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AriseBank CEO Pleads Guilty to $4.2 Million Securities Fraud Involving ICO

Jared Rice Sr., founder of crypto bank AriseBank, pleaded guilty to one count of securities fraud Wednesday in federal court

The Dallas News reported Thursday that Rice, who was arrested last year, admitted to scamming investors out of $4.2 million by selling AriseCoin tokens and promising that customers would receive Visa credit cards and accounts insured by the Federal Deposit Insurance Corporation (FDIC).

Neither the cards nor the FDIC accounts existed, though Rice accepted both crypto and fiat during his ICO, which the U.S. Securities and Exchange Commission (SEC) halted in January 2018.

According to his plea agreement, the U.S. government and Rice have agreed that the defendant should spend 60 months in prison. He faces a maximum sentence of 20 years, a $5 million fine, three years’ supervised release, restitution and forfeiture.

The plea deal is dependent on federal judge Ed Kinkeade, of the U.S. District Court, Northern District of Texas, signing off on the 60-month sentence.

The FBI arrested Rice last November, after the U.S. Attorney’s Office in the Northern District of Texas charged him with three counts of securities fraud and three counts of wire fraud.

Rice has already settled a civil charge with the SEC, paying $2.7 million in disgorgement and another roughly $190,000 in penalties. His former chief operating officer, Stanley Ford, settled similar charges with an identical monetary fine.

Neither admitted or denied the SEC’s charges, though both have agreed to lifetime bans from serving as officers or directors of public companies, as well as a lifetime ban from participating in digital securities offerings.

Gavel image via Shutterstock

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Alleged BTC-e Operator Alexander Vinnik Seeks Extradition to Russia

Alleged BTC-e exchange operator Alexander Vinnik, who is accused of laundering billions of dollars, is officially seeking extradition to Russia.

According to a report from local news source e-Kathimerini on Thursday, Vinnik, a Russian national, has filed an appeal in a Piraeus city court for release or extradition to his home nation for humanitarian reasons.

Vinnik was arrested in Greece back in July 2017, after police alleged that he had laundered at least $4 billion in cash through a bitcoin platform since 2011. He was detained for money laundering, conspiracy and transacting in cash obtained through illegal means.

Since his arrest, Vinnik’s extradition has been sought by the governments of the U.S., Russia and, more recently, France.

To date, Vinnik has maintained that he is innocent of all charges. He once said: “I do not consider myself guilty … The fact that I worked for BTC-e and did my job, and it’s not justifiable to accuse me of it.”

Vinnik has been on a hunger strike for 90 days, according to the report from e-Kathimerini, and was transported to the court by ambulance.

Vinnik’s lawyers say his life is “at risk” and maintain that the charges against him are “unfounded,” e-Kathimerini writes. They have also criticized the Greek justice system for detaining him for “more than the maximum 18 months permitted for pre-trial detention.”

The U.S. Department of Justice levied a $110 million fine against BTC-e and a $12 million penalty against Vinnik back in July 2017. If convicted in the U.S., Vinnik could face up to 55 years in prison.

Earlier this month, WEX, the apparent successor to the shuttered BTC-e exchange, was again tied to illicit funds gained through ransomware attacks. “Big Four” consulting firm PwC said that two Iranians who have created the SamSam ransomware variant are tied to WEX and may have used it to launder millions in illegal earnings.

Alexander Vinnik image via Shutterstock 

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WSJ’s ShapeShift Exposé Overstated Money Laundering by $6 Million, Analysis Says

When it comes to cryptocurrency transactions, questions about alleged money-laundering quickly get thorny.

A Wall Street Journal investigation from last September, titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” claimed the crypto conversion platform ShapeShift had facilitated at least $9 million worth of money laundering over several years with “a parade of suspected criminals.”

Now, at ShapeShift’s request, the blockchain analytics firm CipherBlade recreated the 2018 report and found less than $3 million in transactions involving potentially “tainted” funds.

The main distinction here is that CipherBlade focused on allegedly tainted coins instead of the total value held in each affiliated wallet or account.

