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Telegram Appeals Federal Court Injunction to Stop Gram Distribution

Telegram has filed an appeal to yesterday’s ruling by a United Stated federal court in favour of the US Securities and Exchange Commission (SEC) which has prohibited the issuance of Gram tokens for the time being.

Court Sides with SEC early

The SEC has won an important decision in their court case against Telegram over the legal status of the latter’s $1.7 billion Gram token offering in 2018. The SEC has maintained throughout that the tokens sold were unregistered securities and yesterday the US federal court granted the regulator an injuction to halt the distribution of Grams as the legal battle continues.

The injunction states, “For reasons that will be more fully explained, the Court finds that the SEC has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities under the Howey test to which no exemption applies. The motion for a preliminary injunction will be granted.”

The SEC believes through its examination via the Howey test that the contracts governing the Telegram’s token issuance qualify Gram tokens as securities. Per the filing, ““Under the Howey test, the series of contracts and understandings centered on Grams are a security within the meaning of the Securities Act of 1933 (the “Securities Act”).”

Telegram immediately filed a notice of appeal with the Court of Appeals for the Second Circuit.

Former SEC Counsel Has Little Hope for Appeal

The evidence being presented to the court by the SEC’s Howey Test appears to have compelled them to act in favour of the regulator early in the legal proceedings – this cannot be a good sign for Telegram and their TON network.

On Feb. 18, Telegram’s lawyer, Alexander Drylewski had criticized the application of the SEC’s Howey Test, citing that a test designed to categorize securities does not apply to digital assets that are offered with a promise of managerial oversight, that will increase their value over time. The lawyer argued that when TON blockchain launches, Grams will not be securities but commodities.

Philip Moustakis, attorney at Seward & Kissel LLP and former SEC counsel told Blockchain.News that Telegram’s defense was not looking good and believes the SEC has applied the Howey test correctly.

Moustakis said,“Telegram argues the “interests in Grams” are one transaction and the “delivery of Grams,” another. However, the court, rightly in my view, held the Howey test requires it to examine the entire series of understandings, transactions, and undertakings at the time they were made, meaning the totality of the facts and circumstances underlying the economic reality of the investment, including at the moment in time when investors separated with their money.” He concluded, “In other words, an issuer cannot avoid application of the federal securities laws by separating in time the capital raise and the delivery of the digital representation of the investor’s interest in that capital raise. And, at delivery, in my view, the Grams would still represent the series of promises and understandings that led up to their distribution”

The case between the SEC and Telegram is ongoing and we will continue to bring you updates.

Shanghai High Court Pilots Blockchain Technology to Record Hearings for Court Reform

Shanghai’s high court has started using blockchain technology to record hearings as part of its court record reform pilot.

During the meeting on the reform of court records, participants took part in observing the whole process of the court trial of a dispute over the equity transfer contract heard by the Shanghai Minhang District People’s Court.

Using blockchain technology, and voice recognition, text records including audio and video recording functions were also activated. File names, sizes, creation time, and other information related to recorded audio and written files related to the court hearing were generated automatically.

The judge asked the parties of the court to sign and confirm the metadata table that recorded those records. The report read:

“The audio-visual conversion record, the metadata table confirmed by the parties’ signature, and other materials were completely presented in the “electronic file” of the case.”

According to the report, trialing of the court records reform in Shanghai has started in June, and within 3 months, 260 courts were installed and deployed to support the reform of the court records, resulting in 27.4% of the total number of courts.

Chinese courts deploy blockchain-powered door seals

Chinese courts have recently started to adopt blockchain-based door seals that will optimize property security by enabling real-time video surveillance and sophisticated alarm systems. This move is intended to eradicate the conventional paper seals, which are not tamper-proof.

The Executive Bureau of the People’s Court in Beijing, China, set a precedent by using a blockchain-enabled seal in securing a property located in Chaoyang district. Other courts in Jiangxi, Hunan, and Jiangsu provinces have also followed suit.

The electronic seals based on blockchain technology are unique as they have a rectangular dimension consisting of internal contraction and expansion grooves. Additionally, they are adjustable depending on the door size.

An enforcement ruling is also pegged on the seals to inform the populace about the property status.

California Man Pleads Guilty to Running Illegal Bitcoin ATMs and Money Laundering

The US Department of Justice has accepted a guilty plea from a Californian man for operating a money laundering and illegal Bitcoin business.

