIZA tokens.” That, according to the regulator, indicates that the token’s description as a utility token is incorrect, and is instead a security.

According to the North Dakota Securities Department, Advertiza falsely claims to be registered with the U.S. Securities and Exchange Commission (SEC) and is also not registered to sell securities in North Dakota.

The third firm, Life Cross Coin, operates a website from a Berlin IP address associated with ransomware, malware, and identity fraud, and offers a cryptocurrency called “Life Cross Coin,” or “LICO.” The firm claims that the token will be spent on charity, while investors can allegedly get a “huge return on investment.” LICO is not registered in North Dakota, and its site reportedly contains unsubstantiated claims and blatant misrepresentations. Tyler commented on the orders:

“The continued exploitation of the cryptocurrency ecosystem by financial criminals is a significant threat to Main Street investors. In formulaic fashion, financial criminals are cashing in on the hype and excitement around blockchain, crypto assets, and ICOs – investors should be exceedingly cautious when considering a related investment.”

The order is part of Operation Cryptosweep, a coordinated multi-jurisdiction investigation into potentially fraudulent crypto investment programs, that involves 40 U.S. and Canadian state and provincial securities regulators. Since the initiative’s launch in May, investigators discovered about 30,000 crypto-related domain names and conducted over 200 investigations of ICOs.

In May, the Colorado Securities Commissioner launched probes into two companies — California-based Linda Healthcare Corp. and Washington-based Broad Investments LLC — for promoting unlawful ICOs.

 

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Anastasios A. Antoniou, a member of the EU Blockchain Observatory and Forum, thinks that blockchain has to find its place within a regulatory framework rather than evade it, according to his post published in the Oxford Business Law Blog Wednesday, October 3.

The expert thinks that it is imperative to bridge the divide between code and law in blockchain, calling this “a radical rethink” of current regulation.

Antoniou further compares the current legal situation around blockchain with the principle question of the late 1990’s dedicated to cyberspace regulation. He explains that blockchain has to apply the law to attain its full potential, writing:

“If distributed ledger technology seeks to attain its full potential, it should not attempt to evade or circumvent law but rather find its place within a well-structured, relevant and versatile regulatory framework that will allow it to be exploited to its profound potential.”

The Oxford blog contributor then continues by noting that the adoption of new rules would help gain some certainty in the markets and create new ecosystems. He stresses that any legislation should support blockchain, rather than opposing innovation.

Finally, Antoniou writes that that developers should interact with governments, concluding that “the blockchain developers should inform the law’s response to code by engaging with legislators and regulators.”

As Cointelegraph wrote earlier in October, audit and consulting firm Deloitte named five obstacles that blockchain had to overcome to gain mass adoption — the possibility of time-consuming operations, lack of standardization, high costs and complexity of blockchain applications, and regulatory uncertainty, as well as the absence of collaboration between blockchain-related firms.

Earlier in July, former Wall Street executive Mike Novogratz predicted that mass adoption of crypto and blockchain is “still five to six years away” because of the lack of precedents in the tech industry and the doubts of conventional investors.

 

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In a new letter dated September 28 to Jay Clayton, chairman of the Securities and Exchange Commission (SEC), US Congressmen Warren Davidson, Ted Budd, Tom Emmer, and Darren Soto asked for clarifications on the regulatory status of initial coin offerings (ICOs) and cryptocurrencies.

According to the lawmakers, the current uncertainty regarding digital tokens “is hindering innovation in the United States,” while hinting that businesses may be moving elsewhere to more crypto-friendly jurisdictions if nothing is done.

The pro-crypto Congressmen went on to write that they “believe the SEC could do more to clarify its position,” and added that they are “concerned about the use of enforcement actions alone to clarify policy […]” The Congressmen were particularly interested in getting a clear regulatory framework for when a token sale should be considered an “investment contract,” thus classifying tokens as either securities or non-securities.

As Cryptonews.com reported last week, Congressman Davidson hosted a roundtable discussion on Capitol Hill between lawmakers and representatives for the crypto industry. The forum, dubbed “Legislating Certainty for Cryptocurrencies,” will provide input from the industry to be used in the preparation of a new bill that Davidson plans to put up for a vote in the US House of Representatives this fall.

During the meeting, Davidson was quoted as saying that “I am confident we can move forward and make this a flourishing market in the U.S.,” while adding that “we did it well with the Internet.”

Meanwhile, not only in the U.S. the lack of regulation in the crypto and blockchain space, especially for projects that raised funds through ICOs, is keeping even compliant projects from working.

“If you’re a good citizen complying with accounting, opening bank accounts, doing everything correctly, you can still get hit every single week by institutions, service providers, partners that tell you they’re not working with you anymore just because you’re dealing with cryptocurrencies,” Ada Jonušė, CEO of Lympo, a Lithuania-based sports and health data monetization company, said in September.

Ripple forms lobbying group

In other news from Washington this weekend, a statement from Ripple revealed that the California crypto startup focusing on the banking sector, and other companies associated with it, are forming a lobbying group to influence crypto regulations during a critical time when lawmakers in Washington are trying to figure out how to approach the issue.

The new advocacy group, dubbed Securing America’s Internet of Value Coalition (SAIV), says it will promote “a vision of fair and equitable Internet of Value,” as well as fair tax treatment on crypto-related “capital gains, assets and charitable contributions.”

 

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