“Of the ShapeShift addresses which receive ETH within three hops from the initial dirty addresses, less than half of the ETH traded through them are tainted,” the CipherBlade report says. “Using the most generous assumptions, this is still only 23.53 percent of the WSJ’s claimed $9 million.”

Add to that ether to roughly 40 bitcoin, which ShapeShift itself found to be associated with suspicious wallet’s the WSJ identified, and the total estimate falls just shy of $3 million.

When asked about the investigative process, a WSJ spokesperson told CoinDesk:

“An analysis looking at individual tainted ethereum coins, rather than tainted wallets, would be a different project than what the Journal embarked on, and one we can’t comment on because we have not reviewed it.”

All parties agree the most pessimistic reading of the data still indicates questionable transactions made up a pittance of ShapeShift’s volume since the company was founded in 2014. According to a tweet by CEO Erik Voorhees, ShapeShift processed crypto worth $30.3 million a month in 2017 alone.

Still, experts such as Pawel Kuskowski, CEO of the analytics firm Coinfirm, told CoinDesk there’s no clear answer to how much may have been laundered through the platform – because until October 2018 ShapeShift did not perform know-your-customer (KYC) identity checks.

“If you don’t know the underlying clients, how do you know?” Kuskowski told CoinDesk. “This is why you have KYC in the first place, to understand the profile.”

When asked about whether it’s better to account for the whole wallet or focus on the tainted coins themselves, Kuskowski said the truth hides in the shades of gray in between. He said a complex analysis of the risks associated with the people involved in these transactions, along with “plausibility and some other rules,” all combine to reveal whether the wallets themselves should be considered tainted or suspicious.

In Coinfirm’s own report on risks associated with crypto platforms, ShapeShift was classified as “high risk” with regards to anti-money laundering procedures and compliance because of anonymous usage until the KYC policy began last October. According to Kuskowski, it often takes months for a traditional bank to de-risk after any association with money laundering.

“It’s a good direction, that’s for sure,” Kuskowski said of ShapeShift’s added KYC procedures.

Compliance overhaul

That de-risking process actually began months before the WSJ report, according to ShapeShift Chief Legal Officer Veronica McGregor.

“Among law enforcement, ShapeShift is regarded as a very helpful and cooperative player,” she told CoinDesk. “Just because we started implementing those KYC procedures does not mean that we didn’t already have procedures in place to detect fraud and bad wallet addresses and theft, things like that.”

The company was already working with external consultants to identify and block transactions from suspicious wallets, McGregor said. Then ShapeShift underwent a compliance overhaul throughout the second half of 2018, mandating KYC identity checks for all users and working with three independent analytics firms, Chainalysis, ComplyAdvantage and IDology.

McGregor said ShapeShift continues to “tweak” its procedures, both in-house and through work with the three aforementioned services providers, in order to keep up with the evolving technology.

Richard Sanders, CSO and co-founder of CipherBlade, told CoinDesk he believes the claims in the WSJ report were “grossly exaggerated.”

“We did find around $3 million, which isn’t a great look for ShapeShift,” Sanders said. “But it is significantly smaller than what the Wall Street Journal reported.” CipherBlade says its independent analysis was not paid for by ShapeShift.

For his part, ShapeShift’s Voorhees continues request the WSJ retract the report, which was published in September 2018 during the company’s compliance overhaul. He believes the methodology used to tally questionable funds was fundamentally flawed.

“Crypto is bringing light, truth, and openness to finance,” Voorhees told CoinDesk. “And it’s a pleasant irony that the transparency of blockchains so easily vindicates us from the narrative that the Journal has imagined into existence.”

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Blockchain Analysis Links Hamas Fundraising to Coinbase Bitcoin Account

The Palestinian military-political group Hamas, which the U.S. government deems a terrorist organization, may be using the Coinbase cryptocurrency exchange for fundraising.

Earlier this week, the Israeli blockchain analytics firm Whitestream identified several bitcoin wallet addresses referred to on official Hamas digital media channels in public requests for donations. One such appeal for bitcoin donations to support “the resistance” was issued on January 31, via a Telegram channel run by Abu Obeida, a spokesman for Hamas’ military wing.

