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Blockchain Bites: US Treasury releases responsible crypto regulation framework; US Fed Vice Chair pushes for crypto reform; Shanghai new metaverse development fund; Celsius plunges into bankruptcy; NFTs stolen in phishing attack – Fin Tech

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Michael Bacina, Steven Pettigrove, Jade McGlynn,
Luke Misthos and Jordan Markezic of the Piper Alderman Blockchain
Group bring you the latest legal, regulatory and project updates in
Blockchain and Digital Law.

U.S Treasury releases framework for responsible
development of digital asset regulation

The United States Treasury has issued a framework on
crypto-assets designed to assist US government agencies to work
with foreign regulators.

This globally focused framework follows
an executive order
on digital assets made by President Joe
Biden back in March, which focused on the coordination and
consolidation of various government agencies under a national
policy. The Treasury’s recent framework order appears to be an
internationalisation of the governments efforts to ensure the
responsible development of digital assets under the executive
order. According
to the Treasury
the framework aims to:

ensure that, with respect to the development of digital
assets, America’s core democratic values are respected;
consumers, investors, and businesses are protected; appropriate
global financial system connectivity and platform and architecture
interoperability are preserved; and the safety and soundness of the
global financial system and international monetary system are

The government department cites
that due to the risks posed to investors by the uneven regulation,
supervision, and compliance across jurisdictions international
cooperation among public authorities, the private sector, and other
stakeholders is critical. This could be seen as a dig at the highly
centralised Chinese central bank digital currency.

To elaborate on the nature of the issue, the report

Inadequate anti-money laundering and combating the financing
of terrorism (AML/CFT) regulation, supervision, and enforcement by
other countries challenges the ability
of the United
States to investigate illicit digital asset transaction flows that
frequently jump overseas, as is often the case in ransomware
payments and other cybercrime-related money laundering.

To promote these aims of international co-ordination and
cooperation the Treasury will continue to engage with international
policy makers at G7 on topical matters related to digital assets
payments, including the implications of: new technologies on the
international monetary system, the creation and movement of money
in public and private sectors and central bank digital currencies,
it says.

In addition, the country will work with G20 members to: reduce
the challenges presented by the use of digital assets for
cross-boarder payments and financial stability due to digital
assets, push for better digital asset regulations, and speak over
any remaining macro-financial challenges.

It remains to be seen if the bold statement of “inadequate
anti-money laundering” is evidenced by the data, as the
regular Chainalysis Crypto Crime reports continue to show that
crypto-assets are not used in illicit activity in a substantial
proportion relative to total transaction volume (and well below the
levels of illicit use of cash).

US Fed’s Vice Chair pushes for crypto

Speaking at the recent Bank of England Conference, the Vice
Chair of the Federal Reserve, Lael
, has
urged crypto regulation
as a necessary step to combat weighty
risks such as fire sales, deleveraging and contagion in the crypto
markets, and to promote competition, efficiency and speed.

The news comes amid a recent number of collapses in the crypto
industry following the
Terra/Luna meltdown
Three Arrows liquidation
Celsius’ freezing transactions
as the largest casualties of
the crypto winter so far. Despite significant losses occurring, Ms.
Brainard says the crypto system is not yet so interconnected with
traditional finance to be considered a systemic threat.

Although she did not disclose much relating to potential policy,
Ms. Brainard did confirm the future of crypto involves

Future financial resilience will be greatly enhanced if we
ensure the regulatory perimeter encompasses the crypto financial
system and reflects the principle of same risk, same disclosure,
same regulatory outcome.

While praising the benefits of crypto and digital assets
generally, the Vice Chair sought to draw a distinction as to
whether lower costs were delivered by genuine innovation, or cost
savings by non-compliance with existing laws. This is a curious
point to make, given that crypto businesses have been clamouring
for clear paths to regulation which can be complied with using
decentralised technology.

Crypto has headlined US regulatory conversation in the finance
space for the past few months, most recently with the Securities
Exchange Commission (SEC)
confirming bitcoin as a commodity
and inferring ether is a
security for regulatory purposes.

As the US continues to traverse the crypto winter, those in
charge of inciting and enacting policy, such as Ms. Brainard, seem
to believe it is a global process instead of something that must be
tackled by each individual country:

Due to the cross-sectoral and cross-border scope of crypto
platforms, exchanges, and activities, it is important that
regulators work together domestically and internationally to
maintain a stable financial system and address regulatory

This is spot on, as highly mobile crypto businesses with young
staff will move to jurisdictions which have supportive frameworks
for regulation, and rely on the borderless nature of blockchain
networks to deliver their innovation. This poses a significant
challenge to traditional financial services regulation, which has
traditionally enjoyed a clear enforcement path and a gatekeeper
model to ensure compliance. Designing laws which must balance
incentives and costs more carefully than ever before is a difficult

Shanghai Govt launches $1.5B Metaverse Development

The Shanghai Government has
the launch of a US$1.5 billion Metaverse Development
Fund as part of measures designed to boost its post-pandemic
economy recovery.

According to Hong Kong-based media outlet, the
South China Morning Post
, the fund will help Shanghai foster 10
“leading” companies, and 100 small firms which could
launch at least 100 “benchmarking products and services”.
Head of Shanghai’s Economy and Information Technology
Committee, Wu Jincheng, commented that:

The Metaverse will drive the transformation and upgrading of
various industries in the real economy.

