New Crypto Products Launch; Bank Pilots Crypto Trading; Reports Address Bitcoin Halving, DeFi Regulation; Crypto Enforcement and Hacks Continue | BakerHostetler

New Crypto Payment and Staking Services Launch, Bank to Pilot Crypto Trading

By Christopher W. Lamb

According to recent reports, Transak, a leading payments infrastructure provider for crypto and NFTs, has announced a strategic collaboration with a major global payments firm to implement new capabilities and improve global off-ramp services. According to a Transak blog post, the collaboration will allow users in over 145 countries to convert cryptocurrencies into their respective local fiat currencies. Additionally, the partnership will reportedly allow real-time card withdrawals and significantly expand the number of options available for conversion of cryptocurrencies into fiat.

In other recent reports, MetaMask, a popular crypto wallet application, has partnered with Consensys Staking to introduce a new feature to run Ethereum validator nodes on behalf of users who hold at least 32 Ethereum. The reports indicate that currently the service offers an approximately 4 percent yield, but a 10 percent fee is deducted, although the yield is subject to change.

In a final notable item, recent reports indicate that Germany’s second-largest bank has plans to roll out a cryptocurrency trading pilot this year. The bank, which has around $627 billion in assets under management, released a cryptocurrency custody platform in November 2023 after announcing it would use Metaco’s technology solution to build the crypto-related services.

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Major Crypto Exchange Publishes Report on Expected Impact of Bitcoin Halving

By Robert A. Musiala Jr.

A major U.S. cryptocurrency exchange recently published a report titled “Bitcoin Halving and Miner Economics” that analyzes the prospective impact of the Bitcoin halving, which is expected to occur in April 2024. Among other things, the report includes the following findings:

  • Following the halving, miner revenue per terahash is set to drop to all-time lows absent significant Bitcoin price appreciation, and transaction fee-based revenues are growing in importance.
  • With the saturation in network hash rate, variations in transaction fees have started to play an outsize role in miner revenues relative to price fluctuations, and this trend is expected to increase post-halving.
  • The halving could reduce profitability margins, leading to consistent BTC sell pressure from miners and further consolidation in miners and mining pools.
  • Uncertainty around constant price increases emphasizes the increasing need for sustainable miner revenue via transaction fees, which has already begun materializing throughout 2023.
  • While the Bitcoin Network hash rate will continue to increase in the short-to-medium term, we are rapidly reaching a point where growth will be unsustainable, with a corresponding appreciation in price.
  • The halving will highlight the need to find long-term solutions for miner incentives without changing the emission schedule or relying solely on price appreciation.
  • The halving will call further attention to the increasingly outsize role transaction fees have in miner economics.

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White Paper Proposes Framework for Combating Illicit Activity in DeFi

By Robert A. Musiala Jr.

A recently published white paper “proposes a framework … to effectively detect, deter and prevent illicit financial activity in DeFi, while preserving the technology as permissionless, neutral infrastructure.” According to an abstract, the paper sets forth a three-part proposal that “(1) sets forth a definition of ‘independent control’ in order to identify smart-contract based financial protocols that do not constitute DeFi; (2) seeks to classify genuine DeFi protocols — neutral, decentralized software — as ‘critical infrastructure,’ subject to oversight and security coordination by the Treasury Department’s Office of Cybersecurity and Critical Infrastructure Protection (“OCCIP”); and (3) suggests that new laws could require certain businesses that are (a) necessary to the transmittal of communications about DeFi transactions, (b) transmit a material portion of such communications and (c) offer the service as a business to take on additional illicit finance risk management practices, without becoming ‘financial institutions’ subject to the [Bank Secrecy Act].” The abstract further notes that the paper seeks to “begin a meaningful conversation about how to achieve the policy goals of combating illicit financial activities while allowing for continued innovation in DeFi.”

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SEC Action Targets Crypto Fraud Scheme; Germany and UK Seize Illicit BTC

By Robert A. Musiala Jr.

A recent press release by the U.S. Securities and Exchange Commission (SEC) announced that the SEC “charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.” According to the press release, “from June 2020 through early 2022, Lee and Chunga promoted HyperFund ‘membership’ packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company … however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors.”

In other news, recent reports provided details on two major seizures of bitcoin by European law enforcement. In one instance, German police reportedly seized 50,000 BTC related to the operation of a piracy website that violated German copyright law. In another instance, court proceedings revealed that U.K. police had seized 61,000 BTC related to a Chinese investment fraud scheme.

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Crypto and DeFi Hacks Continue; Data Published on DEX Pump and Dumps

By Robert A. Musiala Jr.

According to recent reports, a senior executive at a major U.S. cryptocurrency and fintech firm recently fell victim to a major hack of his personal cryptocurrency accounts. The hacker reportedly gained access to approximately $112.5 million in cryptocurrency value.

Another report provided data on recent DeFi hacks, noting that DeFi hacks resulted in total losses of $38.9 million in the month of January. The report cited the five largest DeFi hacks in January, which included hacks of Radiant Capital, Gamma Strategies, Wise Lending, Socket and Goledo Finance.

A recent blog by blockchain analytics firm Chainalysis provided new data indicating that 54 percent of ERC-20 tokens listed on decentralized exchanges (DEXs) in 2023 display patterns indicative of pump and dump schemes. The blog noted that such activity accounts for only 1.3 percent of all DEX trading volume.

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