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Russia May Build Offshore Destination for Cryptocurrencies, Exchanges and Forex

An island bordering Russia and China may become a large financial center for crypto exchanges and forex markets.

Russia may build a large financial center on the island of Bolshoy Ussuriysky, according to a report by the state-run TASS news agency on June 8.

Leonid Petukhov, who heads the Far Eastern Agency for Attracting Investments and Supporting Exports, said the island could become an offshore destination for cryptocurrenciescrypto exchanges and forex markets.

Bolshoy Ussuriysky lies on the border between Russia and China, with western parts of the long-disputed territory transferred to Beijing following a 2004 agreement.

Petukhov made his statements while speaking to TASS at the St. Petersburg International Economic Forum.

Russia has already built two offshore economic zones in recent years: Oktyabrsky Island off Kaliningrad and Russky Island in Vladivostok. Neither of them currently deal in cryptocurrencies.

Acceptance of crypto and blockchain in Russia has been somewhat mixed. On June 7, it emerged that the country’s parliament is considering imposing fines on crypto mining by the end of the month.

That same day, the CEO of Russia’s largest bank, Sherbank, officially confirmed that the institution will not be developing crypto-related services.

Last year, authorities in the Crimean peninsula, a territory claimed by Russia, considered creating a blockchain cluster in the form of a crypto investment fund in order to attract more tech businesses to the area.

Russia’s own long-awaited cryptocurrency legislation is currently being delayed after facing a requirement to include more crypto-specific terminology.

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Israeli Court Rules Bitcoin Is Not a Currency in Court Case Over Taxes on BTC Gains

The ruling is a setback for crypto entrepreneur Noam Copel, who will now have to pay tax on $830,000 in profits he made by selling bitcoin.

An Israeli judge has ruled that bitcoin (BTC) is an asset and not a currency, local news site Globes reported on May 21.

The judgment is significant because it means profits made by selling the cryptocurrency will now be liable to capital gains tax, Globes notes.

Noam Copel, who founded the blockchain startup DAV, had bought BTC in 2011 and sold two years later — making a profit of $2.9 million at today’s rates.

During the court case, he had argued that bitcoin should be regarded as a foreign currency, as fluctuations in exchange rates are not taxed.

But the Israel Tax Authority (ITA) argued differently, with the organization putting forward the idea that currencies must have some physical manifestation under the country’s laws.

Judge Shmuel Bornstein ruled that Copel had failed to prove that bitcoin met this requirement, or that it could be used as a viable alternative to fiat when he had sold the cryptocurrency six years ago. However, he indicated that the court’s attitude may change — describing his ruling as “for now.”

As things stand, the entrepreneur must now pay tax on $830,000 of the profits he made; however, Copel does have the option of appealing to Israel’s Supreme Court.

The ITA had first outlined plans to tax cryptocurrencies as property in February 2018.

Earlier this month, the United States Internal Revenue Service said it was prioritizing issuing guidance on cryptocurrencies after politicians in Congress warned there is still much ambiguity about how the asset should be taxed.

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French Regulatory Agency Sees 14,000% Surge in Crypto-Related Scam Enquiries Since 2016

The French Autorite des Marches Financiers has warned the public against 118 crypto-related actors since March 2018.

The French stock markets regulator AMF has seen over a 14,000% surge in enquiries related to fraudulent crypto offers in 2018 as opposed to 2016, the agency wrote in a new annual report released May 7.

In the report, the Autorite des Marches Financiers (AMF) specified that the number of enquiries associated with crypto-related scams online has surged to over 2,600 in 2018 from only 18 similar enquiries back in 2016.

With that, the amount of fraudulent online offers in other industries such as foreign exchange (forex) and binary options have significantly decreased, the AMF noted. As such, fraudulent offers concerning investment in forex and binary options triggered a total of 3,768 enquiries in 2016, with the number having decreased to 968 enquiries in 2018.

