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South Africa Classifies Crypto Assets as Financial Products, Clears Deck for Regulation

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By Reuters | Updated: 20 October 2022

South Africa’s financial watchdog has classified cryptocurrency assets as financial products, a notice in the government gazette said on Wednesday, enabling them to be regulated.

In the brief notice, the Financial Sector Conduct Authority (FSCA) said a crypto asset, which it referred to as “a digital representation of value”, must be regulated in South Africa from the date of publication.

Regulations that the authorities have said they planned to introduce include applying foreign exchange controls and licensing crypto trading companies.

Financial watchdogs across the globe have been grappling with how to regulate new digital currencies and tokens, the prices of which have fallen since November last year.

Crypto assets are not issued by a central bank, but are capable of being traded, transferred or stored electronically.

South African Reserve Bank (SARB) Deputy Governor Kuben Naidoo told Reuters in May that regulation of crypto assets was in the offing and might come into force within 9 to 15 months, after regulators said they intended to do so in November 2020.

He added the SARB wanted regulation of crypto assets to prevent theft, money laundering and undermining of monetary policy because a ubiquitous cryptocurrency could weaken the authority of the central bank.

“This was the first legal step that was required to bring the crypto asset industry within the South African legal framework,” Brent Petersen from Easy Crypto, a crypto buying and selling platform, said in a note.

He added the declaration would apply to crypto trading platforms, as well as those that provide advice or intermediary services for the buyers and sellers of digital financial assets.

© Thomson Reuters 2022

Cryptocurrency

BlockFi Files for Bankruptcy in the US, Cites Exposure to FTX Amid Crypto Meltdown

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By Reuters | Updated: 29 November 2022

Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, it said on Monday, the latest industry casualty after the firm was hurt by exposure to the spectacular collapse of the FTX exchange earlier this month.

The filing in a New Jersey court comes as crypto prices have plummeted. The price of bitcoin, the most popular digital currency by far, is down more than 70 percent from a 2021 peak.

“BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem,” said Monsur Hussain, senior director at Fitch Ratings.

New Jersey-based BlockFi, founded by fintech executive-turned-crypto entrepreneur Zac Prince, said in a bankruptcy filing that its substantial exposure to FTX created a liquidity crisis. FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders pulled $6 billion (roughly Rs. 49,020) from the platform in three days and rival exchange Binance abandoned a rescue deal.

“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the bankruptcy filing by Mark Renzi, managing director at Berkeley Research Group, the proposed financial advisor for BlockFi. “Quite the opposite.”

BlockFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a crypto trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between $1 billion (roughly Rs. 8,170 crore) and $10 billion (roughly Rs. 81,700 crore).

BlockFi on Monday also sued a holding company for Bankman-Fried, seeking to recover shares in Robinhood Markets Inc pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Renzi said BlockFi had sold a portion of its crypto assets earlier in November to fund its bankruptcy. Those sales raised $238.6 million (roughly Rs. in cash, and BlockFi now has $256.5 million (roughly Rs. 2,100 crore) in cash on hand.

In a court filing on Monday, BlockFi listed FTX as its second-largest creditor, with $275 million owed on a loan extended earlier this year. It said it owes money to more than 100,000 creditors. The company also said in a separate filing it plans to lay off two-thirds of its 292 employees.

Under a deal signed with FTX in July BlockFi was to receive a $400 million (Rs. 3,270 crore) revolving credit facility while FTX got an option to buy it for up to $240 million (roughly Rs. 1,960 crore).

BlockFi’s bankruptcy filing also comes after two of BlockFi’s largest competitors, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions that had led to losses at both companies.

Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.

Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders and some found themselves exposed when a shortage of collateral forced them – and their customers – to shoulder large losses.

BlockFi’s first bankruptcy hearing is scheduled to take place on Tuesday. FTX did not respond to a request for comment.

Creditor list

BlockFi’s largest creditor is Ankura Trust, which represents creditors in stressed situations and is owed $729 million ( roughly Rs. 5,600 crore). Valar Ventures, a Peter Thiel-linked venture capital fund, owns 19 percent of BlockFi equity shares.

BlockFi also listed the U.S. Securities and Exchange Commission as one of its largest creditors, with a $30 million (roughly Rs. 245 crore) claim. In February, a BlockFi subsidiary agreed to pay $100 million (roughly Rs. 820 crore) to the SEC and 32 states to settle charges in connection with a retail crypto lending product the company offered to nearly 600,000 investors.

Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, BlockFi said in a press release issued at the time. Both firms did not immediately respond to a request for comment.

In a blog post, BlockFi said its Chapter 11 cases will enable the company to stabilize its business and maximize value for all stakeholders.

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said.

In its bankruptcy filing, BlockFi said it had hired Kirkland & Ellis and Haynes & Boone as bankruptcy counsel.

BlockFi had earlier paused withdrawals from its platform.

In a filing, Renzi said Blockfi intends to seek authority to honor client withdrawal requests from its customer wallet accounts, in which crypto assets are held in custody. However, the company did not disclose plans for how it might treat withdrawal requests from its other products, including interest-bearing accounts.

“BlockFi clients may ultimately recover a substantial portion of their investments,” Renzi said in the filing.

Origins

BlockFi was founded in 2017 by Prince, currently the company’s chief executive officer, and Flori Marquez. Though headquartered in Jersey City, BlockFi also has offices in New York, Singapore, Poland and Argentina, according to its website.

In July, Prince had tweeted that “it’s time to stop putting BlockFi in the same bucket / sentence as Voyager and Celsius.”

“Two months ago we looked the ‘same.’ They shut down and have impending losses for their clients,” he said.

According to a profile of BlockFi published earlier this year by Inc, Prince was raised in San Antonio, Texas, and financed his college education at the University of Oklahoma and Texas State University with winnings from online poker tournaments. Before starting BlockFi with Marquez, he held jobs at Orchard Platform, a broker dealer, and at Zibby, a lease-to-own lender now called Katapult.

Marquez previously worked at Bond Street, a small business lending outfit that was folded into Goldman Sachs in 2017, according to Inc.

© Thomson Reuters 2022

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Hackers Said to Demand Rs. 200 Crore in Cryptocurrency From AIIMS-Delhi, Server Remains Down for Sixth Day

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By Press Trust of India | Updated: 29 November 2022

Hackers have allegedly demanded an estimated Rs 200 crore in cryptocurrency from the All India Institute of Medical Sciences (AIIMS), Delhi as its server remained out of order for the sixth consecutive day, official sources said on Monday.

It is feared that data of around 3-4 crore patients could have been compromised due to the breach detected Wednesday morning.

Patient care services in emergency, outpatient, inpatient and laboratory wings are being managed manually as the server remained down, the sources said.

The Delhi Police, however, issued a statement, saying “no ransom demand as being quoted by certain sections of the media has been brought to notice by AIIMS authorities.” The India Computer Emergency Response Team (CERT-IN), Delhi Police and representatives of the Ministry of Home Affairs are investigating the ransomware attack.

A case of extortion and cyber terrorism was registered by the Intelligence Fusion and Strategic Operations (IFSO) unit of the Delhi Police on November 25.

Official sources said Internet services are blocked on computers at the hospital on the recommendations of the investigating agencies.

The AIIMS server has stored data of several VIPs, including former prime ministers, ministers, bureaucrats and judges.

“Hackers have allegedly demanded around Rs 200 crore in cryptocurrency,” one of the sources told PTI.

Meanwhile, the NIC e-hospital database and application servers for e-hospital have been restored. The NIC team is scanning and cleaning infection from other e-hospital servers located at AIIMS which are required for delivery of hospital services, an official source said.

Four physical servers arranged for restoring e-hospital services have been scanned and prepared for the databases and applications.

Also, the AIIMS network sanitisation is in progress. Antivirus solutions have been organised for servers and computers. It has been installed on nearly 1,200 out of 5,000 computers. Twenty out of 50 servers have been scanned and this activity is ongoing 24×7, the source said.

“The full sanitisation of the network is likely to continue for five more days. Thereafter, e-hospital services can be rolled out in a phased manner. Patient care services including emergency, outpatient, inpatient,laboratory etc services are being continued on manual mode,” the source said.

The AIIMS-Delhi in a statement said, “The data restoration and server cleaning is in progress and is taking some time due to the volume of data and large number of servers for the hospital services. Measures are being taken for cybersecurity.” All hospital services, including outpatient, in-patient and laboratories, continue to run on manual mode, it added.