As the Israeli newspaper Globes reported, those wallets included a Coinbase account.

Although Coinbase declined to comment on the address in question, Whitestream told CoinDesk that the account continued to receive transactions even 48 hours after it was identified and reported in the media.

“Based on shared inputs, we can tell that Hamas blockchain transactions were signed by addresses that are operating on Coinbase company wallets,” Itsik Levy, the firm’s founder and CEO, told CoinDesk.

Adding this account’s sum to two other bitcoin addresses Whitestream also identified as recipients of the Hamas fundraising campaign, the Islamic organization appears to have garnered less than $4,000 in bitcoin.

“[Hamas] is struggling with getting funds from the Israeli government and Qatar,” Levy continued. “We’ve heard of other Islamic extremist organizations doing the same thing over the past few years…now Hamas tries the same thing.”

“It’s still an active campaign,” he added. “It just started.”

Even if this is a case of terrorist financing solicited by the Hamas military wing, the Izz ad-Din al-Qassam Brigades, Coinbase is hardly the sole company involved with this week’s activity.

Whitestream also reportedly identified this Hamas-operated Coinbase account potentially sending bitcoin to a Binance account and a CoinPayments account, the latter of which is a wallet provider legally incorporated in the Cayman Islands. Binance and CoinPayments did not immediately reply to requests for comment on these transactions.

Fringe activity

Several studies – including a 2018 report by the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance – have asserted cryptocurrency usage among jihadists is still an extremely “fringe” activity.

Whitestream co-founder Itsik Levy told Globes “only 2 percent” of the bitcoin transactions his firm analyzed were connected to “terrorist or criminal activity.”

Furthermore, compared to a CoinDesk report from 2018, even the monthly volume of a single bitcoin dealer serving dozens of Gaza-based retail investors would dwarf the sum collected so far in these Hamas-affiliated accounts.

The Hamas spokesperson has not posted in the Telegram group since the last request for bitcoin donations on February 2, CoinDesk found. On that same day, this bitcoin address was tweeted by the Brigades’ global outreach account.

This may be inspired by the way the Islamic State’s Gaza wing, a fierce rival of Hamas, reportedly raised $8,000 worth of bitcoin donations by March 2018. However, there appears to be confusion among these supporters about the transparent nature of blockchain data.

On January 30, Palestinian journalist Hussam Al-Dajany said during an interview on Hamas-owned Al-Aqsa TV that: “People who donate using this currency cannot be identified by any security agency.”

Hamas image via Shutterstock

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Japan Eyes Regulation of Unregistered Crypto Investment Schemes

Japan’s financial regulator is reportedly looking to close a legal loophole that lets unregistered investment firms solicit funds in cryptocurrencies rather than cash.

According to a report from Sankei Shimbun on Tuesday, Japan’s Financial Service Agency (FSA) is planning revisions to bring such schemes under the country’s Financial Instruments and Exchange Act, although no timeline for the changes was provided.

Currently, the act prohibits unregistered schemes from collecting investments in fiat currencies, but it does not mention cryptocurrencies.

The issue has reportedly received increased focus from the watchdog in the wake of rising incidences of crypto pyramid schemes in the country. Back in November, police in Tokyo arrested eight men alleged to have run such a scheme that collected 7.8 billion yen (almost $69 million) in cryptos from thousands of victims.

The eight were said to have collected most of the payments in bitcoin, as well as another 500 million yen (about $4.40 million) in cash, under the guise of a bogus investment firm called Sener.

Sankei Shimbun cited officials as saying that, if the scam had solicited only cryptocurrency, it’s possible the criminals would not have been caught.

Japan’s FSA has been actively regulating the cryptocurrency space since the shockwave that followed the collapse of the Mt Gox exchange in 2014. Measures have included instigating a licensing scheme for crypto exchanges and scrutinizing exchanges over security and compliance with anti-money laundering rules.

Just yesterday, the agency was reported to be considering approving crypto exchange-traded funds (ETFs). At the same time, it has now apparently dropped plans to approve trading of crypto derivatives on financial exchanges due to concerns the products would encourage speculation.

Bitcoins on keyboard image via Shutterstock