Fraudulent offers online in forex, diamonds, and cryptos chart. Source: AMF

Fraudulent offers online in forex, diamonds, and cryptos chart. Source: AMF

According to the report, the AMF has issued public warnings against 118 bad crypto-related actors starting from March 2018, while the overall number of warnings has accounted for 154.

In April, the AMF issued a public warning against Kuvera France, a company offering training courses and software for trading crypto and investing in forex markets.

Previously, Belgium’s Financial Services and Markets Authority updated a blacklist of crypto-related websites associated with fraud to a total of 120 websites.

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Is the Forex Market Ready to Go Blockchain? Some Banks Don’t Think So

On July 27, the foreign exchange trading market (forex) settlement powerhouse CLS reported it was in the final stages of testing its blockchain payment service for banks. However, while the service is reportedly set to be launched as soon as in August, the amount of players backing the project has halved since the initial announcement. As it turns out, large financial institutions are not quite ready to hand over their data to a blockchain-powered system.

Brief introduction to forex and CLS system

Forex is a worldwide market where convertible currencies are traded and their conversion rates are determined. Albeit being decentralized, it is the largest and most liquid market in the world: In April 2016, for instance, trading there averaged $5.1 trillion per day, according to Bank for International Settlements (BIS) data. Given the fact that forex relies on over-the-counter type deals, larger participating players — i.e., international banks — strive to mitigate the settlement risk associated with their forex transactions.

Cue in Continuous Linked Settlement (CLS), a U.K.-based financial institution that has the U.S. Federal Reserve Bank as its primary regulator and provides its customers with just the thing forex players need — risk-reducing settlement services. CLS minimizes the perils through payment versus payment (PvP) settlements — the process ensuring that a final transfer of one currency occurs only if a final transfer of the other currency also takes place.

CLS was founded in 2002 and has been rapidly growing since: In July 2012, it officially became a Systemically Important Financial Market Utility — meaning that its disruption might shatter the U.S. financial system as a whole — and by March 2017, it was handling over 50 percent of forex transactions globally. CLS’s members include more than 60 of the world’s largest financial institutions, such as JPMorgan Chase, Barclays, Goldman Sachs and Citigroup.

CLS’s relationship with blockchain, IBM and R3

CLS is by no means new to the concept of blockchain. It began researching distributed ledger technology (DLT) proofs-of-concept (PoCs) back in 2015, when the technology was in its earlier stages and the prospect of mass adoption barely existed. In September 2016, the early CLS blockchain experiments were put under CLSNet, a network that essentially played the role of a sandbox for DLT-powered attempts to streamline CLS’s internal processes at the time. Made in conjunction with IT giant IBM, it aimed to ensure intraday liquidity, enable real-time awareness of currency and reduce risk, among other goals. At the time, CLS Netting would reportedly allow participants to submit forex instructions for six products and 24 currencies.

Notably, CLS has been cautious not to put its main settlement system, long favored by the world’s largest financial institutes, on blockchain — at least until it becomes fully tamper-proof and adoptable, from their viewpoint. The 2017 joint report presented by CLS and IBM read:

“Based on the CLS-IBM collaboration, it seems most banks will need to readjust their approach to risk in terms of go/no-go decisions, especially in the early phases of a project. As we’ve learned, organizations can design their first blockchain initiative to avoid significant risks. At CLS, our first decision was not to build a bridge too far or wide. In other words, our first initiative could not be one where failure put our existing business at risk.”

Similarly, in April 2017, Tom Zschach, chief information officer at CLS, explained to the International Business Times (IBT):

“The important thing about CLSNet is it doesn’t have anything to do with settlement or funding. It doesn’t touch our central bank accounts, it doesn’t access RTGS [real time gross settlement] gateways. What we are doing here is introducing the technology as more of a foundational step than a transformational step.”

The CLS joint project with IBM relies on Hyperledger Fabric (version 1.0), an open-source business blockchain framework hosted by the Linux Foundation, that the companies have been weaving into their DLT-based ecosystem. IBM seems confident in regards to the their collaborative work, as its vice president Keith Bear told IBT:

“Volume is an important consideration, but the technology is perfectly capable of supporting the levels we are talking about in the case of CLS, also with Northern Trust and the other projects that we have going on at the moment.”