The Shanghai Government is also backing investments in
low-carbon energy projects and small terminal technology. Jincheng
added that there was “huge market value” in the three
sectors, which are estimated to be worth approximately
US$224 billion by 2025
. The Shanghai Government has also
identified the metaverse as one of its four ‘frontiers for
exploration’ in its five year plan published in December

Shanghai’s announcement follows a tumultuous period for Web3
technologies in China. In September 2021, the Central Government
launched a crackdown
on trading cryptocurrencies and Bitcoin mining. In recent times,
State-run media outlets and regulators, such as the China Banking
and Insurance Regulatory Commission,
have issued several warnings
with respect to illegal
fundraising schemes associated with the metaverse and various

Notwithstanding these developments, a consortium of Chinese
companies with links to the Government has
been building a Blockchain-based Service Network
(BSN) targeted at companies offering computing
infrastructure services. China is also pushing
with the development of its CBDC, the eCNY, and has
as a leading Bitcoin mining center trailing only the
United States.

Mirroring its approach to the early days of the Internet,
China’s apparent strategy is to seek to secure the economic and
technology benefits associated with blockchain and Web3
technologies while maintaining control over markets and data. It
remains to be seen how this will play out in the Web3 era with its
focus on the benefits of decentralisation and permissionless

Celsius files for bankruptcy, under

Embattled crypto lender, Celsius Network
(Celsius), has
for bankruptcy in New York. The filing follows a
statement issued by the US State of Vermont’s Department of
Finance Regulation (DFR) earlier this week
labelling the firm
‘deeply insolvent’

According to Reuters, Celsius
its assets and liabilities as between US$1 billion to
US$10 billion and has US$167 million in cash on hand. It has more
than 100,000 creditors.

In its statement on Tuesday, the
stated that Celsius:

deployed customer assets in a variety of risky and illiquid
investments, trading, and lending activities. Celsius compounded
these risks by using customer assets as collateral for additional
borrowing to pursue leveraged investment strategies. Additionally,
some of the assets held by Celsius are illiquid…

In June,
Celsius suspended withdrawals
, cut its workforce and engaged
restructuring experts following the downturn in crypto markets.

On Wednesday, it was
that Celsius had paid off its debt on the DeFi
protocol, Aave, which freed up US$26 million in tokens in its
restructuring strategy. Celsius also moved US$418 million in staked
ether (
) to an unknown wallet. Last week, Celsius
paid off
a loan on Maker, another DeFi protocol, releasing
US$440m in collateral. The pay-offs
sparked controversy
in some quarters that Celsius was
apparently paying third party loans while customer withdrawals
remained suspended. However, the pay-offs were presumably intended
to release more funds from overcollateralized loans to repay

Meanwhile, Celsius is reportedly
under investigation
in a number of US States along with other
failed crypto-lenders. In its statement, the DFR alleged that
Celsius engaged in
unregistered securities offerings
by offering cryptocurrency
interest accounts to retail investors. The DFR also noted that
Celsius lacked a money transmitter license, meaning that Celsius
operated largely independent of regulatory oversight.

Celsius is also currently subject to
proceedings in the New York State Supreme Court
brought by
KeyFi for breach of contract and fraudulent misrepresentation. The
proceedings commenced by KeyFi allege Celsius had been:

leveraging Celsius’ customer deposits to manipulate
crypto-asset markets, had failed to institute basic accounting
controls which endangered those same deposits, and had failed to
carry through on promises that induced the Plaintiff to undertake
various trading strategies.

The lawsuit also levels allegations of gross mismanagement at
Celsius and that Celsius become a Ponzi scheme after suffering
heavy losses in early 2021.

Despite today’s filing, the ramifications of Celsius’
collapse are likely to reverberate for some time to come.

NFTs stolen in Phishing Attack on Uniswap

A group of hackers has pulled off a
major phishing scam
on a Uniswap v3 liquidity pool, making off
with NFTs worth roughly US$3.56m in ETH. The hackers impersonated
Uniswap’s website and deceived liquidity providers into signing
malicious transactions.

Positions in Uniswap v3 liquidity pools
are represented as NFTs
which liquidity providers can use as
collateral for loans paid out in stablecoins and other assets.

On chain data
tied to the scammer’s account reveals that
all but 70 ETH of the amount stolen has already been transferred
through a cryptocurrency mixing service, Tornado Cash, in an
attempt to obscure the destination of the stolen digital

The hack follows not long after a much wider attack against
Uniswap users. According to MetaMask security analyst
Harry Denley
, a malicious actor targeted over 73,000 wallet
addresses by sending them a token under the guise of a UNI airdop,
hoping to steal the credentials of those who logged in to inspect
the free token.

Following the latest incident, Hayden Adams, founder of the
Uniswap protocol, confirmed in a tweet that the loss of NFTs was
the result of a phishing attack which was:

totally separate from the protocol (and) a good reminder to
protect yourself from phishing and not click on malicious

These incidents demonstrate the increasing sophistication of
phishing scams where bad actors seek to deceive users by
impersonating well known websites and offering seemingly plausible
inducements to gain access to users’ accounts.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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