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WazirX Received 828 Requests From Indian, International Law Enforcement Agencies During April-September

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By Press Trust of India | Updated: 28 November 2022

WazirX has received 828 complaint requests from the US Federal Bureau of Investigation (FBI), Interpol, among other international agencies, and Indian law enforcement agencies such as the National Investigation Agency (NIA), Enforcement Directorate (ED), and Central Bureau of Investigation (CBI), according to the cryptocurrency exchange. The requests were received against a total of 10 million transactions during April-September 2022. The exchange maintained its record of a 100 per cent compliance rate for all 828 requests received from Law Enforcement Agencies (LEA), said a report released by WazirX.

The exchange on Monday released the third edition of its Transparency Report. According to the report, only 0.008 per cent of all transactions during this period were reported or investigated by law enforcement agencies. Out of 828 queries received, 764 were by Indian law enforcement agencies, whereas the foreign agencies made 64 requests.

The greatest number of requests came in from regulators and law enforcement agencies in Maharashtra, it said. Illegal fund transfers, crypto scams, cheating, and forgery were the most common types of crimes reported, resembling scams in the traditional financial sector.

Over 700 accounts were blocked during this period. The majority of them were due to requests that came in from users.

In its continued effort to provide transparency to users and safeguard their assets, it launched the third edition of the Transparency Report.

The report highlights the company’s initiatives in boosting awareness about Web3, assisting law enforcement in identifying bad actors and implementing a full-proof onboarding process to ensure the security of users.

“We have also outlined some common trends observed in crypto scams over this time period which users should be aware of,” it said.

Some of the Indian and Foreign Law Enforcement Agencies that WazirX has worked with during this period are: the National Investigation Agency, Enforcement Directorate, State Cyber Crime Cells, Intelligence Fusion & Strategic Ops (IFSO) Delhi, Special Task Force, Narcotics Control Bureau, Bhopal Police, Crime Branch and CID, Toronto Police Department, Federal Bureau of Investigation (FBI), German Police Agencies, United Kingdom Police, Interpol, Dutch Police, Austrian Police, Europol, etc.

“We still have some way to go to prevent security risks in crypto. The level of awareness around crypto needs to extend to its ill uses too. Only then can mainstream adoption take place in an environment of trust. We will continue our efforts to educate Indians about crypto, and comply with regulators to ensure any form of fraud with virtual digital assets is tackled,” Nischal Shetty, CEO and Founder at WazirX.

According to the report, around 40 per cent of the scams are happening in Ponzi schemes and social engineering scams, 34.7 per cent of cases of Impersonation type, 21.1 per cent of cases are in Phishing / Airdrop Scams and 4.2 per cent are in other categories.

As per the report, in a recent case, a Bitcoin racket being run from Delhi came to the notice of the CBI on being alerted by the Austrian police. Imposters posed as Europol officers and other law enforcement agencies to tell their victims that their identities had been stolen and used for narcotics businesses. The criminals would target foreign nationals for the same. WazirX’s legal team, with assistance from Chainalysis, collaborated with the CBI on this case to block the operation. They identified the accounts which were being used to carry on this racket and blocked the withdrawal of the assets that were gained from the criminal proceedings.

In one of the first disproportionate asset cases involving crypto, WazirX helped Bhubaneswar Police identify the crypto accounts of an engineer who did not reveal his investments in Digital Assets. Upon scrutiny by the team, it was discovered that he had 50-odd crypto wallets and an investment worth Rs. 2 crores.

In another incident, the legal team assisted the Kolkata police in nabbing criminals who were defrauding people through a mobile gaming platform. In this case, a large sum of money was collected from the public via the platform called e-nuggets. The culprits then disabled the withdrawal of money and also removed all data from the app. WazirX helped ED freeze crypto assets worth Rs 12.83 Crores.

A few months ago, a group of criminals from Ghaziabad, Uttar Pradesh, created an elaborate fake trading app to lure customers and dupe them of huge sums of money. WazirX assisted the Ghaziabad Police real-time in identifying the identities that were linked to the culprits which led to their arrest.

In Bandra, Mumbai (Maharashtra) the WazirX team helped identify wallets linked to Chinese loan apps which were used to dupe people through fraudulent transactions. The team worked closely with the law enforcement agency to identify the accused and block their operations using crypto.