CLS and IBM’s collaboration has also resulted in the creation of a seperate PoC project called LedgerConnect, a so-called financial blockchain “app store” that showcases DLT solutions crafted by fintech and software companies to help banks navigate through the maze that is blockchain — for conventional business players, at least.

Nevertheless, CLS doesn’t limit its blockchain operations to collaborating with IBM. The forex giant also works with R3, a blockchain consortium of more than 200 financial firms globally, whose primary goal is building a DLT platform called Corda. R3 could be considered a rival to IBM, at least on the field of blockchain.

Both R3 and IBM use Hyperledger Fabric for their blockchain efforts. Notably, in a comment for IBT, Charley Cooper — the managing director at R3 —  emphasized that Corda is written for Java, “the language of banks” specifically, while IBM attempts to employ a more general approach:

“The folks at IBM Fabric who donated it to Hyperledger are looking to solve a whole set of problems for a much broader set of industries — healthcare, auto financing, supply chain management, finance, etc. — whereas Corda was built specifically for financial institutions and built with the financial institutions[…] I think what CLS is doing is the right thing, meaning they are working with multiple different providers; they are involved in Hyperledger work with Fabric, they are involved with the R3 consortium and working on projects that go beyond that.”

Additionally, in late May 2018, CLS invested $5 million in R3. Under the deal, CLS also entered R3’s Board of Directors, hence it would be fair to expect other DLT-based projects to be introduced by CLS in the future.

But do banks want to rely on blockchain for settlement payments?

Apparently, many of the CLS-enlisted, large financial firms are hesitant to incorporate blockchain at this point, as Alan Marquard — chief strategy and development officer at CLS — told Financial News London. Indeed, investment banks have shared concerns regarding the use of the “largely-untested technology” in the past, citing privacy concerns and blockchain’s current “immaturity” among the primary reasons.

Having this in mind, CLS planned to offer members two ways to access CLSNet: directly and via the old, tested way — SWIFT, which is a 45-year-old interbank messaging service and a co-operative owned by about 11,000 member banks. As the company’s spokeswoman confirmed to FN London:

“It was always CLS’s intention to launch the service in phases. With the first phase, clients will rely on SWIFT connectivity for inputs submitted to and received from CLSNet. As the service continues to grow with functionality and client adoption, and the DLT matures, CLSNet will enable clients to host their own node.”

Marquard of CLS mentioned that some of the banks were reluctant to merge blockchains into their tuned IT systems, mostly due to “security implications”:

“You are not just installing a piece of software. [Banks] need to build operational knowledge and know-how.”

Originally, when the blockchain-powered settlement system was announced back in September 2016, the project was backed by 14 large institutions, including Bank of America, Bank of China – Hong Kong, HSBC and Morgan Stanley, among others. Other banks preferred the wait-and-see approach, as Ram Komarraju — head of innovation and technology at CLS — told Forbes in 2017:

“The journey has been accelerating. We were building something for the very first time, and we started selling to larger buy-side firms. Some of them are attracted to bleeding edge technology while others would rather stick with existing systems and wait and see. As we talked to banks, we found they are investing in blockchain, but they aren’t taking the risk to actually use it. They are investing in multiple blockchain vendors.”

However, now that the service is almost ready and is expected to launch by the end of the summer, about half of the 14 banks that originally signed up for the CLSNet have reportedly dropped out of the program — at this point, there are much fewer players that are expected to enlist themselves for CLSNet once it’s released. Still, CLS might convince the majority of banks to join later through efforts like the above mentioned LedgerConnect and collaborations with organizations like R3 — which, for instance, gathers different law firms to educate lawyers globally in its efforts to bring about the mass adoption of the technology — steadily pushing global banks to swap their traditional tools with new blockchain ones.