According to a plea agreement filed Wednesday, July 22 in federal court, 36-year old Kais Mohammad, also commonly recognized as “Superman 29”, has agreed to plead guilty to one count each of operating money laundering, unlicensed money transmitting business, and failing to maintain an effective AML (anti-money laundering) program.

Law Enforcements Spot and Study Patterns to Catch Criminals

Federal investigators revealed that Mohammed owned and operated HeroCoin, which was an illegal digital currency money services business, exchanging Bitcoin cryptocurrency for cash and charging commission rates of up to 25% that were “significantly above” the market rate.

The company also operated Bitcoin ATM kiosks in multiple retail centers, including convenience stores, gas stations, and malls throughout San Bernardino, Riverside, Los Angeles, and Orange counties. Such kiosks allowed customers to either sell Bitcoin in exchange for cash or buy Bitcoin with cash that would be dispensed on site.

Prosecutors claimed that Mohammad knew at least some of his clients’ funds were obtained through illegal activities.

As part of his plea agreement, Mohammad admitted to having exchanged more than $25 million through the firm.

Prosecutors alleged that Mohammad intentionally failed to register the firm with the U.S Department of Treasury’s Financial Crime Enforcement Network (FinCEN) or develop an effective anti-money laundering program.

Prosecutors also claimed that being a former banker, Mohammad was aware, but ignored regulations related to reporting requirements for digital currency exchanges. Regulations required Mohammad to report exchanges of currency bigger than $10,000 or any transactions over $2,000 involving customers suspected to be involved in criminal activities. But Mohammed ignored complying with these regulations.

According to court records, law enforcement officials conducted several transactions with Mohammad as a way of carrying out their investigations. One undercover agent bought $14,500 value of Bitcoin cryptocurrency during three successive transactions at a Bitcoin ATM kiosk located in Lakewood.

As per the U.S attorney’s office, Mohammad once again met in person with undercover agents who represented themselves that they worked at a ‘karaoke bar, which employed beautiful women from Korea who entertained men in several ways, including engaging in sexual activity. Mohammed agreed to accept $16,000 in cash from one of the undercover agents in exchange for Bitcoin, prosecutors reported.

Prosecutors alleged that Mohammed did not file the required currency transaction reports nor a suspicious activity report, in relation to the exchanges involving the undercover agents.

So far, no hearing date has been scheduled for Mohammad to enter a plea of guilty. He faces a maximum sentence of 30 years in federal prison. He has agreed to forfeit cryptocurrency, cash, and 17 Bitcoin ATMs that he used for his business operations.

Laundered Cryptocurrency Washed with Exchange Services

Chainalysis report reveals that a majority of criminally-connected cryptocurrencies are laundered on basic online exchange services. In 2018, doge cryptocurrencies amounted to more than $1 billion were washed by simply depositing them onto digital asset exchanges and trading them. Money launders utilized other p2p (peer-to-peer) exchange services to clean a further 12% of their illegal proceeds. This implies that over 75% of illegal cryptocurrencies were moved through an online exchange service in 2018.

The majority of illicit money flowed through either peer-to-peer exchanges or crypto exchanges, with others flowing through conversion services like gambling sites, mixing services, and Bitcoin ATMs.

Most of the digital currencies were acquired by hacking crypto exchanges directly. In 2018, about $36 million value of Ethereum was stolen through exit scams, Ponzi schemes, or phishing.

US Federal Court Defines Bitcoin As Money

A US Federal court has classified Bitcoin as a “money” under the Washington, D.C., Money Transmitters Act (MTA).

A US Federal court would not dismiss criminal charges laid against Larry Dean Harmon, the operator of an underground Bitcoin trading platform, for running an unlicensed money transmitting business under D.C. law and for laundering money under federal law—because Bitcoin is a form of money according to Act. Chief Judge Beryl A. Howell.

On Friday, July 24, Act. Chief Judge Beryl A. Howell wrote for the US District Court of Colombia, that money is defined as “a medium of exchange, method of payment, or store of value,” before adding, “Bitcoin is these things.”

The decision to label Bitcoin as “money” was made as the court denied the motion by Larry Dean Harmon’s defense to dismiss criminal charges of operating an illegal-money-transmission—arguing that Bitcoin is not money under the MTA which meant his business could not have done anything illegal under US regulation.

What does this mean for Bitcoin?

The ruling in the US District Court of Columbia is not expected to have much impact on how Bitcoin is perceived in the mainstream market. The definition does, however, further provide parameters on how the US Courts regulate cryptocurrency in money transmissions and how Bitcoin will be treated by federal and state authorities in the context of anti-money laundering.