WazirX cooperated with the investigators by providing them with all the necessary details, information, and documents of the alleged accused companies who used the WazirX platform. After an in-depth internal investigation, WazirX noticed that most of the users whose information was sought by ED were already identified as suspicious by WazirX internally and were blocked in 2020-2021. Due to the active cooperation extended by WazirX and active Anti-money laundering (AML) checks, suspected users were identified.

WazirX also modified the procedure to raise a Law Enforcement request. To submit a Law Enforcement request under relevant provisions of law, the requester must be a law enforcement agent or government official authorized to Gather evidence in connection with an investigation or Make a formal law enforcement request.

They can send an email to legal@wazirx.com from the official email ID of the law enforcement agency along with a duly authorized written request.

WazirX has continued its association with TRM Labs, a virtual digital asset compliance platform, to sustain and scale up its efforts of security. It also collaborated with Chainalysis, a platform to analyze blockchain data. WazirX also joined hands with other industry players in the country to form a new crypto advocacy group called Bharat Web3 Association (BWA).

WazirX launched a course on Blockchain Technology to educate individuals. This was in collaboration with Gurukula Kangri in Haridwar, a deemed-to-be university, as per the University Grants Commission (UGC). Since its initiation, the course has seen more than 20,000 enrolments. We recently awarded the completion certificate to over 400 individuals. 7.4 per cent of them were females. Uttar Pradesh saw the highest number of enrolments in the program (25.4 per cent) among all participating states.

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FTX Collapse: Bahamas Attorney General Says Crypto Exchange Remains Focus of ‘Active’ Investigation

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By Reuters | Updated: 28 November 2022

Collapsed cryptocurrency exchange FTX remains the subject of “an active and ongoing investigation” by Bahamian authorities, Bahamian Attorney General Ryan Pinder said on Sunday, as he praised the Bahamas’ regulatory regime and swiftness with which it responded to the crisis.

FTX, which had been among the world’s largest cryptocurrency exchanges, is headquartered in the Bahamas. The firm, whose liquidity crunch forced the company to declare bankruptcy on November 11, is the subject of investigations by Bahamian and US authorities. In mid-November, the Royal Bahamas Police said that government investigators in the Bahamas were looking at whether any “criminal misconduct occurred.”

“We are in the early stages of an active and ongoing investigation,” Pinder said on Sunday, according to prepared remarks for the speech. “It is a very complex investigation.” He said it involved both civil and criminal authorities.

Pinder said that the Bahamas Securities Commission, Financial Intelligence Unit and the police’s Financial Crimes Unit would “continue to investigate the facts and circumstances regarding FTX’s insolvency crisis, and any potential violations of Bahamian law.”

Pinder also defended the Bahamas’ regulatory regime and said that its Securities Commission had moved quickly “because of the strength of the legislative framework.”

Bahamas securities regulators had revoked FTX Digital’s licence and began involuntary liquidation proceedings the day before the US bankruptcy case kicked off.

“Any attempt to lay the entirety of this debacle at the feet of the Bahamas, because FTX is headquartered here, would be a gross oversimplification of reality,” Pinder said, adding that the Bahamas Securities Commission had moved with “remarkable” speed in response.

Sam Bankman-Fried, 30, founded FTX in 2019 and rode cryptocurrency boom to a net worth that Forbes pegged a year ago at $26.5 billion (roughly Rs. 2,16,560 crore). Bankman-Fried resigned as FTX’s chief executive officer the same day as the firm’s bankruptcy filing.

The liquidity crunch came after Bankman-Fried secretly moved $10 billion (roughly Rs. 81,700 crore) of FTX customer funds to his proprietary trading firm, Alameda Research, Reuters reported, citing two people familiar with the matter.

The US Attorney’s Office in Manhattan, led by veteran securities fraud prosecutor Damian Williams, in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters. The Securities and Exchange Commission and Commodity Futures Trading Commission also opened probes.

FTX’s demise comes after a string of meltdowns that have taken down other key players including Voyager Digital and Celsius Network and led some global investors to question the viability of the cryptocurrency sector.

© Thomson Reuters 2022

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Binance to Establish Industry Recovery Initiative to Invest in Digital Sector Companies

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By Reuters | Updated: 25 November 2022

Cryptocurrency exchange Binance said on Thursday it was committing $1 billion (nearly Rs. 8,200 crore) to establishing an industry recovery initiative (IRI) to invest in companies from the digital assets sector.