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FX Settlement Provider CLS Begins Final Testing for Blockchain Payment Banking Service

Forex exchange (FX) settlement giant CLS is in the final stages of testing its blockchain payment service for banks, Financial News reported July 27.

The service is reportedly set to be launched later this summer, with at least seven banks expected to sign on to the system in the early months.

CLS, the New York-based global multi-currency cash settlement system, has been working with tech company IBM to introduce the blockchain-powered payment netting service. The system is set to be incorporated in banking IT systems to boost the level of standardization in the global FX markets, as well as reduce costs of the process.

At the moment, the FX markets are reportedly lacking standardization as forex institutions are forced to complete the process manually, which often causes scattered approaches to netting and leads to higher costs, the Financial Times notes.

CLS is planning to offer its members two options to connect to the CLSNet service, providing a direct, as well as an intermediary, connection via the SWIFT financial messaging provider. However, a CLS spokesperson clarified that clients would rely on the SWIFT provider in the first stages, while direct node hosting will be offered as “the service continues to grow with functionality and client adoption, and the DLT [distributed ledger technology] matures.”

While around seven banks are ready to test the upcoming service, they are reportedly just half of those that backed the project originally. CLS chief strategy and development officer Alan Marquard revealed that some of their big banking members are cautious to connect directly to the blockchain since the technology is still not tested enough for settlement and safekeeping of securities.

Marquard explained that banking institutions cannot “just install a piece of software,” as they first need to “build operational knowledge and know-how” to ensure their databases have adequate privacy protection.

CLS Group, originally Continuous Linked Settlement, is a U.S. FX settlement service supplier with such high-profile members as Goldman Sachs, JPMorgan, Barclays, and Citigroup. In late May, the company invested $5 million in blockchain consortium R3 in order to collaborate with leading blockchain experts.

SWIFT, with 45 years of experience in providing financial institutions with transactions information, has recently reported that its blockchain pilot for bank-to-bank transfers went “extremely well,” having first announced the Hyperledger-based project for a cross-border payments market back in 2017.

Earlier in June, Ripple (XRP) chief cryptographer David Schwartz claimed that banks are unlikely to deploy blockchain to process international payments, citing low scalability and privacy problems.

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Forex Settlement Provider CLS Invests in Blockchain Consortium R3

CLS, a provider of foreign exchange settlement and processing, has invested $5 mln in R3, a New-York-based blockchain consortium, Reuters reported May 30. Under the deal, CLS will have a seat on R3’s Board of Directors.

The deal reportedly comes as a part of the third tranche of R3’s fundraiser, which also included financing from Singapore real estate firm OUE and Japanese IT services provider TIS. David Rutter, R3’s chief executive officer, shared his enthusiasm about major infrastructure players’ involvement in using blockchain technology to improve their products:

“It is absolutely right that major infrastructure players like this look to technologies such as blockchain to continue making their products and services faster, easier, safer and more cost-effective for the end user.”

R3, which was launched in 2015, reportedly completed the first two tranches of its fundraising round a year ago, attracting $107 mln from over 40 financial and technology companies. R3 developed a type of distributed ledger technology called Corda and is testing it with the consortium’s members. Initially backed by nine large investment banks, its membership has grown to more than 80 financial institutions.

Alan Marquard, chief strategy and development officer at CLS, said to Reuters that the company looks forward “to working in collaboration with other members to explore how CLS can provide transformative blockchain-based solutions.”

In March, Cointelegraph reported that the Swiss-based Credit Suisse and Dutch-based ING financial service groups successfully completed the first live transaction of €25 mln (around $30 mln) in securities on R3’s Corda blockchain platform.

In February, R3 Blockchain consortium announced the creation of a Legal Center of Excellence, where a team consisting of ten law firms will educate lawyers globally about new blockchain technologies and let them participate in Corda training workshops for attorneys.

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German Bank and Steel Conglomerate Execute Forex Transaction via Blockchain

German bank Commerzbank and steel company Thyssenkrupp have completed a €500,000 pilot transaction of a forex (FX) forward on a blockchain, reported Cointelegraph auf Deutsch May 24.

