NFT Used for Service of Process; Blockchain CO2 Monitoring Solution Launches; IRS Addresses Staking; SEC Enforcement Continues; DeFi Hacked for $47M | BakerHostetler

Federal District Court Enters Default Judgment Based on NFT Service of Process

By Keith R. Murphy

A federal district court judge in Florida entered a $2.2 million default judgment against a defendant on whom the judge previously authorized service of process via non-fungible token (NFT), according to a recent report. The defendant reportedly was accused of stealing $2.2 million in cryptocurrency in connection with an investment scam, and it is the second such case in which the Florida judge has authorized service via NFT when the defendants could not be located. An attorney for the plaintiff in the matter stated that “[t]he important issue here is whether a wrongdoer has notice that they’re being sued so that they have to come and present their defense, or default” and that a wrongdoer cannot hide from justice when there is a method of providing them with notice. In this case, the plaintiff served notice of his complaint by sending the NFT to the wallet addresses to which he traced his stolen cryptocurrency.

For more information, please refer to the following link:

Auto Manufacturers Introduce Blockchain System for Monitoring CO2 Emissions

By Keith R. Murphy

According to recent press releases, two major international automotive companies have introduced an artificial-intelligence (AI)-enabled blockchain-based system called “Supplier CO2 Emission Monitoring System” (SCEMS) to manage the carbon dioxide emissions of their cooperative business partners. The companies note in the press releases that through SCEMS, “it is possible to secure reliable carbon emission data over the entire business operations of their suppliers, including raw material procurement, manufacturing processes and product transportation. The system’s next-generation technology will enable regulators, stakeholders and investors to have complete confidence in the accuracy of the data.” According to the press releases, integrating AI technology and high-performance blockchain will enable the companies and their partners to establish carbon dioxide reduction targets and to accurately predict carbon dioxide emissions going forward, thereby stimulating climate change mitigation efforts.

For more information, please refer to the following links:

IRS Revenue Ruling Addresses Taxation of Crypto Earned in Staking Activities

By Robert A. Musiala Jr.

The U.S. Internal Revenue Service (IRS) recently issued IRS Rev. Rul. 2023-14, which addresses the taxation of cryptocurrencies earned as staking rewards. Rev. Rul. 2023-14 addresses the following specific issue.

“If a taxpayer that uses a cash method of accounting (cash-method taxpayer) stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs (validation rewards or rewards), must the taxpayer include the value of the rewards in the taxpayer’s gross income and, if so, in which taxable year?”

Among other things, Rev. Rul. 2023-14 includes an overview of the tax treatment of cryptocurrencies, describes proof-of-stake consensus mechanisms and staking, and provides a sample fact pattern to illustrate the specific issue addressed. Rev. Rul. 2023-14 then provides the following holding.

“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards. The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation.”

For more information, please refer to the following link:

OFAC Adds TRON Public Key to SDN List

By Robert A. Musiala Jr.

A recent press release from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that OFAC has “designated key leaders and financial facilitators of the Islamic State of Iraq and Syria (ISIS) and al-Qa’ida in Maldives, including 20 ISIS, ISIS-Khorasan (ISIS-K), and al-Qa’ida operatives.” For one of the sanctioned individuals, OFAC included a cryptocurrency public key associated with the TRON blockchain in the Special Designated National (SDN) List entry for the individual. Blockchain analytics firm Chainalysis published a blog post analyzing cryptocurrency transaction activity related to the public key.

For more information, please refer to the following links:

SEC Charges Token Issuer with Fraud, Unregistered Securities Offering

By Christopher Lamb

A recent press release by the U.S. Securities and Exchange Commission (SEC) announced charges against an individual and three unincorporated entities that he controls – Hex, PulseChain and PulseX – for “conducting unregistered offerings of crypto asset securities that raised more than $1 billion in crypto assets from investors.” According to the press release, the SEC also charged the individual and PulseChain with “fraud for misappropriating at least $12 million of offering proceeds to purchase luxury goods including sports cars, watches, and a 555-carat black diamond known as ‘The Enigma.’” The press release further noted that marketing of Hex and the Hex tokens began in 2018 with claims of “mak[ing] people ‘rich,’” and between “July 2021 and March 2022, [the individual] orchestrated two additional unregistered crypto asset security offerings” of PLS and PLSX tokens that “each raised hundreds of millions of dollars in more crypto assets.”

For more information, please refer to the following link:

Vulnerability in Ethereum Programming Language Exploited in DeFi Hack

By Maya E. Rivera

On July 30, hackers exploited a vulnerability in Vyper, a popular smart contract-oriented Ethereum Virtual Machine (EVM) language, to attack several decentralized finance (DeFi) protocols, resulting in millions of dollars in losses. Curve Finance, whose multi-asset stablecoin pools reportedly play a major role in Ethereum’s DeFi stack as a liquidity source, was among the most significantly impacted, with initial loss estimates of more than $47 million. The attack also impacted DeFi exchanges Ellipses, Alchemix and Metronome, with initial loss estimates ranging from $1.6 million to around $15 million.

Vyper, the second most popular EVM language, behind Solidity, relies on a function known as a reentrancy guard, which locks contracts to prevent multiple functions from being executed simultaneously. According to reports, some versions of Vyper did not correctly execute the reentrancy guard, allowing attackers to repeatedly call smart contracts before initial execution was complete. This exploit, known as a reentrancy attack, can result in an attacker draining a pool of all of its funds. According to reports, the reentrancy bug in Vyper has now been patched.

For more information, please refer to the following links:

[View source.]