Peter Van Valkenburgh, Director of Research at Coin Center told Bloomberg Law, that the district court’s ruling means that Bitcoin is only treated as money in the context of D.C. money transmission law. He said, “These cases pop up all the time because nearly every state has its own definition of money transmission.”

According to the official indictment, Harmon’s platform was located on the darkweb and was allegedly advertised as a Silk Road type of service, which provided a way to mask the purchase of drugs, guns, and other illegal transactions from law enforcement. The platform was allegedly used to exchange the equivalent of around $311 million dollars between 2014 and 2017.

The court has further seized 160 Bitcoins from Harmon and has also denied his request to have them released as there is a very high likelihood that the funds were leveraged in illegal transactions.

Columbia Man Pleads Guilty to Bitcoin Dark Web Chemical Weapon Purchase

A Columbia, Missouri, man pleaded guilty in United States federal court yesterday to attempting to purchase a chemical weapon on the dark web using Bitcoin.

A 45-year-old man from Columbia, Missouri pled guilty yesterday in a US federal court to one count of aggravated identity theft and one count of attempting to acquire a chemical weapon—via the dark web using Bitcoin.

According to the United States Department on Justice (DoJ), Jason William Siesser admitted before U.S. Magistrate Judge Willie J. Epps, Jr. that he attempted to obtain chemical weapons on two separate occasions in mid-2018 using around $150 dollars in Bitcoin.

The statement from the DoJ, Siesser did not attempt to acquire that chemical weapon for a peaceful or protective purpose and the amount of toxic chemicals ordered were enough to kill up to 300 people.

Siesser was arrested by the Federal Bureau of Investigation (FBI) when the package arrived at his home addressed to juvenile living with him at the time— whose identity he used without authorization. Siesser admitted that he had paid for the chemical weapon with at a rate of $52 dollars in Bitcoin per vial.

Law enforcement executed a search warrant at Siesser’s residence and found two separate and seemingly unopened shipping boxes which contained approximately 10 grams of cadmium arsenide, a toxic compound, which can be deadly if ingested or inhaled; approximately 100 grams of cadmium metal; and approximately 500 ml of hydrochloric acid. An invoice for these products showed they had been ordered together on March 30, 2018.

As for motive, the DoJ reports law enforcement agents also found letters located within the home which articulated Siesser’s heartache, anger, and resentment over a breakup and a desire to exact revenge on the mentioned person.

Jason William Siesser now faces a minimum five-year jail term upon sentencing.

Bitcoin leveraged on Dark Web in the Darkest Ways

While the news of Siesser leveraging Bitcoin on the dark web is another example of the cryptocurrency having a nefarious purpose, it, unfortunately, is not the darkest story on the dark web of late.

As reported by Blockchain.News, two 17-year-old Italians were recently detained under the Delirium operation for instigating child pornography and live torture viewings on the dark web.

One of the teens uncovered encrypted websites that would enable his counterpart and him to witness live torture of children as well as sexual abuse of the minors. The two Italians paid Bitcoin (BTC) to a dark site address in order to unlock explicit footage of children being sexually abused. Some were reported to be tortured to the point of dying. All this happened on the live stream.

The deep-web website also had a feature linked to it that incited viewers to pay extra cryptocurrency in exchange for deciding what kind of torture and what level of it would be carried out next on the minors.

Teenage Twitter Hacker Mastermind of Bitcoin Scam Pleads Not Guilty

The alleged mastermind of the massive Twitter Bitcoin hack, 17-year old Florida resident Graham Ivan Clark has pleaded not guilty to multiple counts of fraud. The plea which came in a brief hearing conducted via the video conferencing service Zoom came following the arrest of Clark which ushered in a series of investigations.

The Twitter Bitcoin scam hack targeted multiple high-profile figures such as Bill Gates, Elon Musk, Joe Biden, Jeff Bezos, multinational tech company Apple as well as a prominent elected Dutch official.

The perpetrators allegedly took over the direct messages of these prominent figures to spread the message, “I am giving back to the community. All Bitcoin sent to the address below will be double! If you send $1,000, I will send back $2,000. Only doing this for 30 minutes.” a tactic that saw about $100,000 worth of Bitcoin being garnered.

Important Track of the Hack Investigation

While the hack took the world by surprise, a United States Senator, Josh Hawley advised Twitter to cooperate with federal investigators and to secure the accounts of the affected users before the hack escalates.

This nudging appears to be yielding dividends as the coordinated investigation revealed that the hack originated from a phone phishing attack. A later investigation further traced the attack to crypto wallets using Bitpay and Coinbase exchange. The productive investigation led to the arrest of Graham Ivan Clark about two weeks after the incident.