The EUR/PLN forward deal worth €500,000 with a one month tenor was initiated by Thyssenkrupp on the Commerzbank’s FX Live Trader platform on Wednesday. The transaction was then confirmed directly through Corda, a distributed ledger technology (DLT) of the R3 blockchain consortium.

The use of blockchain technology, which underpins the Bitcoin virtual currency, could help reduce delays and manual errors, as well as “significantly reduce operational risks in foreign exchange transactions”, according to  the Commerzbank website. This eliminates the need for transaction synchronization because the transaction is stored as a single, unchangeable record.

Nikolaus Giesbert, Head of Fixed Income at Commerzbank, says blockchain will enable low transaction fees and secure data through a self-contained, unified network and infallible, fraud-proof transaction processing:

“Significant resources are dedicated to resolving the issues that occur during the matching process. This deal demonstrates how the use of distributed ledger can transform and digitalise the processes in this space.”

Banks and financial institutions globally have recently been running blockchain pilots for various types of transactions. In late April, Spanish Bank BBVA became the first global bank to issue a loan on a blockchain. The bank stated that using a distributed ledger cut the time to process the €75 mln loan from “days to hours”.

Earlier this week, the Thai bank Krungsri’s conducted a cross-border payment pilot test in Bank of Thailand’s regulatory sandbox with Japan’s Mitsubishi Group, their banking unit MUFG Bank, and the Standard Chartered Singapore Bank. Krungsri’s is Thailand’s fifth largest bank by assets.

Argentinian Banco Masventas (BMV) recently announced a partnership with blockchain-based financial services provider Bitex, which will enable clients to use Bitcoin as an alternative to SWIFT in cross-border transactions.

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Barclays Joins CLS Blockchain Consortium in Search of Swift Alternative

Barclays has become the latest major financial institution to join the foreign exchange-focused blockchain consortium founded by cash settlement system provider CLS Group.

Revealed today, the London-based bank will now work alongside the group’s other members, including JPMorgan Chase, Goldman Sachs and Bank of China, in a bid to bring new levels of efficiency and security to the forex settlements industry. First revealed last year, the CLS consortium specifically aims to use the open-source Hyperledger Fabric blockchain to create new channels for foreign exchange.

Demoed at Swift’s annual Sibos conference last autumn, the group’s blockchain platform is designed to be a new way for buy-side and sell-side institutions to exchange 140 global currencies that are now settled outside of the existing CLS settlement service.

According to Lee Braine, head of Barclays Invest Bank’s CTO office, his institution became interested in the project partly because the CLS platform will operate side-by-side with the existing Swift solution – at least for now – rather than being forced on customers.

Braine told CoinDesk:

“People can connect via Swift or via a new [distributed ledger technology] connection mechanism. So, you have a choice.”

In its initial incarnation, the platform, called CLS Net, is expected to let participants trade global currencies using six different kinds of blockchain-based products.

The netting services amount to a new line of business for CLS, which traditionally uses its own payment-versus-payment settlement service linked to the real-time gross settlement systems of 18 currencies.

A representative of CLS confirmed that progress on the expanded blockchain functionality is “proceeding well.”

Blockchain evolution

Providing more detail about what attracted Barclays to the CLS consortium, Braine pointed to the desire for “harmonious” functionality with Swift’s foreign exchange service.

Instead of what he called a “Big Bang” implementation of blockchain (wherein entire consortia of institutions convert to blockchain-based systems), Braine described a tiered system of integration he’d prefer to see implemented by the group.

He breaks down this “incremental roadmap” into 10 layers, with the lowest level of blockchain adoption requiring only existing technology plugged into a third-party blockchain provider. The highest level, by contrast, would see transactions being fully reliant on distributed ledgers without a centralized backup system.

Braine hopes the lessons Barclays learns about how this work might play out in the real world will inform other blockchain projects.

He told CoinDesk:

“We envisage banks could be at different levels of integration for particular use cases, and yet still being able to participate.”

Barclays sign image via Shutterstock

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