The move comes at a time when the crypto market is teetering from the collapse of FTX, which is seeking Chapter 11 bankruptcy protection in the United States.

The unraveling of one of the biggest crypto exchanges in the world has also fanned worries around the industry’s continued ability to draw investments from venture capital and private equity giants.

Binance said it intends to ramp up its commitment amount to $2 billion (nearly Rs. 16,340 crore) in the near future depending on need.

“We anticipate this initiative will last about six months and will be flexible on the investment structure — token, fiat, equity, convertible instruments, debt, credit lines, etc,” the crypto exchange added in a statement.

Zhao said while speaking at a conference in Abu Dhabi last week that there was significant interest from industry players in a recovery fund his company plans to launch to help cryptocurrency projects facing a liquidity squeeze, following the collapse of rival FTX.

He said such a fund would help “reduce further cascading negative effects of FTX” without giving an exact figure for the fund.

Several crypto firms have been bracing for the fallout from the FTX collapse, with many counting their exposure in millions to the beleaguered exchange.

It was reported a few days back that Binance is also under global regulatory scrutiny following the sudden collapse of the FTX cryptocurrency exchange and its subsidiaries. While speaking to reporters, Republican Patrick McHenry, a senior House Republican, confirmed that Binance’s role in the FTX collapse is under congressional scrutiny. Binance CEO Changpeng Zhao aka CZ has, however, has come out and vehemently denied taking part in the FTX collapse, citing that his exchange is a victim of the situation.

Binance has time and again argued that the cause of FTX’s collapse was ‘financial irregularities and possible fraud’ in written comments to a UK parliamentary committee. Notably, the UK counterparts wanted to know what role Binance played in the FTX collapse.

© Thomson Reuters 2022

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FTX Bankruptcy: BitGo Recovers $740 Million in Crypto Assets So Far, Court Filings Show

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By Associated Press | Updated: 24 November 2022

The company tasked with locking down the assets of the failed cryptocurrency exchange FTX says it has managed to recover and secure $740 million (roughly Rs. 6,040 crore) in assets so far, a fraction of the potentially billions of dollars likely missing from the company’s coffers.

The numbers were disclosed on Wednesday in court filings by FTX, which hired the cryptocurrency custodial company BitGo hours after FTX filed for bankruptcy on November 11.

The biggest worry for many of FTX’s customers is they’ll never see their money again. FTX failed because its founder and former CEO Sam Bankman-Fried and his lieutenants used customer assets to make bets in FTX’s closely related trading firm, Alameda Research. Bankman-Fried was reportedly looking for upwards of $8 billion (roughly Rs. 65,330 crore) from new investors to repair the company’s balance sheet.

Bankman-Fried “proved that there is no such thing as a ‘safe’ conflict of interest,” BitGo CEO Mike Belshe said in an email.

The $740 million (roughly Rs. 6,040 crore) figure is from November 16. BitGo estimates that the amount of recovered and secured assets has likely risen above $1 billion (roughly Rs. 8,170 crore) since that date.

The assets recovered by BitGo are now locked in South Dakota in what is known as “cold storage,” which means they’re cryptocurrencies stored on hard drives not connected to the Internet. BitGo provides what is known as “qualified custodian” services under South Dakota law. It’s basically the crypto equivalent of financial fiduciary, offering segregated accounts and other security services to lock down digital assets.

Several crypto companies have failed this year as Bitcoin and other digital currencies have collapsed in value. FTX failed when it experienced the crypto equivalent of a bank run, and early investigations have found that FTX employees intermingled assets held for customers with assets they were investing.

“Trading, financing, and custody need to be different,” Belshe said.

The assets recovered include not only Bitcoin and Ethereum, but also a collection of minor cryptocurrencies that vary in popularity and value, such as the shiba inu coin.

California-based BitGo has a history of recovering and securing assets. The company was tasked with securing assets after the cryptocurrency exchange Mt. Gox failed in 2014. It is also the custodian for the assets held by the government of El Salvador as part of that country’s experiment in using bitcoin as legal tender.

FTX is paying Bitgo a $5 million (roughly Rs. 40 crore) retainer and $1,00,000 (roughly Rs. 81 lakh) a month for its services.

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