Productive Investigation Suggests Crypto Transactions are Easy to Track than Fiat

The Twitter Bitcoin scam with the progressive investigation has served as a basis to advocate for wider adoption of cryptocurrencies. Referencing the Twitter Bitcoin hack, the Chief compliance officer for Paxful Lana Schwartzmann noted that with traditional fiat, the issue would not have been resolved and traced as quickly.

The United States through the Commodity Futures Trading Commission (CFTC) has a functional regulatory framework to bolster the growth of digital currencies and despite Schwartzmann’s position, the mainstream adoption may be too much of a wild guess at this time

NAC Foudation Accuses US SEC of Misleading Court in AML BitCoin Case

The NAC Foundation and its founder and CEO, Rowland Marcus Andrade, accused the US Securities and Exchange Commission (SEC) of prosecutorial misconduct in the SEC’s ongoing legal case against an alleged ‘AML BitCoin’ securities offering.

On October 20, Rowland Marcus Andrade and his company, the NAC Foundation, filed a notice of claim in which they requested a federal judge working at the San Francisco Superior court in California to throw out the SEC lawsuit filed in June this year.

Fraud Case Against the NAC Foundation

In a separate complaint filed in U.S District Court in San Francisco, the SEC charged the Nevada-based NAC Foundation, its CEO Andrade, and co-founder Jack Abramoff (the political lobbyist) with defrauding investors by carrying out a fraudulent unregistered security digital asset “AML BitCoin” which they claimed was an improved and new version of the original Bitcoin due to its security features.

The SEC reported that NAC Foundation managed to raise more than $5.6 million from over 2,400 retail investors by selling digital tokens, which could later be converted to AML BitCoin. The SEC’s complaints alleged that NAC Foundation, its CEO Andrade, and co-founder Jack Abramoff described “AML BitCoin” as better than the original Bitcoin because it allegedly had theft-resistant, anti-terrorism, and anti-money laundering technology built into the coin. As per the SEC’s lawsuit, such security capabilities mentioned never existed, and the development of the token and its blockchain was in very early stages.

However, Andrade has accused the SEC of intentionally attempting to mislead the court by alleging that his company offered technology that never worked. He argued that the commission has anti-money laundering patents associated with the NAC Foundation cryptocurrency “AML BitCoin.”

Furthermore, Andrade argued that the terms and conditions of sales of AML BitCoin apparently indicate that the digital asset is not an investment contract. He said that anyone who has bought AML BitCoin entered in a written contract to understand that token is not an investment.

Moreover, Andrade claimed that all customers understand that the digital asset acts as a medium of exchange and could not be used as a right claiming for ownership in a joint venture, firm, or business.

The defendants also argued that the written conditions of sale clarified that their clients should not have an expectation of a return on investment and further stated that the digital assets were not a financial instrument sold or offered as equity or debt.

Lastly, the defendants claimed that the SEC’s alleged inability to point out important components of Howie’s test with regards to the cryptocurrency indicates that the token is not a security. Therefore, Andrade argued that the situation implied that the commission “has no cases.”

The Scale of Punishment

The U.S Attorney’s Office for The Northern District of California announced separate legal charges against Abramoff and Andrade, charging Abramoff with lobbying disclosure violations and conspiracy to commit wire fraud and Andrade with wire fraud.

If convicted, Andrade faces a maximum period of 40 years in prison and a fine of $750,000 and restitution for his alleged violations, while Abramoff faces a maximum period of 10 years in jail and a fine of $500,000 for charges leveled against him.

U.S. Judge Approves SEC's Motion to Extend its Discovery Period For Lawsuit with Ripple

The request made by the United States Securities and Exchange Commission (SEC) to extend its discovery period in its ongoing court battle with blockchain payments firm Ripple has been granted.

The SEC-Ripple lawsuit that many have been looking to be wrapped up has now been pushed until the end of August. In addition, the timeline to conduct fact discovery while conducting expert discovery has been extended to October 15, 2021.

Since February, the court duel between both entities has been ongoing February, and the presiding Judge, Sarah Netburn, has had her hands full. The case has culminated in small wins for Ripple thus far, and many believe that the SEC has a weak advantage against the embattled company. In the latest pronouncements, a number of motions from the SEC were denied by the Judge.

Per the reports, two of the motions denied include the SEC’s request for documents post-dating the complaint and documents from General Consul and Deputy Consul. In a series of tweets, Attorney James K. Filan, who first broke the news, noted that the extensions might eventually work in Ripple’s favour. According to him, “This is a good sign for the fair notice defence. Judge Netburn has made clear to the SEC yet again that the focus of that defence is on the activities of the SEC and not on Ripple.”

The case has notably impacted XRP holders, as the digital currency’s price has not moved in tandem with the broader market amidst the previous bull run this year. While the end looks promising for Ripple, Attorney Jeremy Hogan noted in a tweet that the extension of both the fact and expert discoveries is sure to push the case into 2022. Additionally, he highlighted the options for settlement between both parties. However, the likelihood of settlement looks bleak at the recent twist of events.

U.S Court Issues John Doe Summons to Taxpayers that Failed to Remit Crypto Taxes

The United States District Judge, Paul G. Gardephe has granted permission to the Internal Revenue Service (IRS) to issue what is called a John Doe summons on M.Y. Safra Bank to release information about customers who may have failed to remit taxes received from conducting crypto transactions.

According to a court order, Gardephe specifically asked SFOX to produce information about its customers who use M.Y. Safra Bank to make cryptocurrency payments. SFOX is a complete crypto dealer that provides crypto services for institutional investors that provide the liquidity, security and infrastructure needed to open the full potential of digital assets.

SFOX collaborated with M.Y. Safra to offer SFOX customers access to bank accounts for depositing and withdrawing cash.

SFOX users could use their money on M.Y. Safra to buy and sell positions in SFOX virtual currency. IRS, therefore, expects M.Y. Safra to provide information on the identity and crypto transactions of SFOX customers based on their partnerships so as to determine if IRS laws are complied with.

SFOX has a record of over 175,000 registered subscribers on its platform that have collectively performed transactions of over $12 billion since 2015. The IRS also stated that a third party is required to report such virtual transactions to them.

The IRS Commissioner Charles P. Rettig said in a statement that;

“The government’s ability to obtain third-party information about individuals who have failed to report their digital asset income remains an important tool for tax evasion.” According to him, the John Doe summons is a step in the right direction towards ensuring that everyone pays their taxes according to what they earn.

The U.S IRS issued a warning letter in 2019 to crypto owners stating that taxpayers must pay taxes owed or file amended tax returns for their cryptocurrencies.

“Taxpayers should take these letters very seriously by reviewing their tax returns and, if necessary, amending previous returns and paying back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig.

FTX Founder to Forfeit $700 Million

According to recent documents filed in court, in the event that disgraced FTX founder Sam Bankman-Fried (also known as SBF) is found guilty of fraud, he will be required to relinquish assets valued at over 700 million dollars.

U.S. federal prosecutor Damian Williams said, in a document that was submitted to the court on January 20, 2019, that the “government respectfully provides notice that the property susceptible to forfeiture” contains a comprehensive list of assets that include fiat currency, shares, and cryptocurrency.

According to the documents, the majority of the assets were taken by the government between January 4 and January 19, while the government is also attempting to lay claim to “all funds and assets” linked to three different accounts on Binance.

When looking at the list of assets that were seized, the largest allocations include 55,273,469 Robinhood (HOOD) shares, which had a market value of approximately $525.5 million at the time this article was written; $94.5 million was held at Silvergate Bank; $49.9 million was held at Farmington State Bank; and $20.7 million was held at ED&F Man Capital Markets, Inc. In this particular incident, the government has requested that the assets in question be forfeited since it believes that these assets were illegally gained via the use of consumer deposits.

Although other members of SBF’s inner circle, such as Caroline Ellison and Gary Wang, have confessed and cooperated with prosecutors over their involvement in the failure of FTX, the man himself has entered a not guilty plea to all eight of the criminal counts that have been brought against him.

In other developments pertaining to FTX, a story published on January 18 by the Wall Street Journal (WSJ) revealed improperly aged advertisements that the exchange issued in Africa not too long before it filed for bankruptcy in November.

The campaign in issue promoted USD-pegged stablecoins as more secure investments than local currencies with respect to inflation, while simultaneously advertising the ability to earn 8% annually via staking rewards schemes.

In spite of the fact that those inflation sentiments may generally be true given that African currencies such as the Nigerian naira and the Ghanaian cedi have plummeted against the USD, any African FTX customer who was persuaded by the marketing of the company went on to lose funds when the company went bankrupt.

Pius Okedinachi, a former FTX education lead for Africa, disclosed to the WSJ that the exchange managed over $500 million worth of monthly trading activity in Africa, with the majority of the volume originating from Nigeria.